What is a dividend?
A dividend is a payment of money made regularly (usually annually) by a company to its shareholders out of its profits. A company can choose whether or not it pays a dividend. A company may prefer to reinvest its profit back into the company rather than pay dividends to its shareholders.
Does a Pty Ltd company have to distribute dividends equally to ordinary shareholders?
The Corporations Act contains a replaceable rule stating that the directors of a Pty Ltd company may pay dividends ‘as they see fit’. Accordingly it is important to check the company’s constitution to see whether it stipulates equal dividend rights. If it does, then this replaceable rule is ousted and the directors of the Pty Ltd company cannot pay dividends at their discretion; they must pay dividends equally amongst the ordinary shareholders.
However, even if the replaceable rule has not been ousted by the constitution, the Corporations Act requires payment of any dividend to be fair and reasonable to the company’s shareholders as a whole. Accordingly, in the absence of an express right in the constitution allowing for differential dividend payments to ordinary shareholders, the company should be very wary about doing so, as it could be considered unfair or unreasonable to the shareholders.
When determining whether and how to pay dividends to shareholders as a Pty Ltd company, you should consider whether the company’s constitution has ousted the replaceable rule which gives the directors a wide discretion as to how to pay dividends. In addition, this is something to consider when drafting a shareholders agreement for your Pty Ltd company. If you are a minor shareholder with limited board representation, you might want to ensure that matters concerning the payment of dividends have to be approved by a special resolution of the board (i.e. 75% of the directors present at the meeting) to give you some protection against majority shareholders with a strong presence on the board deciding (without the need for your agreement) to pay large dividends to themselves but not to you.
If you require advice on whether your company constitution has ousted the replaceable rule (meaning you have to pay dividends equally amongst shareholders) or you would like a shareholders agreement drafted or reviewed, please get in touch with one of our specialised lawyers and they will be able to assist.