New Zealand Law Society - Clarification of dividend change bill supported

Clarification of dividend change bill supported

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The Primary Production select committee has reported on the Companies (Clarification of Dividend Rules in Companies) Amendment Bill. The committee recommends that the bill be passed with the amendments proposed.

The bill was introduced by Todd Muller on 5 April 2018. It amends the Companies Act 1993 (the Act) to give clarification of dividend rules outlines in ss36 and 53, where there is currently doubt about the ability of a company constitution to provide for “dry shares”(shares not linked to supply and therefore may have no, or limited rights to dividends).

“Wet shares” are shares aligned to supply and therefore have a right to dividends when supplied by the board. For example, agricultural co-operative type companies have wet and dry shares where the shareholders are current or former suppliers to the company. Current suppliers hold wet shares, while former suppliers hold dry shares that may not have a right to dividends (or a reduced dividend).

Section 36(1) of the Act provides a shareholder with the right to an equal share in dividends authorised by the board. However, s36(2) provides that, subject to s53, the constitution of the company can negate, alter, or add to, these rights.

Section 53(2) of the Act prevents a board from authorising differential dividends within any class of shares. This is intended to prohibit a company’s board from discriminating between shareholders within a class.

Section 53(2)

The committee report discusses the different views regarding the effect of s53(2). One view is that the section prevents a board from exercising discretion when authorising a dividend for some shares in a class but not others. This view means that s53(2) does not prevent a company’s constitution from containing a rule that some holders of shared in a class are not entitled to receive dividends.

Another view is that s53(2) prevents a constitution from containing such a rule.

A new s53(2A) is inserted to remove the uncertainty, which would specify that s53(2) does not prevent the constitution providing for differential dividends in the circumstances stipulated in the constitution.

Proposed amendments

As introduced under clause 4 of the bill a company’s constitution could provide for some shares to receive no dividend. The Committee considers that the bill is unclear as to whether a company’s constitution could provide for an increased or reduced dividend entitlement for some shares compared with others.

The committee recommends replacing clause 4 with a new clause 4 to replace s53(2). It would retain three existing exclusions for when a board may authorise a differential dividend (as set out in s53(2)) and clarify that a company’s constitution may provide for differential dividends.

The committee recommends inserting a new s53(2A) to make it clear that a company’s constitution could only provide for shares in a class to receive differential dividends if this is based on objective criteria.

A definition of “differential dividend” should be included by amending clause 4 to insert s53(4).