Towards a “Distribution Policy”
The Investment Association (“IA”) has published an interesting report following its investigation into dividend payment practices of UK listed companies. The research was carried out in response to the Department for Business, Energy and Industrial Strategy’s concern that an increasing number of companies are paying ordinary dividends without seeking shareholder approval, which undermines transparency and accountability to shareholders. This all comes off the back of the high-profile collapse of businesses such as Carillion and BHS and some companies’ short term focus at the expense of the long term sustainablity of the company.
The IA found that a significant minority (22%) of those listed companies paying ordinary dividends are not seeking an annual shareholder vote on these distributions as they are being paid as interim dividends only. Generally speaking, most Articles of Association do not require shareholder approval for the payment of interim dividends.
The IA identified the following 5 reasons why some companies do not put a final dividend payment to a shareholder vote:
- Providing a regular income stream to shareholders: some companies pay quarterly (or monthly) dividends to provide an income stream to shareholders and, if it were put to a shareholder vote, the payment of the fourth quarterly dividend would be paid late and into the second quarter of the new financial year. Some companies also argue that payment of a final dividend can result in a “lumpy” valuation of the company prior to the payment of a final dividend with an associated drop in the share price.
- Solvency II regulations and capital requirements: for financial services companies, a final dividend amounts to a debt due by the company, affecting their Solvency II capital requirements and on available capital. An interim dividend on the other hand can be revoked prior to payment, avoiding the Solvency II issues.
- Flexibility: unlike interim dividends, final dividends are typically paid long after their initial declaration during which period unforeseen events may have taken place, potentially making the payment of the dividend inappropriate.
- Dual-listed structures: these entities may struggle to give equivalence to shareholders in circumstances where a shareholder vote is required.
- Tax treatment for parent companies resident outside of the UK: one company, headquartered outside of the UK, enables shareholders to receive dividends through a UK source, which is beneficial to UK shareholders for tax purposes. If the company had to put the dividend payment to a shareholder vote that would have to be in the jurisdiction in which the company’s headquarters are located, with negative tax consequences for UK shareholders.
The IA research concludes that forcing every company to have a yearly vote may have undesirable consequences. However, investors regard it as essential that companies are transparent and held accountable to shareholders regarding dividend payments and overall capital management.
The IA recommends an alternative approach namely, that companies should articulate a clear “distribution policy” that sets out the company’s approach to making decisions on the amount, structure and timing of returns to shareholders, including dividends and other returns, within the context of any financial or legal constraints. This, they say, will allow companies to set out their approach, based on dialogue with shareholders, and provide shareholders with the means to engage with and hold them to account for the implementation of the policy.
The next steps are that the IA will develop best practice guidance on a “distribution policy” and will make recommendations to government on whether a shareholder vote on this policy and/or on yearly distributions should be mandatory. The IA intends to publish its guidance in Autumn 2019.