If a company has not been paying dividends to shareholders despite making profits for the past few years, what can shareholders do?

As noted in one of our previous columns, a shareholder generally does not have an unconditional right to receive dividends, even when profits are available for that purpose.

How and when a dividend is to be declared is governed by the articles of association of a company. Usually, the directors will recommend a particular rate of dividend, and the company in general meeting will declare the dividend subject to the maximum recommended by the directors.

Given that a shareholder is unable to compel a company to declare dividends in the absence of a specific right granted in the articles of association, the following are some of the ways in which a shareholder may wish to consider adopting to influence a company to declare dividends:

(a) Calling a meeting of the company

2 or more members holding not less than 10% of the total number of issued shares of a company (excluding treasury shares) may call a meeting of the company, at which the issue of lack of declaration of dividend can be raised and addressed. Quite often, shareholders will make use of the annual general meeting as a platform to require the directors to give an account accordingly.

Such a meeting can provide shareholders with the platform to either persuade or add soft pressure on the directors to consider a declaration of dividends or hold the directors accountable for their decision not to recommend the declaration of dividends. For example, a healthy rate of dividend declared which may result in an increased demand for the company’s shares from the investor community, and the possible correlation with the company’s share price are some the reasons that had, in some instances, been put forth in favour of a declaration of dividends. In addition, questions can also be raised as to whether the directors have properly discharged their duty to act in the best interest of the company and the shareholders as a whole if they have not properly applied their minds to consider a declaration of dividends would be appropriate.

There is also Singapore case law to support the position that should majority shareholders consistently refuse to declare dividends when profits are available (particularly if the majority could be shown to have remunerated themselves only in another way), this may amount to oppression of the minority shareholders for which the minority shareholders may choose to seek redress under our Companies Act. For instance, such redress may be available where a majority shareholder, who is also a director, sanctions the payment to himself of substantial director’s fee, which deprives minority shareholders from receiving returns on their shareholding in the form of dividends. Note that insofar as we aware, such an argument has yet to be successfully tested in the context of publicly listed companies.

Where a meeting of the company is validly convened, the passing of the resolution to approve the declaration of dividends will still be predicated on a requisite majority of shareholders voting in favour of the said resolution.

(b) Altering the composition of the board of directors

Shareholders who are not adverse to a more aggressive approach may also wish to consider replacing the board with directors who are more amenable to a declaration of dividends if there is a sufficient majority of shareholders in favour of this. However, especially in the case of a public listed company, shareholders should carefully consider if such a move will unnecessarily shake the confidence of the market (viz., the company) and, where the board has generally been effective in the control and management of the company, if the major revamp of the board may affect the performance of the company (be it in the short term or the longer term).

In this regard, do note that it is not uncommon for articles of association of companies to include a provision that shareholders may by ordinary resolution remove a director before his term of office expires. In addition, our Companies Act stipulates that shareholders of a public company may by ordinary resolution remove and replace directors, even if the memorandum or articles of association provide otherwise.