In Compliance #13, we discussed dividend-related issues for you. In today's post, we'll continue with the topic of cash withdrawals from a company and focus on the possibility of withdrawing additional funds from a joint-stock company's assets in the form of an advance payment on an anticipated dividend .
An interim dividend is an instrument that allows for payments to shareholders during the financial year, without the need to approve the financial statements for the financial year for which the payment is being made. The Commercial Companies Code allows for the collection of such an advance payment and regulates in detail the procedure related to its payment. For an interim dividend payment to be admissible, the following conditions must be met.
1. Statutory authorization.
An interim dividend payment may only be made if the articles of association of a joint-stock company provide for such a possibility. It is worth emphasizing that, in terms of jurisdiction, the only body authorized by the articles of association to pay an interim dividend is the management board . Therefore, the payment of an interim dividend is, in principle, an autonomous decision of the management board, but because it falls outside the scope of ordinary management, it requires the adoption of a relevant resolution.
2. The company must have sufficient funds to pay the advance.
The regulations governing the payment of interim dividends indicate the company's prospects for generating a profit. Legislators use the term "interim dividend payment," which directly indicates the management board's projected financial result. If the company's financial position is uncertain or the forecasts clearly indicate a loss in the current financial year, interim dividend payments should not be made. The prospects for profit correlate with the company having sufficient funds to pay the dividend, which is why taking out a loan to pay an interim dividend is deemed unacceptable.
3. Consent of the supervisory board.
This condition requires further elaboration due to the exclusive authority of the management board to pay advances on anticipated dividends, as indicated in the first point. While the management board is the body that decides on advance payments, of the company's supervisory board . In the legislator's view, this mechanism provides additional protection against mismanagement of the management board and hasty disbursement of the company's funds. Therefore, although the payment of an advance dividend is, in principle, an autonomous decision of the management board, initiating this procedure without authorization contained in the articles of association is impossible. Failure to obtain the supervisory board's consent exposes management board members to organizational liability and may result in shareholders having to return the advance payment as an undue benefit. Similarly to the management board's consent to the payment of an advance dividend, the supervisory board's consent requires a resolution.
4. Approval of the financial statements for the previous year, which show a profit.
An advance payment towards a projected dividend is possible if the financial statement, approved by the appropriate resolution of the annual general meeting, shows a profit . The legislator also introduces an additional stipulation to this condition: the advance payment towards the dividend may not exceed half of the profit earned since the end of the previous financial year, as reported in the audited financial statement, increased by any reserves created from profits that the management board may use for the purpose of paying advances, and reduced by uncovered losses and treasury shares. It is assumed that the advance payment cannot be made from supplementary capital, even the portion of which was created from profit.
5. Announcement by the management board of the planned dividend payment.
The Management Board must announce the planned payment of interim dividends at least four weeks before the start of distributions . The announcement is made in the Court and Economic Monitor (Monitor Sądowy i Gospodarczy) and on the company's website, as well as in another location designated for company announcements. The announcement includes, among other things, information about the date of preparation of the financial statements, the amount to be paid, and the definitive date for determining the beneficiaries.
Those entitled to an advance payment, payment conditions.
As with dividend payments, shareholders who are entitled to company shares as of the date determined by the management board are eligible to collect an advance payment. The date by which the group of persons entitled to collect the advance payment is determined should fall within seven days of the commencement date of the payment. Advance payments are generally paid in proportion to the number of shares held, although the articles of association may provide for special privileges regarding the amount of the advance payment.
No dividend.
The rule is that an advance payment reduces the amount of the dividend towards which it was paid. The question arises: what happens if the advance payment exceeds the dividend amount or the dividend is not paid at all? In such a case, there are no grounds to consider the advance payment unlawful, and the possibility of demanding a return of the funds collected by the shareholder is disputed. Some legal scholars argue that in this situation, the company cannot demand a return of the advance payment from shareholders, and the amount collected is credited towards the profit for the following financial year. It seems that the opposite view currently prevails. The purpose of the benefit, which is to collect an advance payment towards the anticipated dividend, is not achieved. If profit is not paid or the amount paid is lower than the amount of the advance payment, the company may demand a return of the advance payment or the difference between the advance payment and the amount of the dividend paid from shareholders.
This article is for informational purposes only and does not constitute legal advice.
Legal status as of June 21, 2022
authors;
