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Law Notes Company Law Notes

Dividends And Distributions Notes

Updated Dividends And Distributions Notes

Company Law Notes

Company Law

Approximately 805 pages

Company law notes fully updated for recent exams in the UK. These notes cover all the major LLB company law cases and so are perfect for anyone doing an LLB in the UK or a great supplement for those doing LLBs abroad, whether that be in Ireland, Canada, Hong Kong or Malaysia (University of London). These notes were formed directly from a reading of the cases and main texts and are vigorous, concise and very well written.

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Supe 9 - Dividends & Distributions Intro * * * * The rules on capital maintenance affect how much dividends can be awarded to SH. These legal rules bite when the company doesn't have enough cash profit to pay a dividend. The size of the dividend may cause director/SH conflicts These can only be resolved by the Articles, subject to creditor protection rules. Model Arts 30 (Ltd) 70 (PLC) states Dir and SH must agree to level of Dividend. SH cannot approve a level any higher than what Dir suggest. In default of provision, SH have the final say. This is in effect a mutual veto power. Public & Private Companies * * The relationship between legal capital rules and distributions appear most clearly in the rule applicable to public companies in s831 CA. There are two rules of dividends: 1. It is unlawful for a company to make a distribution if its net assets (assetsliabilities) are, or would be after the distribution, less than its share capital and undistributable reserves (inc share premium account, capital redemption reserve, redenomination reserve per s620 & any other reserve made undistributable by the Articles) per s831 CA. i. E.G.: If Company has full paid up 200 PS1 shares at an issue price of PS1.50. It has a share capital value of PS200 and a SPA value of PS100. Thus if the company wants to issue 10p dividends on each share (200*PS0.10=PS20), the company must have assets valued at PS320 (PS200+100+20). ii. NB Before 1948, the SPA was a distributable reserve, thus only needed assets of PS220 before making the above dividend payment. 2. The General Rule The company may only make distributions out of profits per s830 CA. Profits are defined as the company's "accumulated realised profits" so far as not previously utilised by distribution or capitalisation less its accumulated realised losses per s830(2) CA. This rule is focused on the profit and loss account, unlike the first rule which is concerned with the assets. The company must: i. Determine whether there is a profit to support a dividend Thus "nimble dividends" aren't permitted where Co makes a loss in Y1, but a profit in Y2 The company cannot pay out of Y2's profits until it makes good its losses in Y1. Thus it is aggregate profits over the years against aggregate losses over the years. ii. If its aggregate profits over the years exceed aggregate losses over the years, it may make a distribution of surplus profit subject to one further crucial qualification: * s830 only applies to "realised" profits and "Realised losses". "Unrealised profits" and losses are left out of account in the calculation required by s830. "Realised" profits are not defined in the Act, but in accordance with accountancy principles per s853(4) CA. The precise line between the two is subject to controversy. An example is best: * Co owns property acquired years ago for PS1m. The property is now worth PS5m. If it sells at PS5m, it makes a PS4m profit which is distributable to SH (assuming no other aggregate losses). * If Co revalues its books so the asset is now worth PS5m (but doesn't dispose of it), it has simply recorded an unrealised profit. * Similarly, only realised losses count against the amount of 67 3. distributable profit. How do the two rules in s830831 interrelate? s830 applies to all companies, and s831 applies to PLCs alone. Thus assumedly, s831 prevents some distributions which would otherwise be permissible under s830 for PLCS. What distributions? i. At first glance, the rules appear to be different s830 'general rule' is looking at profit/loss account? s831 PLC rule is only looking at overall balance sheet. ii. But the two are interrelated. If Co makes a profit of PS1m, but decides to make no distributions? thus there is an increase in the profit account which is reflected on the overall balance sheet. Thus both are effectively balance sheet tests. iii. The crucial difference between s831 and s830 is that the latter takes no account of unrealised losses. * Under the general rule (s830), a company with accumulated positive balance of realised profits and losses may lawfully distribute them even though there is substantial unrealised losses (though this may breach Dir's duty). In the case of a public company, unrealised losses must be taken into account per s831(4)(c) CA. Identifying the Funds * * * * * * * * What matters is what's in the company's "relevant" accounts per s835(2) CA. The distribution is lawful so long as it is justified by reference to the most recent statutory accounts and those accounts have been properly prepared in accordance with the Act i.e duly audited and auditor's report. This statement must be laid before the company in GM or sent to the members if no GM per s837(3)(4) CA. Special "Interim" Accounts must be used where: * The distribution would contravene the statutory distribution rules if reference were only made to the last accounts per s836(2)(a). * Where the company pays a dividend in its first accounting year or before any accounts have been presented in respect of that period per s836(2)(b). This will enable the company to declare a dividend if it profits before its first set of financial statements are produced, or since its previous statutory accounts were produced (e.g. realised profit by sale of fixed assets and company wished to distribute profit before next accounts). NB: Such accounts are not needed whenever the company declares an interim or special dividend. Provided it complied with its obligations in the previous year, it can pay at any time provided the dividend is supported by the old accounts. It is only where the last accounts would not justify a payment that it is necessary to prepare interim accounts. If accounts were wrong, Directors should obviously not declare dividend. If finances plummet after the last accounts, it would not be unlawful to declare a dividend per Gower & Davies. But the directors may breach their fiduciary duties to promote success of company or an act of wrongful trading. CLR proposed subsequent losses should be deducted from distributable profits, but this wasn't adopted. So DIR duties has to fill the gap. The difference being an unlawful distribution is an unlawful act which cannot be ratified by SH? whereas SH can ratify a breach of directors' duties. But also, the Act preserves "any rule of law" restricting dividends per s851 CA. Accordingly, the CL rule prohibiting the reutn of capital to SH continues in relaiton to distributions. This rule applies at the time the distribution is declared, thus it also fills the gap of subsequent falls in finances. Disguised Distributions * * "Dividend" is defined broadly in s829 CA as "Every description of distribution of a company's assets to its members, whether in cash or otherwise." (e.g. subscribing for additional shares). What about disguised distributions? * This does not purport to be a distribution because of a discrepancy between value 68

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