Table of Contents
The general principle in company law is that all shareholders should be treated equally and fairly, particularly when it comes to the distribution of dividends. However, under English law, there are certain circumstances where it is permissible for you to pay unequal dividends to different shareholders. The default position is that dividends should be paid to shareholders in proportion to their respective shareholdings, ensuring equal treatment among all shareholders. However, the Companies Act 2006 and your company’s articles of association may provide exceptions that allow for the payment of unequal dividends. These exceptions typically involve situations where different classes of shares exist with varying dividend rights. 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.
Some common types of shares with different class rights include founder shares, employee shares, preference shares and investor shares.
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.
This guide will walk you through the due diligence process when purchasing a UK business.
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.
Continue reading this article below the formCall 0808 196 8584 for urgent assistance.
Otherwise, complete this form and we will contact you within one business day.
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.
It is important to note that you must clearly document any unequal dividend payments and they must be supported by your company’s articles of association or specific shareholder resolutions. Failure to comply with these requirements could result in legal challenges from aggrieved shareholders or regulatory scrutiny.
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.
If you are looking to pay unequal dividends, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Some risks you may face include shareholder disputes and taxation issues. It is crucial to consult a legal professional before distributing unequal shares.
Your company may ensure transparency by clearly documenting the process of issuing the shares, obtaining shareholder resolutions and communicating openly with all shareholders. This will help mitigate the risk of any disputes arising and ensure that you comply with relevant laws.
We appreciate your feedback – your submission has been successfully received.
