Corporate Matters to Consider Prior to Paying Dividends
If your company is considering paying dividends to its shareholders, there are a few important considerations to keep in mind from a corporate law perspective.
- Can you pay dividends on the shares?
In some cases, the share provisions may not allow dividends to be paid on a class of shares. If this is the case, the company will not be able to declare dividends on those shares. You should check the share provisions (which you can typically find in the articles of incorporation or amendment) to confirm that you can legally pay dividends on the shares you propose to pay dividends on. If the share provisions don’t specify one way or the other, the shares are dividend bearing.
- How must you pay dividends on the shares?
If you have multiple shareholders holding the same class of shares, dividends must be paid proportionately to all shareholders of that class. For example, if you have a company where Bob owns 20% of the common shares and Dylan owns 80% of the common shares, and the company declares $200 of dividends on the common shares, Bob will receive $40 and Dylan will receive $160.
The share provisions can also specify that if dividends are paid on one class, they must be paid on another class, based on some predetermined formula. It is important to keep this in mind if you are paying dividends so that all shareholders get the dividend that they are entitled to.
- Does your business meet the solvency requirement for corporate law purposes?
In order to pay dividends, the company must be able to meet the corporate solvency tests. The test varies across jurisdictions, but generally the test is met if, after the dividends are paid, the company is able to continue to pay its liabilities as they become due and the realizable value of the assets of the corporation exceeds the amount of its liabilities together with its shareholders equity.
- Documenting dividends.
The directors of a company must approve any dividends to be paid. The directors’ approval can be documented in a written resolution, or through minutes of a director’s meeting. It is important to keep records of these approvals in the minute book of the company so that the corporate records are accurate and up-to-date.
If you have questions about paying dividends to your shareholders, please contact us and one of our lawyers would be happy to assist you.