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Payment of Final or Interim Dividends

Paying dividends – final or interim?

If a company has distributable profits, dividends can be paid. A private company is not under any obligation to pay dividends (subject to any arrangements with capital investors or preference shareholders in, for example, a shareholders’ agreement) but if dividends are not paid, shareholders may be unwilling to wait until the company is sold before they receive any economic benefit. The choice is whether surplus resources can be used more beneficially and efficiently by the company or whether they should be released to the shareholders.

It is for the board of a company to decide how much is to be paid to shareholders in any accounting period, usually after the financial results are known and the cash needed for working capital requirements is considered.

Any dividend paid out will either be a final dividend or an interim dividend.

Final dividends are paid out once a year and are calculated after the annual accounts have been drawn up. The company will therefore have a clearer picture of its financial performance over that financial year. 

Interim dividends can be paid out at any time throughout the year and are calculated before the company’s annual earnings have been determined.

Final dividends are usually declared by shareholders after being recommended by the board. Interim dividends will usually be decided solely by the board. Some companies may wish to circumvent a shareholder vote by paying a series of interim dividends instead of declaring a final dividend. Although this is usually more an issue for public companies than private companies. A (usually) smaller shareholder base in a SME private company (where shareholders and directors are often the same people, whose interests are therefore aligned), means referring it to shareholders is less administratively and strategically difficult. 

Final dividends become a debt payable to shareholders once they have been approved by the shareholders.

An interim dividend becomes a debt payable to shareholders when it is paid rather than when the board resolves to pay it (unless the dividend has been declared by shareholders).

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