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Suspension of Dividend Payments by Companies

Suspension of Dividend Payments by Companies

Introduction

Due to the rapid spread of Coronavirus (Covid-19 or the Pandemic), corporate entities all over the world have been prompted to protect themselves from a complete shutdown due to economic instability. After addressing immediate threats of the Pandemic, companies are now focusing their efforts on trying to prevent financial distress and consequent closure of companies.

In order to reduce their cash outflow, some of the measures which are being implemented by companies include: withdrawing share buybacks, reducing working capital and suspending dividend payments.

Perspective

For instance, Standard Chartered Kenya Limited (Standard Chartered) released a statement on 26th May 2020 notifying its shareholders that it will not meet its dividend payment date as it will not be able to hold an Annual General Meeting with its shareholders, where such matters are approved. Equity Group Holdings Plc. (Equity Group) also issued a press release on the same date withdrawing proposed dividend declaration and payment due to market uncertainty. It should be noted that the Capital Markets Authority (the CMA) issued a circular on 27th May 2020 notifying companies that they are allowed to hold general meetings through virtual/electronic means or any hybrid means subject to obtaining a no objection letter from the CMA.

Shortly after the announcement made by Standard Chartered and Equity Group, the International Monetary Fund (IMF) announced that it backed the decision by banks to halt dividend payments and share buy backs in response to the Pandemic.

The suspension and withdrawal of dividend payments seems to be gaining traction globally. Internationally, the Bank of England urged banks to suspend plans to pay dividends and cash bonuses to executives earlier this year.

Legal Requirement

In order to implement the suspension of dividends, companies should confirm whether their Articles of Association addresses the procedure of suspending or withdrawing dividends. If not, the Articles of Association should be amended to include such a provision. It is common for the Articles of Association to permit shareholders to approve a final dividend only up to the amount recommended by directors. This means that if a board changes its dividend recommendation considering a change in circumstances, a company may withdraw or amend its dividend resolution accordingly. This may be done at any time before the resolution is put to the annual general meeting. It must be noted that companies cannot withdraw or amend final dividends after they have been declared by shareholders.

Under English law, it is possible for a company to suspend the payment of dividends. It is also possible for a company to cancel a dividend, however, this will depend on whether the dividend is a final dividend or an interim dividend.

If a dividend is declared final, it becomes a debt that is immediately due from the company to the shareholder, unless a resolution provides for it to be payable at a future date, in which case it becomes a debt due which is due on the said date. Once a final dividend has become a debt due, its payment can be enforced. This consequently means that the shareholder has a right to sue for that debt if the dividend is cancelled.

Conclusion

Companies should exercise caution when suspending or withdrawing dividend payments in order to ensure that they comply with their Articles of Association and the law.

If you have any queries regarding the article, please do not hesitate to contact Bernard Musyoka at bmusyoka@mwc.legal. Please note that this e-alert is meant for general information only and should not be relied upon without seeking specific subject matter legal advice.

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