Dividend cuts

As investors brace themselves for dividend cuts we take a look at what options are available if you’ve already declared your dividend

27 April 2020

In the wake of COVID-19 and with AGM season approaching, a lot of focus will be placed on whether or not companies will continue to pay dividends. We have already seen a range of companies cancel their upcoming dividend payments. It would be surprising if these are the last of this year’s cancellations. But how do you cancel a dividend and what considerations will directors need to bear in mind as they make these decisions over the upcoming months?

In this article we look briefly at various options that might be available for companies as we approach dividend season.

What do directors need to consider?

Directors will need to be mindful of their statutory duties under the Companies Act 2006 when considering any recommendation for a dividend. If the company is in financial difficulties the directors will also need to understand how these duties may change.

The company’s articles of association will typically contain express provisions regarding the payment of dividends and if there’s a shareholders’ agreement in place this should also be reviewed in case it contains a dividend policy.

Given the pressures being placed on a number of companies as a result of COVID-19 the directors will need to be confident that the company has sufficient distributable reserves to lawfully pay the dividend under the Companies Act 2006. An astute director will want to fully understand the financial position of the company and the board should ensure that any meetings and decisions regarding dividends are fully minuted.

Where possible, the directors may wish to consider whether or not a dividend should be declared at all or, whether any dividend could be delayed or cancelled if this would be in the best interests of the company.

Can a dividend be cancelled after it has been declared but before it has been paid?

Whether or not a dividend can be cancelled will depend on whether the dividend in question is an interim or final dividend.

Final dividends

On the face of it, a final dividend that has already been declared by a company becomes a debt owed by the company to the relevant members and its payment cannot be cancelled. However, if the articles of association contain an express provision which gives the directors the authority to do so, it may be possible to cancel a final dividend even if it has been declared.

In contrast, if a final dividend has not yet been declared, the directors can withdraw their recommendation which may be sufficient to stop the process. However, a word of caution, this withdrawal of the recommendation will only be effective if the directors’ recommendation is a pre-condition to the members’ power to declare the dividend under the company’s articles. Without this pre-condition the directors should consult with the members ahead of any declaration and seek agreement not to declare or to delay declaring the dividend.

Interim dividends

Where an interim dividend has been declared pursuant to the articles of association the directors can cancel the dividend at any point before it is actually paid. Unlike a final dividend, the members have no right to sue for the payment of an interim dividend.

Is it possible to pay a dividend in instalments?

There’s no direct authority on this point but it may be possible if the dividend is declared as being payable in instalments over a period. This point has not been tested in case law so it would need further analysis on a case-by-case basis.

Are there any additional considerations for companies with securities listed on the Main Market or AIM Companies?

Quoted companies will need to continue to comply with their obligations under the Listing Rules, DTRs, Admission and Disclosure Standards, MAR and/or AIM Rules (as applicable) in relation to any decisions made in respect of declaring or cancelling a dividend.

Further information

This article is a brief introduction to a technical area of the law. It is not legal advice, nor does it deal with every aspect of this complex topic. If you would like advice or wish to discuss any steps you could take as a director or company considering a dividend or other corporate governance matters, please speak to your usual Burges Salmon contact or contact Nick Graves.

This article was written by Nick Graves and Amy Carr. 

Key contact

Nick Graves

Nick Graves Partner

  • Corporate Advice
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