Can I Pay Unequal Dividends to Shareholders?

Summary

• Companies can pay unequal dividends to different shareholders, but this must be permitted by the company’s articles of association and agreed upon correctly.
• Dividend waivers allow shareholders to give up their right to a dividend, which can be useful for tax planning but must be handled carefully to avoid HMRC scrutiny.
• Alphabet shares are a common structure used to provide flexibility in dividend distribution among shareholders.
• This is a plain-English guide to unequal dividend distribution for business owners and company directors operating in the UK, produced by LegalVision, a commercial law firm.
• LegalVision specialises in advising clients on corporate structuring and shareholder arrangements.

Tips for Businesses

Review your articles of association before declaring any dividends to confirm unequal distributions are permitted. If using alphabet shares or dividend waivers, document decisions properly and maintain clear records. Consider the tax implications of any distribution strategy, particularly where waivers are involved, to avoid unintended consequences.

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On this page

• Understanding Different Classes of Shares
• Creating New Share Classes
• Waiving Dividends
• Key Takeaways 
• Frequently Asked Questions

Dividends are payments a company makes to its shareholders from its profits. Company law generally requires equal treatment of shareholders, but different share classes can carry different dividend rights. These rights may override the default rule of proportional distribution under the Companies Act 2006 and your company’s articles of association. This article will outline the different classes of shares and when it is permissible for you to pay unequal dividends to shareholders.

Understanding Different Classes of Shares

Shares often hold rights related to voting, dividends, and capital distribution that will be returned on the winding up of the company. All shares of the same class will have the same rights attached to them. To offer different dividends and rights, you can create different classes of shares with varying rights. This can give you flexibility within your structure, allowing you to raise capital but keep control.

Founder Shares 

Your company may issue a special type of share to the business’ founders. These can include special rights that give them extra control of the company, such as an automatic right to appoint a director so long as they hold these shares. Often, founders will use dividends to pay themselves; by having a separate class of shares, they can pay themselves without having to pay other shareholders a dividend.

Employee Shares

Additionally, your company can issue employee shares under an employee share scheme. Start-ups can use employee shares to motivate employees to help grow the business. Often employee shares will have no voting rights or dividend rights. Instead, the employee can sell them for market value when they leave the business as a reward for their hard work.

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Preference Shares

You may also issue preference shares with some preferential rights attached to them, such as rights to:

• fixed dividends;
• priority to dividends over ordinary shares; and 
• a return of capital if the company goes into liquidation.

Investor Shares

A company may issue shares to investors that are different to founder shares and employee shares to reflect the terms of their investment.

Creating New Share Classes

If you wish to issue a new share class, you must follow stringent legal requirements. This includes changing your company’s articles of association. Your company’s articles must include all shares and the rights and obligations attached to them.

Waiving Dividends

In addition to shares with differential dividend rights, you may also pay unequal dividends when certain shareholders voluntarily waive or renounce their rights to dividends. This typically occurs through a formal process where shareholders provide written consent to forego their dividend payments, often for tax planning or other strategic reasons.

Furthermore, you must exercise caution when paying unequal dividends to ensure that you do not unfairly discriminate against minority shareholders or violate the principle of equal treatment. Unequal dividend payments should be based on legitimate commercial reasons, and you should not use them as a means to oppress or unfairly prejudice certain shareholders. 

Tax implications are another consideration when paying unequal dividends. Different tax rates or treatment may apply to different types of dividends or shareholders, depending on factors such as the nature of the shares, the residency status of the shareholders, and the tax laws in the relevant jurisdictions.

Key Takeaways 

In summary, while the default position is to pay equal dividends to all shareholders, UK company law and a company’s articles of association may allow for unequal dividend payments in specific situations. For example, this may apply where different classes of shares have varying dividend rights or when shareholders voluntarily waive their dividend entitlements. However, companies must carefully navigate the legal and practical considerations to ensure fairness and compliance with relevant regulations.

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Frequently Asked Questions