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Dividends are the part of a company’s profits that is paid out to shareholders to reward them for their loyalty and investment in the business. In this article, we will discuss some of the technical aspects of declaring dividends in Singapore as a private company, why it is important to understand this process, what the board of directors’ duties are when it comes to declaring dividends, and more.
Dividends Must Be Paid Out of Profits
Section 403 of Singapore’s Companies Act states that a company can only declare and pay dividends out of its profits. If the company has made a financial loss, it cannot declare any dividends. Doing so can result in severe legal consequences for the company’s board of directors.
What Constitutes Profit?
- In the context of dividends, profits refer only to the company’s profits and not the profits of any group(s) that the company might be a part of.
- The amount of capital that shareholders have paid up to the company is not relevant. As long as there is a net inflow of income, the company can declare dividends.
- In some cases, a company’s total assets are less than the original capital contribution of its shareholders. This is also irrelevant when it comes to determining the company’s profits for declaring dividends.
- Capital depreciation is not a part of profits, unless they are being used to offset such losses.
- Even though it is technically a “paper gain,” capital appreciation is also a part of profits. Unless it is explicitly prohibited per the company’s constitution, dividends may be paid out of capital gains that are realised on the sale of capital assets.
- A company is not required to pay dividends out of profits earned in the same year. This means that it can include profits from previous years that have been carried forward.
- A company may choose to restrict which profits can or cannot be paid out as dividends by adding provisions for this in its constitution.
What Are the Board’s Duties When It Comes to Dividends?
Only the company’s board of directors can declare a dividend. While the CEO of a company can encourage the board to do so, the final power to declare dividends lies with its directors.
The directors must also propose the dividend rate to be paid out to shareholders. In general, a good dividend rate is one that is proportional to the company’s share price. If the share price is high, a high dividend rate is justified. However, if the share price is low, a lower rate is more rational.
Once the directors have decided on the dividend rate, the company must pass a company resolution to formalise the decision. The type of resolution required will be determined by the dividend type. For example, final dividends require a special resolution pass (at least 75 percent of shareholders' votes), whereas interim dividends require a board resolution pass (more than 50 percent of directors' votes). Only after passing a company’s resolution, directors will then declare dividends on the declaration date.
Dividend Policies in Private vs. Public Companies
Given that private companies experience less public scrutiny and oversight than public companies do, their dividend policies tend to be more variable and less transparent. Meanwhile, public companies are also subject to more rules and procedures, such as the requirement to declare dividends and pass resolutions at the AGM, while private companies have more flexibility in this regard.
Generally speaking, private companies only have to worry about the requirement to pay dividends out of profits and can therefore devise a dividend policy that suits their company as they see fit.
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