Month: March 2024

Many companies call an ordinary general meeting before the end of April after the end of the financial year to approve the annual accounts and distribute profits. Shareholders of companies often look forward to this date in the hope of receiving an appropriate share of the profits in the form of dividends. But are they all entitled to receive dividends? Can they be paid every year? Are companies free to decide in what form and how much dividends to pay to their shareholders?

According to Sandra Mickienė, Associate at AVOCAD, the Law on Joint Stock Companies (the "ABI") provides for certain important restrictions that must be taken into account when deciding on the payment of dividends.

Are all shareholders of a company entitled to receive dividends, and what proportion of the net profit is used to pay dividends?

The answer to this question, according to the lawyer, depends on when the individual became a shareholder of the company, whether he or she has paid up his or her shares in full and by the due date, and the way in which the company's articles of association regulate the distribution and payment of dividends (for example, the articles of association may provide that the dividend on paid-up shares is reduced if payment for the shares has been completed in the financial year in respect of which the dividend is paid; they may stipulate the percentage of the company's net profits to be used for the payment of the dividend; and so on.) or in the shareholders' agreement, if any (shareholders' agreements often provide that no dividends will be paid to shareholders for a certain period of time in order to, for example, invest a certain proportion of the profits in the development of the company's business, and usually regulate the percentage of net profit to be allocated to the payment of the dividends, and so on).

 

If the company's articles of association do not deal with this issue or do not provide for any exceptions, if there is no shareholders' agreement, then the following general rules apply:

(1) Dividends shall be payable to those persons who, at the close of business on the day of the general meeting of shareholders declaring the dividend, were shareholders of the company and who have paid up their shares;

2) if the share is not fully paid up and its maturity date has not expired, the shareholder's dividend is reduced in proportion to the unpaid portion of the share price;

3) if the share is not fully paid up and the payment period has expired, no dividend is payable to that shareholder;

4) the decision on the payment of dividends and the specific amount of dividends is taken by the general meeting of shareholders of the companies. The decision shall determine the proportion of profits to be allocated to the payment of dividends and the proportionate dividend per share.

In what form are dividends paid?

In practice, dividends are paid to shareholders in the form of shares or assets, or in some other form. However, the ABL provides that dividends must be paid in cash.

Courts have held that it is contrary to the provisions of the ABI to pay dividends in a form other than cash. For example, in one case, the court ruled on the conclusion of assignment of claims agreements to pay dividends. In this case, the court held that the ABI regulates the payment of dividends only in cash, and that it is therefore contrary to the law to enter into assignment of claims agreements for the payment of dividends.

 

Restrictions on the payment of dividends

 

The Companies Act provides that the General Meeting of Shareholders may not decide to declare and pay dividends if at least one of the following conditions is met:

(1) the company has outstanding debts which have fallen due before the decision is taken;

2) the amount of distributable profit for the financial year is negative(loss);

3) the company's equity is less than , or would become less if dividends were paid, than the sum of the company's authorised capital, statutory reserve, revaluation reserve and reserve for the acquisition of own shares.

According to AVOCAD, it is important to consider not only what debts the company has to its creditors and what the company's situation is before the dividend is paid. "Make sure and assess where the company will be after the dividend has been paid, i.e. whether the company will be able to pay its creditors after the dividend has been paid, and whether the company's equity will not be less than the sum of the company's share capital, the mandatory reserve, the revaluation reserve and the reserve for the acquisition of treasury shares," Sandra Mickienė advises.

However, in business, there are cases where these imperative limits are not respected. There is still a perception that the distribution of a company's profits is a matter for the company itself and its shareholders. Shareholders pay themselves dividends in spite of the legal restrictions, taking the view that non-compliance with the law is a mere formality and hoping that no one will claim against them, either now (since all shareholders have approved the payment of dividends) or in the future.

But the courts say otherwise - if dividends are paid illegally, in breach of the law, shareholders may have to repay dividends paid to the company even years later.

In 2023, the Supreme Court of Lithuania heard a case in which the insolvency administrator applied to the court for an award of dividends paid by the shareholders of the bankrupt company to the shareholders of the bankrupt company (in excess of EUR 75,000), which essentially constituted damage suffered by the bankrupt company as a result of the unlawful acts of the company shareholders. The administrator took the position that both at the time of the decision to pay the dividend (7 March 2017) and at the time of the payment of the dividend (16 August 2017), the company was in arrears to its creditors, and that therefore the decision to pay the dividend and the payment of the dividend were illegal. The Court of First Instance upheld the action and the Court of Appeal and the Court of Cassation have not substantially modified it.

 

Divorce, both in personal life and in business relationships, is a difficult and emotional process. And whether the separation is between famous people, or whether the loss is in the millions or just pennies, the fact of betrayal is equally painful for everyone. Egidijus Langys, partner at AVOCAD, answers whether it can be avoided and what legal safeguards exist.

According to a business law lawyer, the most effective way to prevent tensions with a business partner is to have a shareholders' agreement. This is an agreement between the shareholders of a company that has the force of law for the parties to the contract. It can also be concluded in companies with a large number of shareholders. It should be noted that, in order to avoid a legal impasse, it is acceptable and advisable that the shareholders' agreement be signed by all shareholders of the company. 

"There are no specific restrictions on the content of this agreement, other than the mandatory provisions of the law governing corporate governance, which makes it a highly flexible legal instrument. The shareholders may set out various terms and conditions, both those governing the specifics of the company's management and those regulating the relations between the shareholders, which have the force of law for the parties to the contract," says Langys.

A key advantage of shareholders' agreements is the ability of the parties to create an agreement that reflects the individual wishes, interests and visions of the shareholders. However, it is understood that a shareholders' agreement is subject to the approval of all the parties to it, and therefore the procedure for its conclusion must achieve a proper alignment of interests and consensus between the parties.  

This is a very important safeguard of interests, as the shareholders' interests are materially affected by the agreement. For example, the order in which the company's profits are distributed, with individually negotiated profit distribution terms, for example, if the company's turnover and profits for the financial year are greater than €X, then the shareholders of the company are allocated shares in the profits. Meanwhile, in the absence of a shareholders' agreement, disputes and disagreements between shareholders can often arise and, in the absence of a shareholders' agreement, the ability of shareholders to prove their rights or claims is hampered. 

According to lawyer Egidijus Langis, the shareholders' agreement must address the financing of the company. Shareholders' agreements on the financing of the company are particularly relevant during the periods of the company's incorporation and business development, for example, shareholders may agree on additional cash contributions to be made to finance the company or on loan agreements to be concluded. Shareholders' agreements may also be used to make arrangements for actions relevant to attracting external investment, for example by dividing and allocating the duties to be performed by shareholders in order to attract investment. 

The contract must also contain provisions on corporate governance. For example, extending the rights or powers of the company's board. In order to reduce the scope of the rights of the company's manager and thereby eliminate the possibility of arbitrary decisions that are not in the company's interests, the shareholders' agreement may set out a list of significant decisions of the business or of the company's manager that are subject to the approval of the board. A shareholders' agreement is also an effective means of avoiding a legal impasse where the shareholders of a company have the same decision-making power and pursue different ways of resolving the issue at hand. For example, two shareholders of an LLC each hold 50% of the shares of the LLC, one of the shareholders votes in favour of adopting decision A and the other shareholder votes in favour of adopting decision B. Therefore, the shareholders' agreement may preemptively provide for ways to resolve the legal impasse, for example by agreeing in a compromise way that shareholder X's vote is decisive for the appointment of the company's CEO and shareholder Y's vote is decisive for the appointment of the members of the board. 

It is also worth including in the shareholders' agreement a regulation on the sale of shares in the company. It can be agreed whether, if one of the shareholders decides to sell his shares in the company, the other shareholder has the right of first refusal to acquire the shares to be sold, and the method of calculating the price of the shares to be sold can also be agreed. It should be noted that the waiver of the shareholders' pre-emptive rights may also be provided for by the shareholders of the company in the company's articles of association.

The contractual liability of the shareholders is also very important. The shareholders may agree on the application of contractual liability of the shareholders for certain defaults, but it is important that the form and amount of such liability must not be in breach of mandatory provisions of law, public policy or good morals. Moreover, it should be noted that, according to the recent case law of the Court of Appeal of Lithuania, it is the penalties provided for in the shareholders' agreement that are the essential and most effective means of ensuring compliance with the shareholders' agreement. However, a shareholder who discovers that another shareholder has breached the shareholders' agreement must act swiftly, as such fines are subject to a six-month shortened limitation period.

The agreement should also include a clause on dispute resolution procedures. A shareholders' agreement is not only relevant for the preventive nature of avoiding shareholder disputes, but it can also provide for effective dispute resolution procedures between the parties. For example, in the case of a particularly damaged relationship between shareholders, where there is no possibility of cooperation between the parties and the likelihood of a peaceful resolution of the dispute disappears, but where the actions and conduct of the shareholders do not constitute a legitimate basis for the application of the compulsory sale of shares provided for in the Civil Code, the procedures and conditions for the compulsory redemption or sale of the shares, as negotiated in the shareholders' agreement, can provide the circumstances for a proper and effective resolution of the shareholders' dispute. The shareholders' agreement may also agree on the jurisdiction to be established for shareholders' disputes. 

A shareholders' agreement is drafted to regulate both the company's corporate governance and the relationship between shareholders, and a timely shareholders' agreement is a great preventive way to avoid legal disputes and painful divorces.