Potential to circumvent class protection
Again, it may be possible to utilise these provisions to circumvent the protection provided to class right-holders.
The court has held that a reduction which removes a class is not a ‘variation’ or ‘abrogation’ of those class rights, and so does not need the specific consent of that class – Re Saltdean [1968] 1 WLR 1844. Therefore, it is possible to treat different classes of shareholders differently – e.g. to reduce the whole of one class and none of another.
However, members within each class should be treated equally (Re Jupiter House Investments [1985] 1 WLR 975).
It is also necessary to obtain the consent of the court, which will only be provided if the reduction is ‘fair and equitable’ (Re Old Silkstone Collieries [1954] Ch 169).
Dividends
The Companies Act 2006, Part 23 uses the alternative term ‘distributions’.
A dividend is a payment of the profits of the company to the shareholders, and is assumed to be each member’s share of the profits to be divided (Henry v Great Northern Railway Co (1887) 1 De G & J 606).
There is no need for an express power to be contained in the memorandum of association in order to pay a dividend, but equally there is no rule that all profits must be distributed (Burland v Earle [1902] AC 83). If paid, it must be in cash unless the articles provide otherwise (Wood v Odessa Waterworks Co (1889) 42 ChD 636).
Which assets may be distributed?
When distributing the profits of the company, it is important for the directors to respect the ‘maintenance of capital’ doctrine. In addition, because the company’s assets will be in a constant state of flux, assets must be identified which may be safely distributed:
s.829 (1) CA 2006: “A company may only make a distribution out of profits available for the purpose”.
s.829(2) CA 2006: “A company’s profits available for distribution are its accumulated, realised profits, so far as not previously utilised by distribution or capitalisation, less its accumulated, realised losses, so far as not previously written off in a reduction or reorganisation of capital duly made”.
Public companies are subjected to further restrictions contained in s.831 Companies Act 2006.
The process of declaring a dividend:
For each financial year of the company, the directors must prepare a directors’ report (s.234(1) Companies Act 1985/s.415 Companies Act 2006), and this must state the amount (if any) that the directors recommend should be paid by way of a dividend (s.234ZZA(1) Companies Act 1985/s.416 Companies Act 2006).
In doing this, the directors should have regard to all classes of shareholders, and not favour one over another (Henry v Great Northern Railway Co (1887) 1 De G & J 606).
Once the directors have made their recommendation, the shareholders have the power to declare a dividend:
Art.102, Table A: “Subject to the provisions of the Act, the company may by ordinary resolution declare dividends in accordance with the respective rights of the members, but no dividend shall exceed the amount recommended by the directors”.
Art.105, Table A: “A general meeting declaring a dividend, may, upon the recommendation of the directors, direct that it shall be satisfied wholly or partly by the distribution of assets…”
However, no dividend is payable until it is declared, even for preference shareholders (Bond v Barrow Haematite Steel Co [1902] 1 Ch 353), and once it is declared it is treated as a debt owed by the company.
Again, it may be possible to utilise these provisions to circumvent the protection provided to class right-holders.
The court has held that a reduction which removes a class is not a ‘variation’ or ‘abrogation’ of those class rights, and so does not need the specific consent of that class – Re Saltdean [1968] 1 WLR 1844. Therefore, it is possible to treat different classes of shareholders differently – e.g. to reduce the whole of one class and none of another.
However, members within each class should be treated equally (Re Jupiter House Investments [1985] 1 WLR 975).
It is also necessary to obtain the consent of the court, which will only be provided if the reduction is ‘fair and equitable’ (Re Old Silkstone Collieries [1954] Ch 169).
The Companies Act 2006, Part 23 uses the alternative term ‘distributions’.
A dividend is a payment of the profits of the company to the shareholders, and is assumed to be each member’s share of the profits to be divided (Henry v Great Northern Railway Co (1887) 1 De G & J 606).
There is no need for an express power to be contained in the memorandum of association in order to pay a dividend, but equally there is no rule that all profits must be distributed (Burland v Earle [1902] AC 83). If paid, it must be in cash unless the articles provide otherwise (Wood v Odessa Waterworks Co (1889) 42 ChD 636).
Which assets may be distributed?
When distributing the profits of the company, it is important for the directors to respect the ‘maintenance of capital’ doctrine. In addition, because the company’s assets will be in a constant state of flux, assets must be identified which may be safely distributed:
s.829 (1) CA 2006: “A company may only make a distribution out of profits available for the purpose”.
s.829(2) CA 2006: “A company’s profits available for distribution are its accumulated, realised profits, so far as not previously utilised by distribution or capitalisation, less its accumulated, realised losses, so far as not previously written off in a reduction or reorganisation of capital duly made”.
Public companies are subjected to further restrictions contained in s.831 Companies Act 2006.
The process of declaring a dividend:
For each financial year of the company, the directors must prepare a directors’ report (s.234(1) Companies Act 1985/s.415 Companies Act 2006), and this must state the amount (if any) that the directors recommend should be paid by way of a dividend (s.234ZZA(1) Companies Act 1985/s.416 Companies Act 2006).
In doing this, the directors should have regard to all classes of shareholders, and not favour one over another (Henry v Great Northern Railway Co (1887) 1 De G & J 606).
Once the directors have made their recommendation, the shareholders have the power to declare a dividend:
Art.102, Table A: “Subject to the provisions of the Act, the company may by ordinary resolution declare dividends in accordance with the respective rights of the members, but no dividend shall exceed the amount recommended by the directors”.
Art.105, Table A: “A general meeting declaring a dividend, may, upon the recommendation of the directors, direct that it shall be satisfied wholly or partly by the distribution of assets…”
However, no dividend is payable until it is declared, even for preference shareholders (Bond v Barrow Haematite Steel Co [1902] 1 Ch 353), and once it is declared it is treated as a debt owed by the company.
See further, textbook:
