Is the limited dividend distribution mismanagement by the company?
A conflict between shareholders is never pleasant, especially if the shareholders are related. In a family business, business and personal interests can be intertwined. But if this is the case, inquiry proceedings by the Enterprise Court can force a breakthrough. Corporate lawyer Marco Guit discusses a ruling of the Enterprise Court in a case where a shareholder objects to the low dividend distribution.
Shareholders in family business
This case concerned the following. Shareholder A, who started the proceedings at the Enterprise Court, owned 25% of the shares in a family business. Business was going well, but the dividend distributions were nevertheless kept fairly low. A was not satisfied and wanted a larger distribution. However, his proposal did not gain a majority in the shareholders’ meeting, where the other family members with shares were also represented.
Request Enterprise Court to establish a higher dividend distribution
Through a lawyer he requested the Enterprise Court to annul the dividend resolutions of the company and to determin that a higher dividend would be distributed. To this end there was an inquiry. This showed that indeed only a limited part of the proceeds of the business were distributed as dividend. According to the examiners, this dividend policy is not necessarily in the interest of the conduct of business or to get the balance sheet ratio and the liquidity position in order. It is also unnecessary to reserve this much for future investments.
Purpose of reserving profits: guaranteeing the continuity of the company
The background of the dividend policy was the intended continuity of the company for the “next generation”. Initially the basic premise was to keep the dividend distribution very low, but this distribution was later – at the insistence of A – increased substantially. Nevertheless, the examiners found that the interest of the shareholders have always been subordinate to the financial position of the company and the corporate culture.
Basic premise: shareholders are entitled to profit distribution
The Enterprise Court states, first and foremost, that in principle it is the duty of the general meeting to determine if and how much dividend is distributed. In principle the shareholders are entitled to the profits, but a decision can be made to reserve (all or part of) the profits. The meeting has to weigh the interests of a (minority) shareholder in distributions against the interest of the company and the wishes of the other shareholders when deciding to make a reservation. If this is completely out of synch, the Enterprise Court can intervene, with the proviso that the Court only conducts a marginal test of the policy.
Enterprise Court: no mismanagement whatsoever in case of limited distribution
However, the Enterprise Court found that in this case the conservative dividend policy does not constitute mismanagement. Although the policy of the company of (unnecessarily) not paying out dividends or to a (very) limited degree for a longer period may be unjustified, the policy of this family business is not unreasonable. The company does not want to depend on external financing and, due to its special character as a family business, has a reasonable interest in maintaining continuity and in a long-term view. Therefore the interest of the company in a low dividend distribution is more important than the interest of A.