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As a result of the coronavirus (COVID-19) pandemic, over the coming weeks and months an increasing number of UK companies are expected to seek to preserve their cash by suspending and/or cancelling dividends. This Q&A considers the relevant law, guidance and practice.
For information on dividends generally, see Practice Note: Dividends and distributions. For further details of the rules and guidance that apply to a listed company or an AIM company proposing to pay a dividend, see Practice Note: Dividends—listed and AIM companies.
It is usual for a company's articles of association to provide that:
• its directors may recommend a final dividend (ie one to be paid after the financial year to which the profits being distributed relate), which is then declared by the approval of the shareholders, usually by ordinary resolution, the amount declared not exceeding the amount recommended by the directors, and
• its directors may decide to pay an interim dividend (ie one to be paid during the course of the financial year to which the profits being distributed relate), which is effectively declared at that point as it needs no shareholders’ approval
The shareholders of a private company may approve a final dividend by written resolution or at a general meeting, while the shareholders of a public company cannot pass a written resolution and, in practice, will normally approve a final dividend at the annual general meeting (AGM).
Despite the well-established and recognised procedures for declaring and paying final dividends, there have been a few examples of differing market practice. A small number of FTSE 350 companies have been observed giving their directors authority to declare and pay final dividends before the AGM, without recourse to the shareholders. This means that the shareholders can be paid their final dividend more quickly following the end of the company’s financial year, which is usually the justification given by the board when explaining the reason why final dividends do not require the approval of shareholders. For further details and example wording from the articles of association of a company having given its directors special authorisation to approve, declare and pay final dividends, see page 10 of Dividends—Market Tracker Trend Report, published in June 2018.
It is possible for a company to suspend the payment of dividends (ie to decide not to pay them for a time), as a company is not obliged to pay dividends. It is also possible for a company to cancel a dividend (ie not pay a dividend that it had already indicated that it intended to pay), although if and when a company can cancel a dividend will depend on whether it is a final dividend or an interim dividend.
Once a final dividend is declared (ie approved by the shareholders) it becomes a debt that is immediately due from the company to its shareholders, unless the terms of an approving resolution provide for it to be payable at a future date, in which case it becomes a debt due only on that date. Once a final dividend has become a debt due, its payment can be enforced, meaning that the shareholders have a right to sue for that debt, if the dividend is cancelled.
In contrast, the payment of an interim dividend is a decision of the directors and no debt due from the company to its shareholders is created at the time that decision is made, so an interim dividend can be cancelled at any time up to its payment. A shareholder’s right to an interim dividend does not arise until the dividend is actually paid.
In addition to their general guidance on this topic, a number of regulators and institutional investor bodies have issued guidance in relation to dividends in the context of the coronavirus pandemic.
Details of the general rules and guidance that apply to a listed company or an AIM company proposing to pay a dividend are set out in Practice Note: Dividends—listed and AIM companies.
On 25 March 2020, the London Stock Exchange (LSE) released Market Notice N07/20 on temporary changes to the Dividend Procedure Timetable as a result of the coronavirus pandemic. It gives companies guidance that will remain in place until further notice. It notes that because companies are implementing their contingency plans, the LSE has received enquiries regarding the deferral or cancellation of dividend payments by companies. The LSE will now allow a deferral period of up to 30 business days for payment of a dividend, but that period shall end no more than 60 business days after the record date. After the deferral period has expired the dividend must be paid or cancelled. Companies must inform the Stock Situations Team of any deferral of a dividend payment. If any dividend is to be deferred or cancelled and not paid, this should be notified by the company without delay.
In March 2020, the Financial Reporting Council (FRC) published guidance for companies in the light of the coronavirus pandemic. It called on the directors of companies that have proposed, but not yet declared a dividend (by shareholder approval in the case of a final dividend and by payment in the case of an interim dividend), to consider not only the position of the company when the dividend was proposed, but also when it is made. Where the company is no longer able to pay a dividend, its directors should cancel the dividend and communicate as appropriate to the market.
The FRC takes the view that the assessment of whether a dividend is appropriate should include consideration of current and likely operational and capital needs of the company, its contingency planning and the directors’ legal duties, both in statute and common law. A company’s directors must ensure that the capital maintenance rules of Part 23 of the Companies Act 2006 (CA 2006) are complied with, that they fulfil their duties under CA 2006, s 172 and that due consideration is given to their fiduciary duties to ensure the company will be able to pay its debts as they fall due. It notes that, in some cases, it may be necessary to move funds around a group, using inter-company dividends from subsidiaries to their parent companies or capital contributions between companies, in which case, directors must ensure that such transfers comply with statute and the common law duties of directors.
On 31 March 2020, the Prudential Regulatory Authority (PRA) sent public letters to each of the UK’s seven largest banks (HSBC, Nationwide, Santander, Standard Chartered, Barclays, RBS and Lloyds). It asked each of them to suspend dividends and share buybacks until the end of 2020 and to cancel payments of any outstanding 2019 dividends. On the same day, the PRA confirmed in a statement that the banks had agreed to these measures.
The PRA also wrote to UK insurers on 31 March 2020. It asked them to pay close attention to the need to protect policyholders and maintain safety and soundness when considering any distributions to shareholders. It also reminded that of the PRA’s existing expectation (set out in Supervisory Statement 4/18) that, when deciding on distributions, boards of directors should satisfy themselves that each distribution is prudent and consistent with their risk appetite.
On 27 March 2020, the European Central Bank (ECB) recommended that until 1 October 2020, at least, no dividends are paid out and no irrevocable commitment to pay out dividends is undertaken by ‘significant credit institutions’ for the financial year 2019 and 2020. The ECB requires credit institutions that are unable to comply with this recommendation because they consider themselves legally required to pay-out dividends to immediately explain the underlying reasons to their joint supervisory team. It also considers it appropriate that discretionary dividend distributions should not be made by ‘less significant credit institutions’.
On 27 March 2020, the European Banking Federation (EBF) confirmed that it had written to the Chairman of the Supervisory Board of the ECB regarding bank sector initiatives being implemented across Europe to alleviate the economic impact of the coronavirus pandemic. Among other things, the letter sets out the EBF’s view that listed banks should not accrue dividends at this time, so as to maintain maximum capital preservation. Where 2019 dividend distributions have not yet been voted by shareholders, the EBF notes that some banks could decide that either part or the full amount be assigned to reserves, until there is better visibility as to the effects of the crisis, at which point they could be distributed to shareholders. However, the EBF emphasises that any decisions by a listed bank to withhold its 2019 dividends needs to take into account the perception of investors about the solvency of the European banking sector and the expectations of shareholders.
On 8 April 2020, the Investment Association (IA) wrote to the Chairs of all FTSE 350 companies, expressing the views of its members on a number of issues. On the issues of dividends, the IA’s position remains consistent with the statement it made on 1 April 2020.
The letter notes that the payment of a dividend is a decision for the board. IA members support the FRC guidance stating that firms should consider the position of the company at the time a dividend is paid, not just when it is declared. They agree that companies should be considering the suitability and sustainability of dividend payments in light of the current uncertainties. Companies’ approach to paying a dividend should include ensuring employees and suppliers can be paid.
Having said that, the letter also states that dividends are an important income stream for pension funds and charities, as well as ordinary savers and pensioners, which at this time more than ever, provide an important income. Whilst IA members expect companies to take a prudent approach to current and future dividend payments, carefully assessing their ability to withstand financial stress, shareholders would be concerned if companies unnecessarily reduced or re-based the dividend level. They would expect companies who do decide to suspend, to restart the dividend payments as soon as it is prudent to do so. Ultimately, shareholders will expect companies to be transparent about their approach to dividends, particularly, if they are seeking additional capital.
On 8 April 2020, Institutional Shareholder Services Inc. (ISS) issued guidance on how ISS plans to apply its benchmark proxy voting policies over the coming months, as AGM season gets underway in many markets.
On the issue of dividends, ISS notes that the pandemic-related market downturn and the need to manage cash in an uncertain economic environment are causing some boards to question the appropriateness and prudence of continuing to pay dividends at previously anticipated levels, with a number of companies in Europe having already pulled dividend proposals from their 2020 AGM agenda. In addition, it observes that some government assistance programs are already prohibiting or considering prohibiting dividend payments for companies that elect to accept loans or other subsidies and the ECB has restricted the payment of dividends by banks.
This year, ISS’s position on dividends will be that it will support a broad discretion for boards that seek to set payout ratios that may fall below historic levels or customary market practice. In analysing such proposals, ISS will look at whether boards disclose plans to use any preserved cash from dividend reductions to support and protect their business and workforce. This is a departure from some of the ISS market-specific policies, which ordinarily look for dividend payout ratios to be within a certain range (based on earnings for the prior year).
Many FTSE 350 and AIM companies have chosen to cancel their final dividend this year in the light of the coronavirus pandemic.
A company that has not yet issued its AGM notice may simply announce that it does not intend to propose a final dividend at its forthcoming AGM (eg ITV plc) or that it is withdrawing the board recommendation to pay a final dividend (eg 4imprint Group plc).
A company that has already issued its AGM notice may cancel its final dividend by withdrawing the shareholders’ resolution to approve the final dividend from the agenda of the forthcoming AGM (eg see the announcements made by Melrose Industries PLC and Meggitt PLC). In doing so, some companies have indicated that they will also review their interim dividend (eg Rightmove plc and Coats Group plc) and perhaps pay one or two interim dividends in the year ahead (eg FDM Group (Holdings) plc). Others have decided to pay an interim dividend in lieu of a final dividend (eg Murray International Trust plc).
An alternative approach to withdrawing the shareholders’ resolution to approve the final dividend from the agenda of a forthcoming AGM is to recommend that shareholders vote down the resolution, which was done by Quartix Holdings plc.
Some companies have not yet taken the decision to cancel their final dividend, but have effectively postponed the dividend by postponing the AGM at which it would be approved, keeping the appropriateness of paying the final dividend under review until the rescheduled AGM (eg Balfour Beatty plc). Others have postponed the dividend by withdrawing the shareholders’ resolution to approve the final dividend from the agenda of their forthcoming AGM, while indicating that they are deferring the ultimate decision on the final dividend to a later date (eg BAE Systems plc, which proposes an update on the final dividend with its half-year results). Another way for a company to postpone a dividend is to announce that it will not propose a final dividend at its forthcoming AGM (eg Marshall Motor Holdings Plc) or that it is withdrawing the board recommendation to pay a final dividend, while indicating that the ultimate decision on a final dividend is still to be made.
Many companies have indicated that they will be cancelling a particular interim dividend (eg Redrow plc) or suspending it (eg Brand Architekts Group PLC, which intends to consider the appropriateness, quantum and timing of the dividend payment once it has a clearer view of the effect of the coronavirus pandemic).
Some companies have announced the suspension of dividends generally until the impact of the coronavirus pandemic on the business becomes clearer (Quixant plc) and others have announced they will not be paying interim dividends in the current financial year (eg WH Smith PLC)
To search the AGM notices and announcement of FTSE 350 and AIM 50 companies, see the Market Tracker deal analysis tool.
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