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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 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 pay unequal dividends to its shareholders. This article will discuss how you can achieve this.

How Are Dividends Declared?

Typically, the company’s directors will be responsible for declaring and paying dividends, 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.

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 its 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.

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