|Belgium: Some Interim Dividends Distributions Remain Controversial|
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Interim dividends can be distributed by the board of directors or the general shareholders' meeting of a Belgian company limited by shares, depending on the year (current financial year or not) to which the interim dividend relates. On January 14 2009 the Commission for Accounting Standards advised against the distribution of any interim dividend by the general meeting between the end date of the last financial year and the approval of the annual accounts for that financial year by the general meeting. This advice remains the subject of some controversy.
This update will, first, examine the differences between the distribution of interim dividends by the board on one hand, and by the general meeting on the other. There is no express legal basis for the distribution of interim dividends by a general meeting, but it has become a practice that is generally concerned legitimate, certainly after a positive decision of the Belgian Supreme Court in 2003. Second, this update will also elaborate on the above-mentioned advice issued by the commission. Finally, there will be a comment on the possible practical implications and the practitioners' view on the advice.
Interim dividends distributed by the board
Pursuant to Article 618 of the Companies Code, the board of a company limited by shares may, if so empowered by the company's articles of association, distribute interim dividends to the company's shareholders.
Such an interim dividend distribution is, however, subject to the conditions set out in Article 618 of the code. First, a distribution of an interim dividend by the board may relate only to the profits of the current financial year, less any losses or plus any profits carried forward (if any) and excluding any non-distributable reserves (either legal reserves or reserves provided for by the articles of association). Second, the distribution can only be done if, on the basis of a statement of assets and liabilities drawn up by the board and verified by a statutory auditor, the distributable profits are sufficient for the envisaged interim dividend. The decision of the board to distribute the interim dividend must be made within two months of the date on which the statement of assets and liabilities was drawn up. Also, this decision can only be taken as of the seventh month after the end of the previous financial year and after the approval of the annual accounts concerning that financial year. Finally, once the decision to distribute an interim dividend has been taken, the board must wait at least three months before it may distribute another interim dividend. In practice, this means that the board is limited to a maximum of two interim dividends per financial year.
The limits set by Article 617 of the code have to be observed as well. No dividend distribution is allowed if, on the closing date of the last financial year, the net assets, as reflected in the financial statements are, or as a result of this dividend distribution, would fall, below the paid-up capital (or the called-up capital if this is a higher amount) plus all reserves which may not be distributed according to the law or the company's articles of association.
Interim dividends distributed by the general meeting
In addition to the board's power to distribute interim dividends, the general meeting of a company limited by shares also has the power to distribute interim dividends. Although not explicitly provided for in the code, this practice was confirmed by the Supreme Court on January 23 2003. In its judgment the court stated that, within the above-mentioned limits of Article 617 regarding distributable profits, the general meeting may at any time of the year decide to distribute to the company's shareholders an interim dividend drawn from the available reserves. In practice, the distribution can be drawn not only from the available reserves but also from the profits carried forward.
As set out above, an important difference between the distribution of interim dividends by the board on one hand and the general meeting on the other is the period on which the interim dividend payment is based. An interim dividend distributed by the board is based on the profits of the current financial year, whereas an interim dividend distributed by the general meeting is based on the available reserves and profits carried forward from the last financial year for which the annual accounts have been approved.
In this respect, the commission advises the general meeting not to distribute any interim dividend in the period between the date of closure of the last financial year and the approval of these annual accounts by the general meeting. The commission supports its advice with the following arguments. On one hand, the distribution of an interim dividend in this period would mean that the annual accounts to be approved for the last financial year are not definite. On the other hand, the commission is of the opinion that the annual accounts regarding the last financial year that have been approved by the general meeting must be taken into account. Consequently, as long as these annual accounts have not been approved, it will not be possible to determine the net assets at the closing date and therefore no interim dividend may be distributed.
Although there is no consensus amongst legal scholars on the question of which annual accounts must be used as the basis for the distribution of an interim dividend by the general meeting, a majority of them believe that it is the last approved annual accounts. This means that the annual accounts of the last-but-one financial year will form the basis for the interim dividend distribution if the accounts of the last financial year have not yet been approved.
The commission, however, applies a more restrictive view and uses two criteria: the distribution must be based on the last approved annual accounts, showing the net assets at the closing date of the last financial year ended. This implies that the general meeting cannot distribute an interim dividend before the approval of the annual accounts of the last financial year ended.
This advice is thus not in line with the opinion of the majority of legal scholars. Moreover, it is not in line with the January 23 2003 Supreme Court ruling, according to which the general meeting may, within the limits of Article 617 on distributable profits, decide to distribute an interim dividend at any time.
From an accounting point of view, the commission's advice aims to avoid accounting difficulties which may arise if an interim dividend is distributed by the general meeting in the period between the date of closure of the last financial year ended and the date of approval of these accounts by the general meeting. However, from a corporate law point of view, this advice seems too strict. It triggers a superfluous waiting period as it only allows the distribution of interim dividends by the general meeting in the second half of the current financial year (ie, after the approval of the annual accounts of the last financial year ended).
The opinions expressed do not constitute investment advice and specialist advice should be sought about your specific circumstances.
Published on our website on Dec9, 2010