How Does a Company Pay Variable Dividends to its shareholders?
Reasons to choose Wilson Browne
A company will be unable to pay different rates of dividend to its shareholders unless it is clearly provided for. Failure to do so can result in the dividend being unlawful, resulting in the company’s directors being in breach of their legal duties.
If a company has the sufficient reserves, we commonly find that there are two main issues preventing a company from being able to pay different rates of dividend to its shareholders.
Firstly, the company needs to have different share classes in place. The general principle is that all shares are of one class if the rights attached to them are the same. Note that the emphasis is on the rights of the share, as opposed to what the share is called. To deal with this, we usually amend the company’s articles of association, specifically making reference to the different classes of share and the rights attaching to them. This should be reinforced with resolutions of the directors and shareholders that also document this.
Finally, the share rights must clearly allow for different rates of dividend to be paid to each class. The default position is that equal dividends must be paid on each share on a pro rata basis, irrespective of share class, unless the company articles say otherwise.