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The basics of distributing extraordinary dividend

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Legal news
calendar 17 March 2021
globus Denmark

Extraordinary dividend gives capital owners the possibility of distributing dividends before or after the annual ordinary general assembly. However, there is a number of requirements that owners should be aware of to ensure that the dividend is distributed in a legal manner. If these requirements are not followed, the funds will have to be repaid with an addition of interest, despite the owners not being aware of the payout being illegal.

Extraordinary dividend – what and how?

Distribution of dividend is the basic way for a company to pay profits to its shareholders. Dividend may be distributed to capital owners as part of the ordinary general assembly based on the annual report which is approved at the general assembly (ordinary dividend). Dividend may also be distributed at an extraordinary general assembly based on the most recent annual report or a drawn up interim balance sheet (extraordinary dividend).

The decision of distribution of extraordinary dividend can be made either at the general assembly or by the company’s management with authorization from the general assembly. However, dividend can only be distributed after the company has submitted their first annual report.

Special attention should be paid to

In connection with the distribution of extraordinary dividend it is important that owners are aware of the special rules for this type of distribution.

Before it is decided whether extraordinary dividend is to be distributed, the top management (typically the Board of Directors) has the responsibility of ensuring that no more than what is economically sound is distributed. For example, the distribution may not be to the detriment of the company’s creditors or put the company’s liquidity at risk. The company must also have sufficient funds to sustain the operation of the company and pay the bills that are due in the future. If owners decide to distribute other goods than cash, an assessment report showing that the goods distributed correspond to, at least, the value assessed in the report must be presented.

There are several requirements for distribution of dividend, depending on whether it’s a public or private limited company. For public limited companies, the decision to distribute dividends must be based on a balance sheet prepared by an auditor. In private limited companies, the management or the board of directors may decide that an auditor's assessment is not necessary for the distribution.

For public limited companies, an interim balance sheet must be prepared if the Board of Directors, on the basis of the most recent annual report, assesses that it is not justifiable to make the decision on the payment of dividends, or if there are insufficient funds for the distribution.

For both company types it is, however, mandatory to create an interim balance sheet that shows that there are sufficient funds disposable for the distribution, if the decision for distribution is taken more than six months after the balance sheet day in the most recently approved report.

What to do after the distribution

It is important that the decision of distributing extraordinary dividend is adopted into the protocol. The balance sheet – and interim balance sheet, if necessary – for the most recent financial year must also always be attached to the decision, so there is documentation for the reason behind the decision.

It is important to be aware that if the distribution is not completed and decided upon in accordance with the Companies Act’s, the distribution may be illegal, and the capital owners risk having to repay the amount to the company with added interest.

IUNO’s opinion

One of the disadvantages of companies in company statute is that distribution can only take place if certain conditions are met. Therefore, capital owners must familiarize themselves with the rules for distribution of extraordinary dividend and seek legal assistance if necessary, to ensure that you don’t partake in illegal payouts. For example, special rules apply for listed public limited companies.

IUNO also recommends that all companies remember to keep a record of meetings, as to document on what grounds the decision is made. It must appear clearly that the distribution was economically sound and in compliance with the Companies Act in general.

Lastly, we also recommend that companies, that follow the calendar year, ensure that the decision is made before the end of June. By doing so, you can avoid having to prepare an interim balance sheet.

Extraordinary dividend – what and how?

Distribution of dividend is the basic way for a company to pay profits to its shareholders. Dividend may be distributed to capital owners as part of the ordinary general assembly based on the annual report which is approved at the general assembly (ordinary dividend). Dividend may also be distributed at an extraordinary general assembly based on the most recent annual report or a drawn up interim balance sheet (extraordinary dividend).

The decision of distribution of extraordinary dividend can be made either at the general assembly or by the company’s management with authorization from the general assembly. However, dividend can only be distributed after the company has submitted their first annual report.

Special attention should be paid to

In connection with the distribution of extraordinary dividend it is important that owners are aware of the special rules for this type of distribution.

Before it is decided whether extraordinary dividend is to be distributed, the top management (typically the Board of Directors) has the responsibility of ensuring that no more than what is economically sound is distributed. For example, the distribution may not be to the detriment of the company’s creditors or put the company’s liquidity at risk. The company must also have sufficient funds to sustain the operation of the company and pay the bills that are due in the future. If owners decide to distribute other goods than cash, an assessment report showing that the goods distributed correspond to, at least, the value assessed in the report must be presented.

There are several requirements for distribution of dividend, depending on whether it’s a public or private limited company. For public limited companies, the decision to distribute dividends must be based on a balance sheet prepared by an auditor. In private limited companies, the management or the board of directors may decide that an auditor's assessment is not necessary for the distribution.

For public limited companies, an interim balance sheet must be prepared if the Board of Directors, on the basis of the most recent annual report, assesses that it is not justifiable to make the decision on the payment of dividends, or if there are insufficient funds for the distribution.

For both company types it is, however, mandatory to create an interim balance sheet that shows that there are sufficient funds disposable for the distribution, if the decision for distribution is taken more than six months after the balance sheet day in the most recently approved report.

What to do after the distribution

It is important that the decision of distributing extraordinary dividend is adopted into the protocol. The balance sheet – and interim balance sheet, if necessary – for the most recent financial year must also always be attached to the decision, so there is documentation for the reason behind the decision.

It is important to be aware that if the distribution is not completed and decided upon in accordance with the Companies Act’s, the distribution may be illegal, and the capital owners risk having to repay the amount to the company with added interest.

IUNO’s opinion

One of the disadvantages of companies in company statute is that distribution can only take place if certain conditions are met. Therefore, capital owners must familiarize themselves with the rules for distribution of extraordinary dividend and seek legal assistance if necessary, to ensure that you don’t partake in illegal payouts. For example, special rules apply for listed public limited companies.

IUNO also recommends that all companies remember to keep a record of meetings, as to document on what grounds the decision is made. It must appear clearly that the distribution was economically sound and in compliance with the Companies Act in general.

Lastly, we also recommend that companies, that follow the calendar year, ensure that the decision is made before the end of June. By doing so, you can avoid having to prepare an interim balance sheet.

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Aage

Krogh

Partner

Matilde

Grønlund Jakobsen

Associate

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