Sections 51 to 53 of the Companies Act 1997 govern how value is returned to shareholders in the ordinary course.
Section 51(1) — the definition
A dividend is a distribution other than a distribution to which section 56 or section 63 applies.
So it is defined by exclusion. A transfer of value to shareholders that is not an acquisition of the company’s own shares under section 56, and not financial assistance under section 63, is a dividend — and every dividend must first pass through the section 50 solvency gateway.
Section 51(2) — equality within a class
(a) in respect of some but not all the shares in a class; or
(b) that is of a greater value per share in respect of some shares of a class than others of that class,
unless the amount of the dividend per share is in proportion to the amount paid to the company in satisfaction of the liability of the shareholder under the constitution or under the terms of issue of the share.
Because shares have no par value, the only permissible basis for paying different amounts within a class is the amount actually paid up. A shareholder who has paid in full may receive proportionately more than one whose shares are partly paid — but the proportion must track the payment, not favour.
Between classes, differences are perfectly proper: that is what section 38 classes are for. A preference class may receive a fixed return while the ordinary class receives whatever the board decides. Section 51(2) polices equality within each class only.
Section 51(2) is not expressed as subject to the constitution. Indeed section 37(2) — which allows the constitution to negate, alter or add to a share’s rights — is itself “subject to section 51”. So a constitution cannot authorise selective dividends within a class. The way to differentiate is to create a separate class, which engages the interest group provisions in sections 97 to 99.
Section 51(3) — waiver
Notwithstanding subsection (2), a shareholder may waive his entitlement to receive a dividend by notice in writing to the company signed by or on behalf of the shareholder.
A waiver must be in writing and signed. This is how a founder can leave funds in the company while other shareholders take their dividend, without breaching the equality rule — the dividend is declared equally, and one shareholder declines it.
Section 52 — shares in lieu of dividends
(a) the right has been offered to all shareholders of the same class on the same terms; and
(b) if all shareholders elected to take shares, relative voting or distribution rights, or both, would be maintained; and
(c) the shareholders are afforded a reasonable opportunity of accepting; and
(d) the shares issued to each shareholder are on the same terms and subject to the same rights as those issued to all others in that class who accept; and
(e) the provisions of section 47 are complied with by the board.
| Condition | What it prevents |
|---|---|
| Offered to all of the class on the same terms | Selective issues dressed up as a dividend alternative |
| Relative rights maintained if all accept | Dilution disguised as a scrip dividend |
| Reasonable opportunity to accept | Compressed deadlines that exclude some shareholders |
| Same terms and rights for all who accept | Favoured shareholders receiving better shares |
| Section 47 compliance | Shares issued for consideration that is not fair and reasonable |
Because the shares are issued under section 47, the board must decide the consideration, determine a reasonable present cash value where the consideration is not cash, resolve that it is fair and reasonable to the company and to all existing shareholders, and sign and file a certificate within 10 working days.
Section 53 — shareholder discounts
(1) The board may resolve that the company offer shareholders discounts on some or all of the goods or services it provides.
(2) The board may approve a scheme only where it has previously resolved that the discounts are (a) fair and reasonable to the company and to all shareholders; and (b) available to all shareholders, or all shareholders of the same class, on the same terms.
(3) A scheme may not be approved or continued unless the board is satisfied on reasonable grounds that the company satisfies the solvency test.
(4) Subject to subsection (5), a discount accepted under an approved scheme is not a distribution.
Where a discount is accepted under a scheme approved or continued by the board, and at the time the scheme was approved or the discount was offered the board had ceased to be satisfied on reasonable grounds that the company would satisfy the solvency test, section 54 applies to the discount as if it were a distribution deemed not to have been authorised.
Note that subsection (3) requires the board to be satisfied both when the scheme is approved and while it is continued. A discount scheme running through a company’s decline into insolvency exposes the directors under section 54(4).
Practical points
- Declare, then pay. The board authorises under section 50; shareholders do not vote a dividend to themselves.
- Re-check solvency before payment. Section 50(3) deems an authorisation withdrawn if the board ceases to be satisfied.
- Never pay selectively within a class unless the difference tracks the amount paid up. Use a written waiver under section 51(3) instead.
- For a scrip dividend, satisfy all five section 52 conditions and section 47 — including the certificate and the 10-working-day filing.
- Document a discount scheme with the section 53(2) resolution and a standing solvency review, so subsection (5) is never engaged.
- Watch section 55 — a reduction of a shareholder’s liability is treated as a dividend for section 51(2) and (3) purposes.
Sources
- Companies Act 1997 — ss 37, 38, 47, 50–56, 63, 97–99
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.