Following the collapses of Carillion and BHS in 2016 and 2017 fresh concerns have been raised by the government and other bodies about corporate governance failures in UK companies.

BHS collapsed in 2016 with a pension deficit of around £275m, Carillion followed in 2017 with a pension deficit of around £580m, requiring the government-backed Pension Protection Fund to administer the scheme and potentially cover the shortfalls.

The Department for Business, Energy, and Industrial Strategy (‘BEIS’) carried out a consultation on insolvency and corporate governance in March 2018, following the two high-profile collapses. BEIS considered several issues, including whether the current framework allowing the payment of dividends to shareholders is appropriate where a company is facing financial difficulties, particularly where the company has high net debt and large pension deficits.

The Investment Association (‘IA’), the trade body that represents UK investment managers who collectively manage assets of £7.7 trillion, echoed the concerns of BEIS and as a result commissioned a report on shareholder votes to approve dividends, which was recently published.

The IA report considers the increasing number of listed companies who only pay interim dividends, which under most articles of association do not require shareholder approval, unlike final dividends.

By not seeking shareholder approval, the IA suggested that an essential mechanism for accountability to shareholders is being undermined, allowing capital management to be increasingly focused on the short term.

The report showed that of the 628 companies considered, 121 of them did not seek a shareholder vote on dividend payments, making up a significant minority of 22%. Of those 121, 12 were part of the 20 largest companies in the FTSE 100.

The IA engaged with a number of companies within the FTSE 100 to consider why shareholder approval on dividends was not sought. The responses included:  

  1. Providing a regular income stream and flexibility – there is an increased demand for regular income from shareholders, seeking their approval for a final dividend would delay the payment until the second quarter of the following financial year. Some companies consider this to be too long a period in which unexpected events may occur making the dividend inappropriate.
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  3. Solvency II regulations and capital requirements – companies in the financial sector subject to Solvency II regulations argued that interim dividends are more appropriate as they can be revoked, unlike final dividends which are considered a debt due by the company. Under Solvency II this debt would negatively impact available capital.
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  5. Tax – if a non-UK company were to propose a final dividend this would oblige the parent company to distribute the dividends from its headquartered jurisdiction, having a potentially negative effect in relation to tax for shareholders.

BEIS has suggested that it may legislate to make it a legal requirement for an annual shareholder vote on dividends. The IA’s report offers an alternative ‘distribution policy’. The policy will set out a company’s approach to making decisions on the amount, structure and timing of returns to shareholders, including dividends, share buy-backs and other capital distributions.

The IA considers that this will provide transparency about the approach to capital management and allow shareholders to engage with a company and hold them to account, whereas legislation may have an undesirable effect and negatively impact on shareholders.

The IA will establish a working group on the content of a distribution policy and make recommendations on whether a shareholder vote on this policy should be mandatory. They are due to publish their results in Autumn 2019.

For information and advice on dividends or wider corporate governance matters contact our corporate solicitors to discuss.