Currently, many joint-stock companies are in the process of convening annual general meetings to approve financial documents, including adopting resolutions on the coverage of losses or the distribution of profits earned in the previous financial year. Therefore, in today's entry from our Compliance series, we will discuss issues related to the distribution of profits in joint-stock companies.
What is a dividend?
A dividend is the most important property right held by shareholders. Simply put, it is the right to the profit reported in the financial statements for a given fiscal year . However, the concepts of profit and dividend are not the same. A company's profit reported in the financial statements becomes a dividend when the general meeting decides to allocate it to shareholders.
Who is entitled to profit distributions and when?
The right to a dividend is a specific expression of shareholders' rights to participate in company profits. According to the Commercial Companies Code, the right to a dividend payment requires the following conditions to be met:
- preparation and approval of the company's financial statements (profits may only be paid out on the basis of the annual financial statements);
- examination of the financial statements by a statutory auditor;
- adoption by the general meeting of a resolution on allocating the profit in whole or in part to the payment of dividends.
Once the above conditions are met, shareholders may be paid the profit, but the dividend is payable only to shareholders who were entitled to company shares on the date of the resolution on profit distribution . The company's articles of association may authorize the general meeting to determine the date according to which the list of shareholders entitled to dividends for a given financial year is prepared. This date is called the dividend record date . The dividend record date cannot be set earlier than five days and no later than three months from the date of the resolution on profit distribution. If the resolution of the annual general meeting does not specify a dividend record date, this date is the day falling five days from the date of the resolution on profit distribution . Dividends are paid on the date specified in the resolution of the general meeting, and if the resolution of the general meeting does not specify a payment date, the dividend is paid on the date specified by the supervisory board. The dividend payment date is set within three months of the dividend record date . If neither the general meeting nor the supervisory board determines the dividend payment date, the dividend should be paid immediately after the dividend date.
Profit share and dividend amount
Profit participation depends on the number of shares held by a given shareholder. The principle is simple: the more shares, the greater the profit for the shareholder entitled to dividends. If the shares are not fully paid up, profit is distributed in proportion to the payments made for the shares. It is worth noting that the articles of association may provide for a different method of profit distribution, including providing for shares with special dividend rights.
The amount to be distributed among shareholders may not exceed:
- profit for the last financial year,
- undistributed profits from previous years,
- reserve capital created from profits, which may be allocated to the payment of dividends.
The amount of the dividend should be reduced by uncovered losses, own shares and amounts which, in accordance with the law or the company's articles of association, should be allocated from the profit for the last financial year to supplementary or reserve capital.
Advance payment on dividends
The articles of association may authorize the management board to pay shareholders an advance payment towards the anticipated dividend at the end of the financial year, provided the company has sufficient funds to cover the payment. Payment of an advance payment requires the consent of the supervisory board. The company may pay an advance payment towards the anticipated dividend if its approved financial statements for the previous financial year show a profit. The advance payment may not exceed half of the profit generated since the end of the previous financial year , as reported in the financial statements, increased by reserves created from profits that the management board may use for the purpose of paying advance payments, and reduced by uncovered losses and treasury shares . The management board announces the planned payment of advance payments at least four weeks before the commencement of the distribution, specifying the date of the financial statements, the amount to be paid, and the date by which the recipients of advance payments are determined. This date should fall within seven days before the commencement of the distribution.
Allocating profits for other purposes
Finally, we point out that profits do not have to be allocated annually for shareholder distributions. The general meeting, by resolution, may allocate company profits to, among other things, cover losses from previous years, reserve capital, other company funds, or remuneration for members of the company's governing bodies . However, legal doctrine emphasizes that unjustified, long-term exclusion of profits from distribution to shareholders may be considered detrimental to shareholder interests . It is worth being aware of this risk in the context of analyzing the company's financial capabilities, taking into account the implemented investment strategy and shareholder interests. To repeal a resolution allocating profits for purposes other than dividend payment, it is sufficient to demonstrate that the long-term, unjustified retention of profits in the company has violated the right to profits, and therefore harmed shareholders.
This article is for informational purposes only and does not constitute legal advice.
Legal status as of June 7, 2022
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