How Do You Declare Dividends?
Having explored the fundamentals of dividends – their nature and distribution, let’s focus on the formal process of declaring them
I’ll share the practical processes and legal considerations in declaring dividends to ensure your approach is compliant and strategic.
Dividend Declaration Process
The dividend declaration process usually begins with the directors proposing a dividend rate, representing the amount payable per share.
Dividends can be classified as either interim or final, each with distinct declaration procedures.
Final Dividends
The declaration of final dividends is typically held during the company’s Annual General Meeting (AGM).
The directors propose a dividend rate, which is then presented to shareholders for approval at the AGM or an Extraordinary General Meeting (EGM) convened for this purpose.
A simple majority vote is usually sufficient to pass the ordinary resolution.
While shareholders may express a desire for a higher dividend at the AGM, their requests are often overruled, and the directors’ proposed rate prevails.
Though shareholders may voice their discontent, they ultimately cannot overturn the resolution passed by the majority.
Such scenarios often arise when there are dissenting minority shareholders, but their options for recourse are limited.
Interim Dividends
In contrast, interim dividends only require an ordinary resolution passed by the company’s directors. A simple majority vote is typically sufficient, per a standard company constitution.
Interim dividends are generally declared during the financial year, based on the company’s financial performance supporting such a distribution.
They are usually paid out before the AGM, but can also be paid immediately upon declaration or at a specified future date, provided the company has the necessary cash flow.
Considerations After Declaring Dividends
Once a final dividend is declared, it becomes a debt the company owes its shareholders, payable immediately or on a specified later date. This declaration is irreversible and cannot be reduced.
While interim dividends do not constitute a legal debt, honouring them is considered good practice to maintain shareholder confidence.
Favorable tax treatment in Singapore
In Singapore, dividends are tax-exempt in the hands of shareholders.
This reflects Singapore’s one-tier taxation system, as they are paid from the company’s after-tax profits, which have already been subject to corporate tax.
Risks of Improper Dividend Declarations
Directors’ Liability
Directors who authorize dividend payments without ensuring adequate profits face legal repercussions.
These consequences can be criminal and civil including fines, imprisonment, and liability to the company’s creditors.
Shareholders’ Liability
In most cases, shareholders are not held liable for receiving improper dividend payments.
However, shareholders who accept dividends when the company lacks sufficient profits to justify them may be required to return those dividends. This is also rare.
The Importance of Reserves for Dividend Payments
Under the Singapore Companies Act, dividends can only be paid from a company’s profits, also known as its accumulated reserves.
If the company experiences financial losses, these will deplete its reserves, potentially impacting
its ability to pay dividends or even prevent such distributions entirely until its financial position recovers.
Understanding the legal framework surrounding dividend declarations is essential for any business. Ensuring dividends are paid from profits safeguards your company’s financial health and protects directors from potential liabilities.
Reach out to us for personalized guidance on dividend policies and compliance.
