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Covid-19 = no dividends in 2020?

Bruno Dondero’s point of view


In recent days, statements have been made by several ministers, "inviting" companies not to pay dividends, or to moderate their payment to shareholders.

What is a dividend?

First of all, it must be recalled that in the normal mechanics of a partnership agreement, company shareholders are not remunerated in any other way than by a share in the profits. This profit could in theory only be paid out when the company ceases to exist and is liquidated. In practice, however, there is a tendency among companies, when they have made a profit in year n, of paying all or part of it to shareholders in year n + 1. This distributed profit is the dividend.

Note that the dividend paid by a company often ends up in the pockets of employees! Many of the company's shareholders are often also employees. But beyond this employee shareholding, the most important shareholders of our large companies, apart from the State, are often other companies, which themselves sometimes have many employees. Failure to pay dividends can therefore have a significant impact on shareholders’ employees, since dividends from one company are often used to pay the wages and expenses of another company!

Do you understand the questions about dividends during the Covid-19 pandemic?

This is obviously a very uncertain time for many companies, which are either paralysed themselves by the lockdowns and danger of the epidemic, or see their customer base shrink for these reasons. If a profit was made in 2019, the most reasonable decision would seem to be not to divest the corresponding sums, but to keep them in the company's assets to ensure its financing in 2020.

However, if the dividend is not a gift from the company, it is in principle under no obligation to distribute a dividend to its shareholders ... but the shareholders, again in principle, are under no obligation to leave the profit in the company’s coffers. The shareholders' meeting which notes that a profit has been made in 2019 is and remains sovereign in deciding on its allocation: distribution of a significant dividend or retention of the sums? The shareholders will decide... unless the Government decides to take that choice away from them.

Muriel Pénicaud said the State would request companies in which it is a shareholder not to pay dividends "in any case to individuals".

We understand the idea, which would be that shareholders who are individuals would need their dividend less than shareholders who are companies (or the State!), who use it to pay their own expenses and their employees and to invest. But legally, it would be difficult for a company to sort through its shareholders and not pay dividends to some (individuals), while paying others (companies and ... the State, we imagine). To do this, it would be necessary to have set up a share class or preference share system. Taxation should not even be a useful instrument, because even if the company wanted to, it could not treat its shareholders unequally. The State, even if it were a reference shareholder or a majority shareholder, could not set up such a system, and to do so by means of a special law would probably be very complicated, assuming that it were simply possible.

Bruno Le Maire declares that in his opinion the payment of dividends is incompatible with the deferral of tax and social security charges or with the system of part-time work and flexi hours ("partial unemployment schemes").

The Minister is certainly playing his role in making that statement, as would a private investor who may announce that he will not finance a company if the shareholders in place take the profit made. By giving this instruction, Bruno Le Maire asks businesses to keep their cash.

Now, there should be a specific legal framework to compel a company to repay aid when it distributes a dividend, whether it be a special law or a particular clause to which it should have adhered. It should not be forgotten that, as has already been said, shareholders expecting a dividend are often also, in many cases, companies themselves, who rely on this resource to pay their own expenses.

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Bruno Dondero
Bruno Dondero