Mandatory payment of dividends in 2010

14 July, 2010 Newsletters

Please be reminded that under the amendments made to Article 30 of the Law of Ukraine “On Joint-Stock Companies” (hereinafter “Law on Joint-Stock Companies”) by the Law of Ukraine “On State Budget of Ukraine for 2010”, which became effective on April 30, 2010, in 2010 joint-stock companies are obliged to pay dividends at the amount not less than 30 % of their net profit in the reporting year and/ or their undistributed profit (hereinafter “30 % Payment Rule”). The above-mentioned amount of dividends may be increased (but not reduced) by the resolution of shareholders’ meeting of a joint-stock company.

The significant point is that in accordance with 30 % Payment Rule dividends must be paid not only from the net profit of a joint-stock company in reporting year (2009), but also from its undistributed profit (the period is not specified in the law). It gives the grounds to affirm that the undistributed profit of the joint-stock company for earlier years (not only for 2009) should be also deemed the basis for calculation of dividends.

Payment of dividends may be avoided if the grounds to exclude application of 30 % Payment Rule to a particular case are found. Please find below the example of the attempt to find such grounds1. (for the purposes of objectivity it is accompanied by counterargument):

  • Position. The matter of dispute may be whether 30 % Payment Rule applies to “old” open and closed joint-stock companies, which have not adjusted yet their constituent documents to the requirements of the Law on Joint-Stock Companies. 30 % Payment Rule is directly set in the Law on Joint-Stock Companies only. At the same time, although the Law of Ukraine “On Commercial Companies” (hereinafter “Law on Commercial Companies”) mentions that the payment of dividends is mandatory, it does not specify the amount of such payment and contains the reference to the other laws only. According to the position of the State Commission for Securities and Stock Market (hereinafter – “Securities Commission”), stated in Explanations of July 14, 2009, No. 8 (as amended), within the period from April 30, 2009 to April 30, 2011 the Law on Joint-Stock Companies applies to the joint-stock companies which have brought their constituent documents in compliance with the Law on Joint-Stock Companies; before such bringing joint-stock companies (open and closed ones) are governed by the Law on Commercial Companies. Based on the aforesaid considerations one may infer that “old” open and closed joint-stock companies are not governed by the Law on Joint-Stock Companies, so 30 % Payment Rule should not apply to them.
  • Counterargument. The Law on Joint-Stock Companies does not contain the reservation that it applies only to “updated” and new joint-stock companies. Moreover, some of its provisions (in particular paras. 5-7 of the Final and Transitional Provisions) apparently do apply to “old” joint-stock companies. Besides, there is a certain court practice (including the one of the Supreme Court of Ukraine) disregarding the contemplated and similar explanations of the Security Commission where the latter limits the purview of laws. Hence, the possibility of application of 30% Payment Rule to “non-updated” open and closed joint-stock companies may not be excluded.

As is seen from the above, the presented approach is possible but not sufficiently reliable. More sound legal position for non-application of 30 % Payment Rule may be developed, e.g., from the restrictions for the dividends payment set by the Law on Joint-Stock Companies and the Civil Code of Ukraine. At all accounts, the matter of applicability of 30 % Payment Rule in each particular case should be studied with due consideration of the peculiarities of the respective joint-stock company.

We trust the above comments might be useful for you. Please do not hesitate to contact us in case of any questions as to the above or if any additional information might be required.

The above commentary presents the general statement for information purposes only and as such may not be practically used in specific cases without professional advice.

Footnotes:

1Presented approach is given only as an example of advocatory position on the matter of application of 30% Payment Rule. The said approach may not be treated as a legal opinion of KM Partners on the contemplated matter. We find it expedient to mention this approach as it was suggested and spread in mass media as the argument to avoid application of 30% Payment Rule.

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Kind regards,

© TOV "KM Partners", 2010

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