Dividends - When can a company not pay them to shareholders?

The right to receive a share of profits, or dividend, is one of the fundamental rights of shareholders.

However, if the shareholders do not have shares with a fixed share in the profit, the shareholders will only be entitled to a dividend if the company's general meeting decides to pay it out under the conditions set out in the law and the articles of association.

This article was written in 2019. If you are looking for the latest information on this topic, please contact us at office@arws.cz or by phone on +420 245 007 740. We will be happy to advise you.

At the end of this article you will find our latest publication for download and you can watch our latest webinar. 

It is primarily the articles of association that determine the manner of dealing with the profit, for example, whether it will be distributed only among shareholders or also among other persons (typically as royalties among members of elected bodies of the company), whether a certain part of the profit will always be distributed, etc.

The articles of association may also provide that profits will not be paid to shareholders at all for a certain period of time. However, the articles of association cannot exclude the right to profit-sharing altogether or restrict it in a manner contrary to good morals.

Nor should a shareholder prevent other shareholders from exercising their right to a share of the profits at a general meeting in a manner contrary to good morals (e.g. with a view to the subsequent redemption of the shares of other shareholders) by consistently deciding against the distribution of profits.

This issue has been repeatedly addressed by the Supreme Court of the Czech Republic, which has stated that a general meeting may decide not to distribute profits to shareholders only for important reasons and while respecting the prohibition of abuse of the majority of votes, whereby:

1. Important reasons

According to the Supreme Court of the Czech Republic, important reasons for not distributing profits may be the provisions contained in the articles of association. This important reason may be, for example, the issue of shares without the right to a share in the profit, or the above-mentioned arrangement that the profit will not be distributed for a certain period of time, or that part of the profit will be distributed to other people, typically as royalties to members of the elected bodies of the company.

Other important reasons not mentioned in the articles of association may be typically the poor economic situation of the company, etc.

2. Invitation to the general meeting 

Important reasons for which the board of directors (or other convenor) proposes that profits should not be distributed to shareholders (including reasons that are given in the company's articles of association) must be stated in the invitation to the general meeting.

According to the Supreme Court of the Czech Republic, failure to state these reasons may result in the invalidity of the decision of the general meeting. 

3. Abuse of voting rights

In addition to the absence of important reasons, dividends may also not be withheld from shareholders because a shareholder (whether a majority shareholder or a shareholder with at least a blocking minority) abuses its right to vote against the payment of dividends.

This can typically occur if a shareholder makes a long-term decision not to pay dividends to shareholders (often based on the company's economic situation or planning for future investments), with the intention of such shareholder being to "starve" other shareholders and then buy back their shares.

4. Shareholder rights in the event of a breach of the dividend payment rules

In the event of a violation of the above dividend payment rules, the shareholder is entitled to claim the invalidity of the decision of the General Meeting as well as compensation for damages, including the right to reasonable compensation.

The amount of damages will depend on how much damage the aggrieved shareholder can prove. This may include both real damage (e.g. the obligation to pay interest on a loan that the shareholder was forced to take out because dividends were not paid, the amount of rent because the shareholder could not buy his own house or apartment, etc.) and lost profits (e.g. the inability to buy real estate that he would have continued to rent out, investments in other companies and the resulting dividends, etc.). The amount of appropriate compensation will then be determined by the manner in which the non-pecuniary sphere of the injured shareholder has been affected by the conduct in question (e.g. loss of prestige, reduction in the eyes of customers, distortion of performance or ability, etc.). The award of appropriate compensation is then entirely at the discretion of the court and it is therefore up to the court to decide whether and, if necessary, how much appropriate compensation to award.

In the case of the abuse of voting rights described above, the shareholder also has the right to request that the court decide that such shareholder's vote is not to be taken into account in that particular case.

Although the above case law relates to profit sharing in a public limited company we consider that it will also be applicable to the right to payment of shares in a limited company.

Have you found yourself in a situation where other shareholders are preventing you from paying dividends? Do you want to set precise and transparent rules in your articles of association on how to dispose of profits in your company? Contact us and we will help you protect your right to a share of the profits.