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Dividends & Class Rights

Dividends – class rights & payment

A SME private company will often have only one class of shares. However, if a company has more than one class of share, for example, A and B ordinary shares, as well as preference shares, or wishes to create different dividend rights for different groups of shareholders, it should create different classes of shares with different dividend rights and clearly set these out in the company’s articles of association.

Under common law, all shares in the capital of a company rank equally, regardless of class, and therefore it is essential that the company’s articles make clear any differentials and specifically in relation to rights to dividends.

The model articles for private companies state that dividends are paid according to the number of shares held by each shareholder on the register of members at the time of the declaration or decision to pay the dividend. 

If a company has preference shares, it usually means that the holders of these shares have preferred rights in respect of dividends (or capital or both). The right to receive a dividend is usually a right to a fixed dividend on specified dates to be paid in priority to ordinary shareholders. However, there is no absolute right to a preferential dividend and will be subject to the company having distributable profits available and what is in the company’s articles of association.

Most SME private companies will make dividend payments in £ sterling but there is nothing in the Companies Act 2006 specifying the currency for the payment of dividends. It is again a case of checking the articles or including a provision in the articles should the directors wish to pay out in a currency other than sterling. Likewise whatever payment method is chosen to make the dividend payment (electronic payment, cheque etc), must be authorised by the articles.

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