19. Dividends to SH law and procedure and PCR

Question 1

two types of dividends

Answer 1

ONE - interim dividend

TWO - final dividend

Question 2

interim dividend

Answer 2

• DECLARED WITHIN SH APPROVAL
• can be cancelled by directors at any time prior to payment (only becomes a debt payable to SH once they are actually paid)
• paid during ( and in respect of ) the current accounting period

Question 3

final dividend

Answer 3

• requires SH approval
• cannot be cancelled once declared by SH (it becomes a debt payable to SH once declared)
• normally paid following the end of a company accounting year (and declared at year end)

Question 4

s.830(1) - general rule

Answer 4

Company may not make a distribution of assets to SH except out of realised profit available for distribution (in keeping with the doctrine of maintenance of share capital)
–> if paid in contravention of s.830 = unlawful dividend

Question 5

Part 23 CA 06

Answer 5

Various additional provisions stipulating how ‘profits’ should be determined

Question 6

FINAL DIVIDENDS (IN ARTICLES)

Answer 6

MA 30

• company can declare OR by SH
• amount cannot exceed amount recommended by directors (but SH can decide on smaller amount)

Question 7

INTERIM DIVIDENDS (in articles)

Answer 7

Articles usually say
- portion of profits for the year

• estimate calculated before company’s annual earnings are determined
• final dividend will be used to add an appropriate amount in addition to interim dividened

Question 8

WHO IS ENTITLED TO DIVIDEND?

Answer 8

SHs on Company’s Register of Members at the time of declaration (unless relevant resolution specifies another date)

NB. CANNOT pay for on SH alone without paying dividend to all SH holding the same class of share.

Question 9

HOW ARE DIVIDENDS DISTRIBUTED?

Answer 9

1. Check articles – this usually determines how any dividend is to be distributed between SH
2. If articles silent – generally accepted that dividend has to be paid in proportion to the nominal amount of shares (because SH are, prima facie, entitled to participate in profits of a company in proportion to their respective interest in that company)

Question 10

Consequence of Unlawful Distribution (s.847)

Answer 10

ANY SH receiving the dividend will be liable to repay it to the company IF (at time of distribution) he knew or had reasonable grounds for believing that there was such a contravention

NO criminal sanctions
NO penalties imposed on directors (but directors should be mindful of their general statutory duties)

Question 11

Scrip Dividends (Bonus Shares) - what are they?

Answer 11

A dividend in the form of additional shares to its SH rather than a cash payment (script dividend)

Question 12

why scrip dividend?

Answer 12

• comp can retain cash for use in its business
• keeps SH happy
• SH receives shares without dealing with costs or stamp duty (not treated as distribution by comp for tax purposes even though issuing new shares)

Question 13

disadvantages of scrip dividends

Answer 13

• potential long term disadvantage to any SH who do not take up scrip issue because their existing shareholding can be diluted through issue of new shares

Question 14

PREFERENCE SHARES

Answer 14

These entitle the holder to preferred rights

• Usually first fixed dividend – expressed as % of amount paid up
• Right to receive fixed dividend is a right to be paid in priority to ordinary shareholders in any year in which the company has sufficient distributable profits

Question 15

cumulative preference shares

Answer 15

These entitled holder to accumulate the right to dividends

• Expressed to be payable in a year but are not then paid
• Dividend accumulates as a debt owed to the cumulative preference shareholder until it is paid UNLESS there are provisions in SH’s agreement to the contrary

Question 16

interim dividend procedure

Answer 16

1. check figures in accounts to establish it has sufficient distributable profits to make distribution (can only distribute out of DP - maintain SC!)
2. check articles of association + SH agreement before making any dividend payment (articles may have restrictions/prohibitions, SH agreement might have a mechanism requiring payment of dividend where legally permissible - based on % of DP)
3. BOARD DECIDES (must satisfy themselves that current financial position of comp warrants payment of dividend)
4. Dividend tax vouchers - comp must send (after paying div) to SH a voucher stating: amount of dividend, date of payment, amount of tax credit

Question 17

final dividend - how does the procedure differ?

Answer 17

ONE - directors recommend amount of final dividend

TWO - div declared by SH of company in GM (usually at AGM) or by OR

• cannot exceed amount rec by directors but SH can decide lower amount
• timing rec by directors and put to SH at GM
• can use WR

Question 18

PCR exam structure

Answer 18

1. s.19 gen prohibition (s.22(1))
2. specified investment - shares are
3. specified activity (advising on merits and arranging deals)
4. excluded under FSMA?
   - advise on merits - if necessary
   - arranging deals - if introducing to client someone FCA authorised
5. s.327 FSMA conditions and SRA scope rules
6. conclusion

Question 19

s.327 FSMA

Answer 19

3 CONDITIONS MUST BE FULFILLED

ONE - supervision by professional body

TWO - any COMMISSION is passed to client

THREE - work is incidental to overall work done

Question 20

SRA SCOPE RULE

Answer 20

• activities must be out of or complementary to provision by solicitor of professional service
• if not arise naturally out of work, not complementary

(E.g. advising on merits of purchasing shares in a particular comp does not arise naturally out of advise on share buyback)

Question 21

If excluded/exempt regulated activity (FSMA)

Answer 21

ADVICE can be given

• ensure firm complies with restrictions re: this kind of activity under Scope rules
• firm must be authorised by SRA and comply with SRA financial services (conduct of business) rules

Question 22

if not excluded/exempt (FSMA)

Answer 22

Cannot give advice

• firm can only give advice if someone in the firm were directly authorised by FCA and complied with FCA rules in giving advice
• otherwise breach of s.19(1) = crim offence
• firm should refer client to FCA authorised person

Question 23

taxation on share buyback

Answer 23

SH: tax usually payable

• any amount exceeding amount paid on allotment is treated as a dividend to the SH (unless repayment is on winding up of comp)
• treated as income receipt generally

Company: stamp duty unless consideration below £1000 or exception apploes

Question 24

when will share buyback be treated as a cap reciept for SH?

Answer 24

LOWER TAX (BC OF CGT RELIEFS AND EXCEPTIONS) - stringent rules, rarely apply

• shares in unquoted trading comp
• seller resident in UK in tax year sale occurs
• owned for at least 5 years
• substantial reduction in S’s SH (at least 25% reduction in % of seller’s shareholding)
• 12m after purchase, S must hold not more than 30% of company’s issued ord. share cap, share or loan cap, voting power
• shares brought back by comp are cancelled so no. of shares in issue are reduced
• buyback must benefit trade and not be part of scheme to avoid tax /enable SH to participate in profits without receiving a dividend

Question 25

WHY WOULD A COMPANY REDUCE ITS SHARE CAPITAL

Answer 25

• create distributable reserves to increase ability to pay dividends
• surplus cap wants to return to SH
• substantial reduction in value of assts so SC not representative of true value of assts in comp
• so comp can carry out redemption of its redeemable shares or purchase of its own shares if it doesn’t have enough DP
• part of SVA