Dividends are often known as the “fruits of investment”, paid to shareholders for the risks taken in their capital investment into a business. Paying dividends is the primary way for companies to distribute its retained profits and cash to its shareholders.
There may be instances when a company wishes to allocate a different amount of dividends to different shareholders to reflect their active contributions in the day-to-day business. On the other hand, a patriarchal founder of an established family business may wish to allocate himself the lion’s share of the profits, even when he is no longer actively working in the business.
This leads to the question of “whether the distribution of dividends must always be proportionate to shareholding?”
In this article, we will explore whether an unlisted private company in Malaysia can distribute dividends unequally amongst shareholders, and if so, what are the requirements to do so under the Malaysian Companies Act 2016 (“the Act”).
Ordinary Shares and Unequal Dividends
The distribution of dividends on ‘ordinary shares’ other than preference shares are neither fixed nor guaranteed. Whether dividends are distributed, and in what amount, must be authorized by the directors.[1] If and when dividends are declared by the directors, the shareholders are by default entitled to “the right in an equal share in dividends”.
However, section 71(2) of the Act provides that this right may be negated, altered or added to by:
- a company’s constitution; OR
- in accordance with the terms on which the share is issued.
It is clear that the distribution of unequal dividends are indeed permissible. Interestingly, the “or” in section 71(2) caters for 2 different ways to effect an unequal distribution of dividends.
Firstly, a company’s constitution may be amended to expressly provide for the ability to distribute dividends to shareholders. This is possible even without having different classes of shares. For example, the constitution can expressly confer the authority (or obligation) for the Board to distribute unequal dividends to the shareholders on a 70:30 basis, despite their 50:50 shareholding.
Secondly, the company may choose to issue shares of a different class, with different terms attached to such a class of shares. In particular, section 69 allows different classes of shares to confer preferential rights to distributions of capital or income, with such income being dividends. For instance, holders of ‘Class A shares’ may be entitled to dividends at a fixed annual cumulative or non-cumulative rate, while holders of ‘Class B shares’ may not have a right to dividends at all.
To issue different classes of shares, section 90 requires a company to make clear the following in its constitution:
- that the company’s share capital is divided into different classes; and
- the voting rights attached to the shares in each class.
As they say “All roads lead to Rome”. It appears that both approaches to effecting an unequal distribution of dividends require the express amendment and provision in the constitution.
In conclusion, the Act confers companies the ability to structure the distribution of dividends to its shareholders beyond just a proportional or equal basis. This allows a business to align its rewards system with its commercial objectives.
However, if a company wishes to structure an unequal distribution of dividends to its shareholders, it should ensure that such power is captured within its constitution and not just left to its shareholders agreement and/or subscription agreement.
[1] Companies Act 2016, s 71(1)(e).
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This article was written by Shawn Ho with assistance from Chloe Tan (Intern). Shawn leads the corporate practice group of Donovan & Ho, and has been recognised as a Notable Practitioner, whilst the firm has been recognised as a Notable Firm for Corporate and M&A by Asialaw Profiles 2020 and 2021. We are also ranked as a Recommended Firm by IFLR1000 2020 and 2021.
Our corporate practice group advises on corporate acquisitions, restructuring exercises, joint venture arrangements, shareholder agreements, employee share options and franchise businesses, Malaysia start-up founders and can assist with venture capital funds in Seed, Series A & B funding rounds. Feel free to contact us if you have any queries.
