Withdrawing, deferring or reducing announced dividends

The last two months have seen Australian companies taking the unusual step of withdrawing, deferring or reducing announced dividends.  Given the uncertainty around the duration of the COVID-19 crisis and its continuing impact on businesses, this has been a pragmatic approach to preserve cash.

Before withdrawing, deferring or reducing announced dividends, a listed company should revisit its constitution and consider its continuous disclosure obligations to ensure that such action complies with its constitution, the Corporations Act 2001 (Cth) (Act) and the ASX Listing Rules.

Constitutional requirements: “Declare” vs “Determine to pay

Generally, a company’s ability to cancel or modify an announced dividend depends on when the company incurs the debt to pay the dividend to its shareholders.

Under the Act, if a dividend is “declared”, the company is deemed to incur a debt and become indebted to the relevant shareholders at the time of declaration.  This is the case even where payment of that dividend is set at a future date.  Accordingly, once the debt is incurred, any decision to change the dividend will generally require consent from the company’s debtors (i.e., the relevant shareholders), without which the company and its directors risk being exposed to shareholder action.

In contrast, if a company “determines to pay” a dividend, it is generally treated as only fixing the time for payment and the company does not create a debt until the time fixed for payment arises.  In this second scenario, the company can revoke or amend its decision to pay a dividend at any time before the fixed payment date, without having to first obtain consent from the relevant shareholders.

In considering the above complexity (and technicality), company constitutions drafted in recent years generally provide the board with a choice to either “determine to pay” or “declare” a dividend.  Older constitutions, however, may still require that the dividend be “declared” before it can be paid.  If this is the case:

  • as it may not be practical for a listed company to obtain written consent from each relevant shareholder, the company may be prevented from cancelling, deferring or reducing an already declared dividend; and
  • the board should consider seeking shareholder approval for the constitution to be amended, allowing them to determine to pay (instead of declaring) a dividend, or choose to undertake either action. This would provide the company and its directors greater flexibility in dealing with future dividends.

In addition to the above restrictions, a company constitution may impose other substantive and procedural conditions on the company and its directors in exercising their power in relation to dividends, including the power to change a declared dividend and/or a “determine to pay” decision.  The board should, therefore, carefully consider the company constitution before taking action.

Continuous disclosure obligations and ASX’s expectations

In its recent Compliance Updates no. 03/20 and no. 04/20, ASX indicated that it expects listed companies to take certain steps to ensure their compliance with the continuous disclosure obligations when cancelling or modifying an announced dividend.  These steps include:

  • where the listed company determined to pay a dividend and a cancellation decision has subsequently been made, the company must immediately announce to the market the cancellation. The announcement should explain the legal basis for the cancellation including, confirming that the cancellation is authorised by the company’s constitution if it is so required by law;
  • where the listed company is still contemplating the cancellation of a dividend, it must announce that to the market at the earliest opportunity and, if possible, before the relevant shares commence trading ex-dividend; and
  • if the listed company is considering announcing a change to an upcoming dividend or to its dividend policy, it must clarify in the announcement any change in the nature of the dividend (from ordinary to special or otherwise).

Listed companies that are considering deferring or cancelling a dividend should also be mindful of:

  • the timetable requirements in the ASX Listing Rules, including that a completed Appendix 3A.1 must be provided to ASX not less than four business days before the intended record date to identify shareholders that are entitled to a dividend; and
  • the condition under Appendix 3A.1 that the payment date not be changed (even to postpone it or cancel it) any later than 12 noon Sydney time of the day of the previously announced payment

Australian law concerning payment of dividends is complex and we are here to assist.  Should you wish to discuss your options with respect to an announced or upcoming dividend, or have any queries about your disclosure obligations as a listed entity, please don’t hesitate to contact the authors David Woodford (Partner) and Ha Dinh (Solicitor) on 03 8621 8888 or reach them by email at dwoodford@grillohiggins.com.au or hdinh@grillohiggins.com.au, respectively.