COVID-19: Cash conservation and dividend dilemmas

Cash conservation in what is now an uncertain economic environment has left some company directors with dilemmas over their expected or already announced dividend payments. ICSA has published a useful guidance note  setting out options for directors to consider ahead of general meetings. We briefly discuss the ICSA note, the legal differences between interim and final dividends, and options for postponing, amending or cancelling dividends.

Directors’ duties and distributable reserves

Focus on cash conservation is leading many directors to reconsider their approaches to interim and final dividends and their company’s dividend policy. When recommending and paying a dividend, directors need to consider their general duties under the Companies Act 2006 (the Act), including the duty to “promote the success of the company”. Additionally, directors should remember that dividends may only be made lawfully out of distributable reserves, and directors should also consider the effect of the payment of any cash distribution on the company’s cash reserves. The impact of events, such as unexpected losses after the date of the relevant balance sheet for determining distributable reserves, must be considered before directors go ahead with dividend payments.

Dividend matters

In general terms, it should be easier logistically for a board to cancel, change or delay an “interim” dividend than a “final” dividend. By way of reminder, final dividends, under the Act require shareholders’ approval, after they are recommended by the directors. Once approved by shareholders at a general meeting of a public company, or by way of shareholder meeting or a written shareholder resolution for a private company, the dividend becomes a debt due. This debt is then enforceable by the shareholders against the company. By contrast, interim dividends are declared by the directors and, unless also approved by shareholders, do not constitute a debt until paid.

In principle, a company may pay a smaller interim dividend and then a larger final dividend, a series of interim dividends or a combination of final and interim dividends - more than one final or interim dividend can be paid. In each case, the directors should consult the company’s articles of association (the Articles) to check any particular requirements relating to dividends.

Withdrawing directors’ support

Directors can still change dividend plans after an interim dividend is announced to shareholders and/or a final dividend resolution is included in a notice of a general meeting. From a legal perspective, the directors may remove their recommendation in relation to an announced interim dividend and update the market accordingly of a delay to the dividend payment, a reduction in the amount to be paid or a complete cancellation of the interim dividend. Alternatively, if the resolution for a final dividend has already been included in a notice of a general meeting, the directors may update the market that they no longer support the resolution and that it will not be put to the vote at the general meeting. In each case, the directors should explain to the shareholders the reasons for the withdrawal of the directors’ support for the particular dividend in the announcement to the market.

Returning to shareholders

If the shareholders have already approved the dividend, subject to the Articles, the directors may still be able to stop the dividend payment. As noted by ICSA, companies “cannot withdraw or amend final dividends after they have been declared by shareholders”. We would however, encourage directors to seek advice at this stage as to whether delaying the dividend payment and seeking shareholder approval to cancel the dividend would be feasible. If such an approach was determined by the board to “promote the success of the company”, another shareholder meeting could, in principle, be called.

Proxy voting considerations

A company may have to determine how to deal with proxy votes submitted prior to resolutions being amended or withdrawn. A person appointed as a proxy has an obligation under the Act to follow the instructions of the appointing shareholder. As such, the appointing shareholder could provide the proxy (potentially the chairman given the wider COVID-19 related restrictions on meetings) with updated instructions prior to the general meeting. In the absence of updated instructions, we together with ICSA would expect the proxy to vote on any amended resolution, in line with the original instructions.

Implications for MAR and the equity story

For a listed company, a change to an announced dividend or a dividend policy, already communicated to the market is likely to constitute inside information from a Market Abuse Regulation (MAR) perspective. Advisers should be consulted on any MAR considerations, even if the decision is not to propose to pay a dividend rather than to cancel one already announced. Additionally, the dividend policy may be an important part of the equity story. We would recommend that the “messaging” around delaying, reducing or even cancelling a proposed dividend is discussed with the company’s financial advisers to avoid the longer-term equity story of the company being undermined.

For more information, please contact Andrew Collins.