Shareholder Agreements – Part Two

Shareholder Agreements: 2) Distribution of Profits

Earnings can be paid out by way of salary, dividends, interest payments on shareholders’ loans, repayment of shareholders’ loans or return of capital. Most companies retain part of their earnings and declare dividends with the rest. However, shareholders may hold very different views on what should be done with profits. One might want profits reinvested in the company, another might want to build the company’s cash balance, another might want dividends.

Without a shareholders agreement, directors have discretion to distribute profits or retain earnings more or less as they please, subject to any special rights and restrictions on shares. Amounts to be distributed, retained as cash or paid out as dividends could be set out in a formula, although this may be too inflexible and it may not be possible for shareholders to predict the financial future of the company. It may be desirable for shareholders to set out general principles and understandings in the shareholder agreement.

Located in: Corporate and Commercial Law