Dividends — what are shareholders’ rights when they’re withheld & how can they be enforced?

Companies share their profits with shareholders by paying dividends — but for various reasons, this isn't guaranteed.

For shareholders, especially those with minority shareholdings, this raises important questions: when is it lawful for a company to fail to declare dividends, what protections exist and how can disputes be resolved if directors’ decisions feel unfair?

Here, Suzi Gardener explores the legal framework and remedies available when disagreements arise.

What is a dividend?

A dividend is a payment made by a company to its shareholders. Under English law, dividends must be paid out of a company’s post-tax profits (sometimes also called distributable profits or reserves). They represent a return on investment for shareholders and are often seen as a sign of a company’s financial health.

Even where a company has sufficient distributable profits, shareholders don’t have an automatic right to receive dividends. Whether a dividend is paid will depend on the company's Articles of Association and the relevant decision-making process for interim and final dividends.

Interim or final dividends

Under most private limited companies’ Articles of Association, directors may declare interim dividends, whereas final dividends are generally declared by shareholders via ordinary resolution following a recommendation from the directors. Shareholders can’t usually compel directors to recommend a dividend or declare an interim dividend.

When can a company refuse to pay dividends?

There are various legitimate reasons why a company’s directors might decide not to declare dividends. 

Examples might include:

1. Insufficient profits 

If a company hasn’t generated enough post-tax profit, it can’t legally pay dividends.

2. Board decision

Even when a company is profitable, directors may decide that failing to declare a dividend is in the company’s best interests for a variety of reasons. 

The courts are generally reluctant to interfere in legitimate commercial decisions made by directors of a company in good faith. 

That said, directors must make their decisions in accordance with their duties, including those under sections 171 to 177 of the Companies Act 2006. Key directors’ duties in the context of dividends include the obligation for directors to act within their powers, promote the success of the company and exercise reasonable care, skill and diligence. 

Directors may not refuse to pay dividends for improper purposes. 

3. Reinvestment for growth

Companies often withhold dividends to fund expansion, research or asset acquisition — moves that could deliver greater returns in the future.

4. Financial instability 

If a business is facing financial challenges, paying dividends could risk insolvency. Retaining cash reserves may be essential for survival.

Challenging dividend decisions

Unfair prejudice claims 

A shareholder may potentially bring an unfair prejudice claim under section 994 of the Companies Act 2006 where dividends are improperly withheld. 

Examples might include:

• If it was agreed that dividends would be paid in certain circumstances (such as within a dividend policy in a shareholders’ agreement) and there’s no justification for the payment being withheld.
• In quasi-partnership companies where shareholders have a relationship based on mutual trust and confidence and an understanding that all participants will share in the company's profits, a departure from an established dividend practice may be more readily challenged as unfairly prejudicial.
• Where the withholding of dividends is done by the directors for an improper purpose, such as to put undue pressure on a shareholder or to support the directors paying themselves excessive salaries instead of declaring dividends.  

Where an unfair prejudice claim succeeds, the court has wide powers to grant an appropriate remedy to a wronged shareholder. A commonly sought remedy is an order that the minority shareholder's shares be purchased by the wrongdoer(s) at a fair value. In some circumstances, the court may also regulate the company's affairs or make orders concerning future conduct.

Breach of directors’ duties 

If the directors’ decision to withhold the payment of dividends involves a breach of their duties to the company, the company may have a claim against the directors. In certain circumstances, a shareholder may seek permission to bring a derivative claim on the company’s behalf, although unfair prejudice proceedings are often a more straightforward and practical means of pursuing a remedy for such breaches. 

What should shareholders do if dividends are withheld?

Before taking action, shareholders should:

• Review the company's Articles of Association and any shareholders' agreement.
• Request the company’s accounts and other financial information where they’re entitled to do so.
• Consider whether profits have been extracted from the company through salaries, bonuses, pension contributions or related-party transactions.
• Seek specialist advice on whether the circumstances could support an unfair prejudice petition or another form of claim.
   

Talk to us

If you’re a shareholder who hasn’t received dividends that you believe you’re entitled to, specialist advice can make all the difference. With experienced specialists in shareholder rights, we can review company articles and dividend policies, advise on unfair prejudice claims and represent shareholders in negotiations or court proceedings where necessary.

Talk to us by calling 0151 600 3493, emailing hello@shareholderrights.co.uk or completing our contact form.