Shareholders are at risk of being treated differently and unfairly over dividend payments during the coronavirus pandemic, Lynsey Burke, senior associate at law firm Nelsons“has warned.
The Covid-19 crisis is having a profound impact on economic growth and, as companies look to conserve their cash, dividends a distribution of profits by a company to its shareholders have beencut, deferred or cancelled by many firms, including?48 members of the FTSE 100 index.
Nelsons has?received enquiries from individuals claiming that directors are still receiving their dividend payments despite theirs being withheld ?Attributing the lack of pay-out to ?different classes of shares.
Lynsey Burke, senior associate and solicitor who specialises in commercial disputes at Nelsons, says that it’s only natural that most companies are looking to preserve cash flow and reduce their overheads during this time. Unfortunately, one way of doing this is by stopping dividend payments.
“It’s important that shareholders understand their rights and know when they are being treated differently and unfairly. We re hearing that directors are continuing to receive their dividend payments, while shareholders” payments are being cut or suspended.
Some businesses offer different classes of shares, which allow a variable dividend rate to be applied. For example, a company may have two classes of shares (A and B, for example) and the rights attached to thoseAssetscould allow for dividends to be paid to the A shares in priority to the B shares.
?Withholding payment to those B shares is only legally allowed if it’s stated that different classes of shareholders can be treated differently in a shareholders agreement or the articles of association,” Burke explains. “This is a contract between a company and its shareholders, and usually contains express provisions regarding the rights of shareholders to dividends.
“If this is going to be adopted and directors are wanting to pay different rates of dividends to different shareholders, a company’s articles of association must be amended. If they are not, a breach has occurred, and people may have a case for bringing forward a minority shareholder petition on the basis of unfair prejudice.”
The Companies Act 2006entitles a shareholder to petition the court to allege that a businessis being run in a manner that is unfairly prejudicial?to shareholders. Previously, the courts have found conduct to be unfairly prejudicial in a number of areas including the failure to pay reasonable dividends.
“Confronted with the consequences of the current coronavirus pandemic and the financial difficulties it is presenting, companies are wanting to build up reserves by keeping a hold of their profits, rather than distributing them to shareholders,” she adds.
“Even if businesses have the financial capacity to keep paying dividends, they are likely to adopt a cautious approach given the high levels of uncertainty.”
This financial stress means directors should take time to remind themselves of their legal obligations when declaring and paying dividends. “Getting it wrong now could have serious legal consequences. If a shareholder believes they have been treated differently and unfairly in relation to dividend payments, it’s vital they seek legal advice and instruct a solicitor to look at their shareholder agreement or articles of association to see if a breach has occurred.