A shareholder’s ‘right’ to dividends

We are all looking for ways to make our money make more money. For most people, when they buy shares in a public listed company or put capital into a private company, they are hoping for a return on their investment. That return generally takes the form of a dividend. If you have been savvy enough to invest in a company that regularly declares a dividend, then you may have happily become accustomed to receiving this “extra cash”. However, shareholders do not have a right to dividends.

A dividend can be defined as the distribution of profits by a company to its shareholders. The payment of dividends by a company is subject to several considerations. Firstly, section 158(3) of the Companies Act of Jamaica (the “Act”) states that “no dividend shall be payable to the shareholders of a company except out of profits”. Therefore, there is a statutory requirement that a company can only pay dividends out of profits. This statutory requirement cannot be contracted out of or overruled by agreement.

The Act imposes further limitations on a company’s ability to declare or pay dividends. In section 158(4) it provides that a company shall not declare or pay a dividend “if there are reasonable grounds for believing that a) the company is, or would be after the payment, unable to pay its liabilities as they become due; or b) the realisable value of the company’s assets would thereby be less than the aggregate of its liabilities and stated capital”. In other words, a company is prohibited from declaring or paying any dividends if that payment would result in the company being declared insolvent based on an assessment of either the cash flow or balance sheet test.