As COVID-19 continues to spread and market uncertainty surrounding it persists and intensifies, a number of ASX-listed companies have taken the unusual step of withdrawing, deferring payment of, or reducing, their previously announced dividends in order to preserve cash for the uncertain times ahead.
Last week, for example, saw companies including Vita Group Limited (ASX: VTG), Adairs Limited (ASX: ADH), Alliance Aviation Services Limited (ASX: AQZ), Air New Zealand Limited (ASX: AIZ), Vista Group International Limited (ASX: VGL), and Auckland International Airport Limited (ASX: AIA) withdraw their dividends altogether. AP Eagers Limited (ASX: APE) also announced a reduction of its dividend, and companies including Qantas Airways Limited (ASX: QAN), KIP McGrath Education Centres Limited (ASX: KME), Corporate Travel Management Limited (ASX: CTD), and Ariadne Australia Limited (ASX: ARA) deferred payment of their dividends to later in the calendar year.
Australian companies1 ought to think twice, and carefully consider their constitutions, before doing so. Typically, a company does not incur a debt merely by fixing the amount or time for payment of a dividend. Instead, the debt arises when the time fixed for payment arrives.2 Accordingly, a decision to pay the dividend may be revoked before then. However, section 254V(2) of the Corporations Act is critical - if the company has a constitution and it provides for the declaration of dividends, the company incurs a debt when the dividend is declared.
Ultimately, it all turns on the drafting of a company's constitution, and whether it "provides for the declaration of dividends".
Most public company constitutions drafted in the last decade specifically and deliberately frame the board's power as a power to 'determine' dividends, 'authorise' dividends, or 'pay' dividends, to ensure that they do not enliven section 254V(2). However, the Courts have had cause to consider section 254V(2) on a number of occasions in recent years and, based on the outcomes in those cases, the application of section 254V(2) is not as simple as just confirming that the rule in the constitution that refers to dividends does not specifically reference 'declaration'. The Courts have, instead, looked at the drafting of the constitution as a whole, and what can be deduced in relation to the objective intention of that contract.
Regardless of whether or not section 254V(2) applies, withdrawing a dividend is not without risk in circumstances where investors may have relied upon the form and substance of market announcements regarding the payment of a dividend, and a company's subsequent silence after announcement of the dividend, in order to trade (or not trade) shares in the company, potentially opening the door to a misleading and deceptive conduct claim or other class action risk. Particular care needs to be taken if a listed company cancels a dividend after its "ex" entitlement date, as the market price may well have built this in with the effect that there may be shareholder losses if the dividend is then cancelled.
In the case of any ASX-listed company (Australian-registered or not), any delay in notifying the market of a decision to withdraw a dividend may also result in a breach of ASX Listing Rule 3.21, which would be considered by ASX separately to any alleged contravention of the Corporations Act.
With the full impact of the unfolding COVID-19 crisis on business and the market not fully understood at the time many companies reported half-year earnings, and announced dividends, we expect more boards understandably focussed on the preservation of cash in uncertain times will want to test executives on whether dividends ought be withdrawn, deferred or reduced.
We are here to help. Please let us know if you would like to discuss any of the issues raised in this alert, or require any assistance.
1 Section 254V of the Corporations Act applies to 'companies'. A 'company' does not, in respect of those provisions, include a 'Part 5.7 body' (that is, a foreign-registered company which is registered as doing business in Australia, and which may or may not also be listed on ASX). Foreign-registered companies will need to comply with applicable legislation in their place of registration when considering withdrawal of a dividend.
2 Section 254V(1) of the Corporations Act.