Communiqué on Distribution of Advance Dividend ("Communiqué"), introduced by the Ministry of Customs and Trade, regulates the procedures and principles of distribution of advance (interim) dividend within the relevant fiscal year in (i) joint stock companies that are not subject to the capital markets legislation, (ii) limited liability companies, and (iii) limited partnerships divided into shares. As the latter is almost non-existent in daily business life, this article concentrates on joint stock companies and limited liability companies.
1. What is "dividend" and "advance dividend"?
While "dividend" refers to the monetary amount which is distributed to shareholders or other relevant persons upon a decision of the general assembly over the annual net profit or free reserves, "advance dividend" refers to the monetary amount which is calculated over the profit generated in accordance with the interim period financial statements, distributed to shareholders upon a decision of the general assembly and to be ultimately deducted from the dividend.
In this respect, the Communiqué enables companies to distribute advance dividend in certain circumstances provided that this amount will be deducted from the net profit generated by the end of the relevant fiscal year. The companies cannot distribute the dividend at the end of the relevant fiscal year or further advance dividends unless such deduction is made.
2. Conditions for distribution of advance dividend
As per Article 5 of the Communiqué, in order for a company to distribute advance dividend, the following conditions should be met:
- the company should have made profits in the respective interim period/periods preceding the distribution of advance dividend, according to the respective interim financial statements (3-month, 6-month or 9-month periods),
- general assembly of the company should resolve on distribution of advance dividend.
3. Calculation of the advance dividend
As per Article 7 of the Communiqué, the advance dividend is calculated through deduction of (i) total loss carried over from previous years, (ii) tax, funds and financial allowances, (iii) legal reserves which shall be set aside in accordance with the laws and articles of association, and (iv) rights of the shareholders holding privileged shares, or other relevant persons having the dividend right certificate, or who are entitled to dividend from the profit made in the interim period. However, the advance dividend to be distributed cannot exceed half of the total advance dividend.
If the company makes profit in the following interim periods as well and intends to distribute further advance dividends, the new advance dividend shall be calculated through deduction of the previously distributed advance dividend(s) together with the foregoing items, from the profit made within the relevant interim period. In this case, again, the advance dividend to be distributed cannot exceed half of the total advance dividend amount.
4. Requirements set forth in the Communiqué for the general assembly meetings and resolutions
Article 6 of the Communiqué determines meeting and decision quorums in order for the companies to resolve distribution of advance dividend.
In this respect;
- in joint stock companies (and limited partnerships divided into shares) at least 1/4 of the shareholders or their representatives should be present at the meeting to constitute the "meeting quorum" whereas the "decision quorum" is votes of the majority who attended the meeting unless the company's articles of association stipulates a higher quorum;
- in limited liability companies, decision quorum constitutes with majority of the votes represented in the meeting, unless the company's articles of association stipulates a higher meeting quorum and/or a specific decision quorum.
Article 6 of the Communiqué also requires that the general assembly resolutions as to distribution of advance dividend shall include the following wording:
"a) At the end of the relevant fiscal year, if the company cannot make net profit to cover the advance dividend which has been distributed within the year;
- excessive amount of the advance dividend shall be deducted from the company's free reserves shown in the previous year's balance sheet,
- if the free reserves cannot compensate for the excessive advance dividend, such portion of the advance dividend shall be returned by the shareholders to the company upon notification of the management body.1
b) At the end of the relevant fiscal year, if the company incurs loss;
- general legal reserves and free reserves (if any) shown in the previous year's balance sheet shall be used to compensate the loss in the first place. If they cannot cover the loss, all of the advance dividend distributed within the year shall be returned by the shareholders to the company upon notification of the management body,1
- after deduction of the general legal reserves and free reserves from the loss incurred in the relevant fiscal year, remaining part of the free reserves shall be deducted from the advance dividends. As a result of this, if the amount of the advance dividend distributed within the fiscal year is higher than the remaining part of the free reserve funds, the exceeding portion shall be returned by the shareholders to the company upon the notification by the management body."
5. Duties of the management body
Upon obtaining the decision on distribution of advance dividend by the general assembly, the management body of the company shall be liable to prepare a report, and declare in such report that the interim period financial statements that serve as a basis for distribution of advance dividend have been prepared in conformity with the "fair presentation principle" and that the advance dividend to be distributed has been calculated in compliance with relevant articles of the Communiqué as to calculation of the advance dividend as explained under section 4 above.
The management body should also adopt a resolution regarding payment procedure of the advance dividend to the shareholders.
6. Distribution and payment of the advance dividend
The advance dividend may only be distributed to the shareholders within 6 weeks following the resolution of the management body, pro rata to their shares regardless of the privileged shares.
If a shareholder is in debt to the company, the debt amount is deducted from the advance dividend to be distributed.
The advance dividend shall not be distributed to non-shareholder persons who are entitled to the dividend, non-shareholder management body members, or (non-shareholder) persons holding dividend right certificates.
If the company increases its share capital following distribution of the advance dividend and the company decides within the same financial year to further distribute advance dividend, new shareholders, if any, shall have priority during distribution of the advance dividend until they obtain an advance dividend in the amount equaling the amount distributed to previous shareholders.
1. Management body refers to "board of directors" in joint stock companies and limited partnerships divided into shares, and to "board of managers" or the "manager" in limited liability companies.
This article was first published in Legal Insights Quarterly by ELIG, Attorneys-at-Law in December 2016. A link to the full Legal Insight Quarterly may be found here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.