Reading time: 6 minutes

A dividend is a payment that a company makes to its shareholders when the company has excess profits and chooses not to reinvest those profits in the company. Typically, it is up to the company’s board of directors to choose whether or not to pay dividends to its shareholders. If the directors declare a dividend, they will declare it on a certain class (or classes) of shares and will pay out the dividends. Each shareholder will then receive a dividend for each share that they hold. This means that each shareholder is paid in accordance with the proportion of the company that it holds. 

Under certain circumstances, however, the directors may not wish to pay dividends according to the percentage of the company that each shareholder holds.

For example, there may be an agreement between the shareholders that one shareholder should not be entitled to a dividend on their shares, or should be entitled to less of a dividend, for a number of reasons.

This can lead to difficulties because dividends on shares have to be paid equally to each shareholder. However, it is possible for your company to pay unequal dividends to its shareholders each financial year. This article will discuss how you can achieve this.

How Are Dividends Declared?

Typically, the company’s board of directors will be responsible for declaring and paying dividends. This is done in accordance with the company’s dividend policy. Typically, the directors also decide the dividend policy. You should check your company’s shareholders agreement and constitution to see if there are specific rules governing how you must declare dividends in your company. 

Under the law, there are set circumstances under which a company can pay a dividend. A company must not pay a dividend unless:

  1. the company’s assets are greater than its liabilities when it declares the dividend, and the difference is enough to pay the dividend; 
  2. the payment of the dividend is fair and reasonable to the shareholders as a whole; and
  3. the payment of the dividend does not affect the company’s ability to pay its debts (for example, the payment of a dividend would do so if the company would become insolvent as a result of the payment).

The company’s dividend policy should set out how it will pay dividends. This will typically be in accordance with the particular share classes in a company, as outlined below.

Directors' Duties Complete Guide

If you are a company director, complying with directors’ duties are core to adhering to corporate governance laws.
This guide will help you understand the directors’ duties that apply to you within the Australian corporate law framework.

Download Now

Classes of Shares

Within a company, each shareholder will hold a certain class of shares. Usually, these will be ordinary shares. However, some companies may also issue preference shares to their investors. If your company has a constitution, it will usually set out the: 

  • types of shares that the company can issue; and 
  • rights which attach to each class of shares. 

In order to pay your shareholders unequal dividends, your shareholders will need to hold different classes of shares. The directors will then declare:

  • a certain dividend on one class of share; and
  • a different dividend (or no dividend at all) on the other class or classes. 

If the dividend distribution is the only thing that you want to be different between the classes of shares, then you can simply convert a shareholder’s shares to a different class with the appropriate rights as set out in your company’s constitution. 

For example, if you want to declare a different dividend for a shareholder that currently holds 500 ordinary shares in your company, you can convert those 500 ordinary shares into 500 ‘Class A’ shares, as long as the ‘Class A’ shares have the appropriate rights in your constitution.

If your company’s constitution already covers a class that has the relevant rights, then you can convert the shareholder’s shares into that class. If your constitution does not have an appropriate class of share, you will need to amend your constitution.

How to Convert to a New Class of Share

To convert your shareholder’s shares into a new class, there are a number of steps that you will need to take. The specific requirements will depend on your company’s shareholders agreement and constitution, as these documents will set out any particular approvals or steps that you need to take. 

Generally, converting shares into a new class will require: 

  1. a shareholder or board resolution to approve the conversion; 
  2. cancelling any existing share certificates and preparing a new share certificates;
  3. updating the company’s register of members; and
  4. completing and lodging the relevant ASIC Form within 14 days.

Once the shareholder (or shareholders) hold a different class of shares, the directors can then declare a different dividend as appropriate on each class of share. 

Key Takeaways

If a company wants to pay its shareholders some of its profits, it can do so through the payment of a dividend. A dividend is paid on a per share basis and declared on a certain class (or classes) of shares. If you wish to pay different dividends to different shareholders, those shareholders will need to hold different classes of shares. You can do this by converting the relevant shares held by the shareholder into a new class. You should check your company’s shareholders agreement and constitution regarding your company’s particular requirements in respect of:

  • paying dividends;
  • the types of share classes that your company’s shareholders can hold; and 
  • the process for converting shares into a new class. 

If you need help with determining your company’s requirements to pay out unequal dividends, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

How do I divide my company’s dividends?

Your company’s dividend policy dictates how to divide dividends. In addition, the dividend policy will set out how your company is to pay dividends to its shareholders. The payment will typically be in accordance with the particular share classes in your company.

How can I pay unequal dividends to shareholders?

To pay unequal dividends to shareholders, you will need to ensure that those shareholders hold different classes of shares. If they currently hold the same classes of shares, you can convert the classes held by the shareholders into a different class.


COVID-19 Vaccines In The Workplace

Thursday 10 February | 11:00 - 11:45am

Can you compel employees to have a COVID-19 vaccine? Understand your rights and responsibilities as an employer. Register today for our free webinar.
Register Now

Preventing Wage Underpayment In Your Franchise

Wednesday 16 February | 11:00 - 11:45am

Learn how to identify and prevent wage underpayment in your franchise. Register today for our free webinar.
Register Now

How to Prevent and Manage Commercial Contract Disputes

Thursday 24 February | 11:00 - 11:45am

Learn how to prevent and manage common commercial contract disputes. Register today for our free webinar.
Register Now

About LegalVision: LegalVision is a commercial law firm that provides businesses with affordable and ongoing legal assistance through our industry-first membership.

By becoming a member, you'll have an experienced legal team ready to answer your questions, draft and review your contracts, and resolve your disputes. All the legal assistance your business needs, for a low monthly fee.

Learn more about our membership

Need Legal Help? Get a Free Fixed-Fee Quote

If you would like to receive a free fixed-fee quote or get in touch with our team, fill out the form below.

Our Awards

  • 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice Winner – Australasian Lawyer
  • 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review
  • 2021 Law Firm of the Year - Australasian Law Awards
  • 2019 Most Innovative Firm - Australasian Lawyer