Declaring Dividends in the Time of Covid-19
4th August 2020
Coronavirus (COVID-19) is a pandemic that poses significant issues for companies of all sizes and family business are no exception. One issue that is particularly difficult relates to dividend policy.
Many businesses have been so significantly impacted by COVID-19 that there may be little or no chance of declaring dividends, with directors and senior management trying to keep the business solvent and in a position to bounce back in due course.
For those businesses in a stronger financial position, what are the considerations or restrictions that directors should take into account before declaring a dividend?
As a matter of corporate law, a company will need to have distributable reserves in order for the directors to declare a dividend. Distributable reserves are, broadly, a company's profits available for the purpose of distributions.
It is the directors’ duty to consider the ongoing financial requirements of the business before declaring a dividend. Ultimately, the decision is a matter of commercial judgement for the directors, subject to any dividend policy or specific share rights (such as those attaching to preference shares).
Although there may be no requirement to pay dividends, the directors need to manage shareholder expectations to avoid the possibility of shareholder anxiety/unrest. This is particularly important in family businesses where the directors’ relationship with shareholders can be more personal, compared to a listed company with institutional investors.
Not declaring a dividend may in some cases mean the family members do not receive the dividends they are used to, perhaps for the first time.
COVID-19 specific issues
Where a company has only a limited amount of distributable reserves, the directors’ wider ability to pay a dividend needs careful scrutiny. Given the uncertainty about the extent of recovery in the UK economy, prudent cash flow planning for family businesses will be key.
Thought needs to be given to the directors’ ability to cancel, amend, delay or ‘stage’ dividends to enable the company to align payment of dividends with changing circumstances. Board decisions regarding dividends should be minuted carefully.
In some cases, on an administrative level, COVID-19 has restricted the company’s ability to hold annual general meetings to approve final dividends and alternative arrangements may need to be considered.
The more difficult question is whether a company is permitted to pay dividends if it benefits from COVID-19 government support, in which case it is important to distinguish between the different government schemes:
Where a company has taken a loan under the Coronavirus Large Business Interruption Loan Scheme- (“CLBILS”), the terms of the borrowing restrict the directors’ ability to declare dividends.
For companies taking a loan facility of up to £50m under CLBILS, dividend payments are allowed to continue but may not be increased for so long as the CLBILS facility remains outstanding.
For loan facilities of more than £50m, there is a prohibition on payment of dividends or other returns of value. Additional remuneration for management is also prohibited other than (1) as agreed prior to the facility being put in place, (2) in keeping with similar payments in last 12 months, (3) where there is no material adverse effect on ability to repay the facility and (4) payments to new members joining the management team.
Loan facility documentation as part of ‘normal’ banking arrangements will often restrict a corporate borrower’s ability to declare dividends in any event, so the difference may be minimal, but the restrictions should be noted.
Furlough (otherwise known as the Coronavirus Job Retention Scheme “CJRS”)
There is no express legal restriction under the terms of the CJRS which restricts a company’s ability to declare dividends if it claims under the CJRS.
The CJRS is intended to assist employers ‘who cannot maintain their current workforce because operations have been severely affected by COVID-19’ and HMRC retains the right to audit companies claiming under the CJRS retrospectively.
HMRC has established a portal for employees and public to report suspected fraud and is consulting on clawback arrangements (including where, in error, the grant has not been used to pay the costs it was intended to cover). If repayment is required and the company cannot meet the amount, directors could potentially have personal liability.
Where a company has claimed under CJRS and the directors have subsequently declared a dividend, the factors behind the decision should be documented carefully. Broadly, if a dividend has been paid, this raises the question as to whether the funds allocated to the dividend could have been used to pay the workers.
The wider moral question is whether a family businesses with distributable reserves should be claiming under the CJRS?
Public companies seeking government assistance will face increased scrutiny of how they are run and their approach to governance. Many companies have announced pay cuts and decreases in fees for non-executives. Some have cancelled bonus schemes or pushed some bonus arrangements into the future, with companies such as Primark confirming they will not take advantage of the Job Retention Bonus for their furloughed workers.
Family businesses should consider carefully how to do the "right" thing given the broader environment, particularly in those sectors where their employees have continued to work in their normal place of work to meet surges in demand.
Not getting it “right” carries the risk of significant reputational damage with employees and customers, key stakeholders in any family business.
Even where the family business has not used the CLBILS or CJRS, the directors should be wary of the reputational risk associated with making dividend payments at the current time, particularly with employees where the relationship is so important for any family business
Whilst family businesses are not bound by public company restrictions, directors of larger family businesses may find it helpful to look at what equivalent sized public companies are doing, however directors will need to make tailored decisions to reflect the needs of their company rather than following a general trend.
The key will be to find a dividend policy that is fair to the business, the shareholders and the workforce. Of course, no director can foresee how the future will turn out, and stakeholders should acknowledge such difficulties, so it may be prudent to defer declaring dividends where possible until the wider economic and public health position becomes clearer.
Jim Aveline and Douglas Streatfeild-James are members of the family business team at Burges Salmon.