Dividend: A Rational Expectation of Investors

Dividend is a rational expectation of members of a company. Members invest their money with an expectation to participate in the profits earned by the company. Dividend is a return of investment to the members. Proper declaration of dividend encourage investors especially small investors to invest their capital which ultimately assist the company to implement its new projects resulting overall financial as well as industrial development of the country. In small private limited companies in absence of proper understanding among members about dividend it is not unusual that instead of declaring dividend the members unlawfully withdraw capital from the company causing future legal complications.

Dividend in its ordinary connotation means the sum paid to or received by a shareholder proportionate to his shareholding in a company out of the total sum distributed (AIR 1970 SC 388). In case of winding up of a company, dividend includes a division of the realized assets among the creditors and contributories according to their respective rights (AIR 1967 SC 795). It may be noted that the dividend which is paid in winding up is in fact a distribution of company’s capital or assets even if those assets may include some profits earned by the liquidator during winding up.

The persons enlisted as members in the Register of Members of the company are prima facie eligible for dividends. The right to claim dividend will arise after its declaration by the company in its Annual General Meeting or General Meeting. The right to participation in profits exists independently of any declaration by the company with the only difference that the enjoyment of profits is postponed until dividends are declared (AIR 1955 SC 74).

The company in its Annual General Meeting or General Meeting may declare dividend out of profits of the year or any other undistributed profits i.e. reserve fund. No dividend shall exceed the amount recommended by the Board of Directors although the members in Annual General Meeting may reduce the same. If the members desire to increase the rate of recommended dividend, the proper course would be to adjourn the AGM, hold a meeting of the Board of Directors for recommending better rate of dividend and thereafter hold the adjourned AGM for declaration of better dividend. Dividend may be in cash or bonus share (stock).

The divided shall be disbursed within two months from its declaration unless there is a dispute regarding the right to receive the payment or it is lawfully adjusted by the company against any sum due to it from the concerned member.

If the company is listed in stock exchanges it shall, within 30 (thirty) days of declaration pay off the dividend through transfer of cash dividend to the bank and in case of stock dividend through transfer of stock into the Beneficial Owner’s (BO) account of the members. The Company, thereafter, shall require to submit a compliance report to the Stock Exchange and to the Securities and Exchange Commission in the prescribed format within 7 (seven) working days.

It is apparent that dividend can be paid out of profits or from reserve fund. Instead of distributing all earned profits the Board of Directors may decide to reserve a portion in a reserve fund. Ordinarily, court does not interfere in this business judgment of directors. Even in absence of any provision in Articles of Associations of the Company to create a reserve fund the company has an implied authority to authorize its directors to do so, which can be exercised by the members in General Meeting. There is no principle of company law compelling a company while it is a going concern to divide its entire profits among the shareholders. (1902 AC 83 PC). It may be noted that a reserve fund may be used for payment of dividends in future years.

A dividend once declared creates a debt to the members which cannot be revoked unless the declaration was itself illegal. If a dividend is declared and the amount is credited or paid to the shareholders as dividend that cannot be altered by a subsequent resolution (AIR 1963 SC 390). After declaration of dividend if the company faces supervening circumstances like a fire destroying company’s properties or outbreak of war etc. then in such plight the with the approval of members the declared divided may be revoked.

The Board of Directors considering the financial plight of the company may also declare interim dividend but at any time before payment the Board may rescind such dividend if it is subsequently discovered that the circumstances do not justify such payment. “Where the Directors are authorized to pay interim dividends, a mere resolution to pay does not create a debt as between the company and the members so as to prevent the Directors from subsequently rescinding the resolution” (Buckley on the Companies Act, 14^th Edition, Vol.1 at page 1030).

The payment of dividend is subject to the right of preference shareholders. Preference share means shares or stock in a company having priority as to payment of dividends of a fixed amount (Encyclopaedic Law Lexicon, 4^th Edition, Vol.3). They are entitled to priority over other members and the company may require to arrange for a guarantee that their dividend would be paid even if there is no profit. Preference shareholders may file suit and obtain injunction to refrain payment of a proposed interim dividend which would prejudice their preferential rights (1953 1 All ER 7).

Although the court does not compel Board of Directors to declare dividend but the Settlement of Stock Exchange Transactions Regulations, 1998 prescribes a critical classification for listed companies based on their divided payment. Companies which are regular in holding the current annual general meetings and have declared dividend at the rate of ten percent or more in the last English calendar year belong to ‘A’ category. Companies which are regular in holding the annual general meetings but have failed to declare dividend at least at the rate of ten percent in the last English calendar year belong to ‘B’ category. ‘G’ category includes green field company which makes direct foreign investment and establishes operations in a foreign territory. All newly listed companies except Greenfield companies will be placed in ‘N’ category. Finally, companies which have failed to hold the current annual general meetings or have failed to declare any dividend or which are not in operation continuously for a period of more than six months or whose accumulated loss after adjustment of revenue reserve, if any, is negative and exceeded its paid up capital belong to ‘Z’ category. Investment in companies which belong to ‘Z’ category carries heavy risk.

If a company enlisted in stock exchange has failed to declare dividend (cash/stock) for a period of five years commencing from the date of declaration of last dividend or the date of listing with the Exchange may be delisted from the stock exchange.

If the members or directors of a company without declaring dividend withdraw money from the company that shall be treated as capital reduction and the members or directors as the case may be shall be liable to refund the same. To participate in the profit by the members the company should declare dividend in compliance with law. In absence of profit or distributable fund, a company cannot lawfully declare dividend. The recipients of unlawful dividend shall be liable to refund the same.

A significant number of private companies have been suffering deadlock or similar situations due to their failure to ensure appropriate returns to members. A large amount of money of small investors has been stuck in those companies in most unproductive manner. Proper steps to save these investors shall encourage them as well as others to invest in small companies which shall inevitably assist in the national developments.

Md. Nazrul Islam Khan is an Advocate of the Supreme Court of Bangladesh and can be reached at nikhan.law.ru@gmail.com