(*) This work is based on the knowledge, experience, and perspective of ATA Legal Services' team. The arguments given herein are not meant to guarantee or firmly determine the successful application in practical situations. Should you have any queries on a case-by-case basis, please contact us for assistance.
Late payment of dividends is a practice that comes across frequently in the market, not only in ordinary enterprises but also in public and listed companies. Typically for instance: the case of owing dividends for over a decade Dong Do Petroleum Joint Stock Company (stock code PFL) [1], or the case of Lilama 45.4 Joint Stock Company (stock code L44), which has changed the dividend payment date for the 8th time[2]. These cases have existed for many years, but neither management authorities nor shareholders can come up with any directions and solutions to resolve and protect the legitimate interests of related parties.
In this article, we would like to deeply analyze the legal provisions related to the payment of dividends of enterprises to determine "AT WHAT TIME IS DIVIDEND DETERMINED AS THE DEBT OF THE ENTERPRISE?", thereby giving opinions in determining the rights and obligations of shareholders as well as proposing directions to improve legal regulations and protect investors' interests in the market.
1. Legal provisions related to dividends and payment of dividends
1.1. Definition of dividends and forms of payment of dividends
According to Clause 5 Article 4 of the Law on Enterprise 2020, a dividend means a net profit on each share in cash or other assets.
Article 135 of the Law on Enterprise 2020 clarifies that dividends can be paid in cash, the company’s shares, or other assets specified in the company's charter. If dividends are paid in cash, it shall be VND and using the methods of payment prescribed by law.
1.2. Right to receive dividends of shareholders
According to the Law on Enterprise 2020, shareholders are entitled to receive dividends from the company, unless otherwise provided by law, in the company’s charter, or other conditions and terms related to share issuance.
However, depending on the type of shares, shareholders may receive dividends of different levels and forms, specifically:
a. For shareholders owning dividend preference shares
Shareholders owning dividend preference shares will receive annual dividends at a higher rate than that of ordinary shares or the annual stable rate. Specifically, depending on the conditions and terms of preference shares, shareholders may enjoy dividends as follows:
+ Fixed dividend: shareholders enjoy dividends at the annually fixed-rate (%) based on the total value of their preferred shares. This type of shares gives shareholders the right to receive dividends regardless of the company’s business results.
+ Bonus dividend: when the company pays dividends, the shareholders are entitled to dividend amount at a higher rate (%) than the remaining shareholders, this difference could be determined in principle or according to the value following the conditions and terms of the shares. In addition, the basis and conditions for dividend payment hereof must also meet the same as in the case of dividend payment for ordinary shares.
b. For shareholders owning ordinary shares
Dividends paid to ordinary shares are determined based on the amount of net profit realized and the payment of dividends is deducted from the company's retained earnings. In these cases, a joint-stock company may only pay dividends when it fully meets the following conditions:
+ The company has fulfilled its tax obligations and other financial obligations as prescribed by law;
+ The company has set aside company funds and offset previous losses following the law and the company's charter;
+ Immediately after paying off the dividends, the company still ensures full payment of debts and other property obligations due.
c. For shareholders owning other preference shares (other than dividend preference shares)
The Law on Enterprise 2020 stipulates that dividends paid for preference shares shall be made according to the conditions and terms applied separately to each type of preference share. These conditions and terms can be determined by enterprises and shareholders by themselves following the practice of the enterprise and do not infringe upon the legitimate rights and interests of other shareholders of that enterprise.
1.3. Competence to decide on the payment of dividends
According to the Law on Enterprise 2020, the competence to decide on the payment of dividends and the annual payment amount of dividends of each type of share belongs to the General Meeting of Shareholders. However, the Board of Directors has the right to decide on the period and procedures for payment of dividends. This stems from the practice that the Board of Directors understands the financial issues, cash flow, and capital sources of the company to determine whether the company is eligible to pay dividends and at what level is appropriate, ensuring the financial safety and by other operation plans and development of the company. However, given the fact that members of the Board of Directors are mostly the major shareholders or are nominated/elected by them, the decision of dividend payment, and dividend payment percentage shall depend on, even be dominated by the major shareholders.
1.4. Procedure of dividend payment
According to the Law on Enterprise 2020, the payment of dividends is carried out in the following order:
- Step 1: The General Meeting of Shareholders meets and approves the plan to pay dividends to shareholders and assigns the Board of Directors to implement.
Duration: At the Annual General Meeting of Shareholders – within 04 to 06 months from the end of the fiscal year.
- Step 2: The Board of Directors lists shareholders entitled to receive dividends, and determines the amount of dividends to be paid for each share, the time limit, and the form of payment for each dividend payment.
Duration: Within 30 days before each dividend payment.
- Step 3: Notice of payment of dividends to shareholders.
Duration: Within 15 days before the payment of dividends is made.
- Step 4: Payment of dividends
Duration: The payment of dividends could be made in several installments, but dividends must be paid in full within 06 months from the end of the Annual General Meeting of Shareholders.
In practice, dividends are not always paid on time as prescribed by law. However, there is currently no specific sanction for violations applied to enterprises or to enterprise managers that violate the dividend payment obligation. Previously, for state-owned enterprises, in the Regulation Management of Enterprise Arrangement and Development Support Fund issued together with Decision No. 21/2012/QD-TTg dated May 10, 2012, the Prime Minister stipulated that if an enterprise is at least 03 months behind schedule in paying dividends as specified in the Resolution of the General Meeting of Shareholders, it must bear the interest upon the basic interest rate for the dividend amount to be paid. In case of at least 03 months behind schedule, it will also be subject to the punitive interest. However, Decision 21/2012/QD-TTg has expired and the replacement document, Decree 148/2021/ND-CP dated December 31, 20,21 on management and use of revenues from ownership conversion of enterprises, public non-business units, revenues from state capital transfer and greater difference between the equity and the charter capital at enterprises no longer stipulates the issue above.
Therefore, there are many enterprises, that had approved the payment of dividends in a resolution of the General Meeting of Shareholders but have yet paid accordingly. The question is whether the enterprise is required to dividends and whether the dividend becomes a debt or a priority financial obligation of the enterprise after the payment of dividends has been approved by the General Meeting of Shareholders. This has great significance for enterprises and shareholders in the process of exercising their responsibilities and protecting their legitimate rights and interests.
In this article, ATA will study and analyze relevant legal provisions to clarify this issue.
2. Are dividends a debt that an enterprise is required to pay to shareholders?
2.1. Fixed dividends are naturally debts of enterprises that do not depend on payment conditions:
According to the Law on Enterprise 202the 0, fixed dividend is the dividend that shareholders annually absolutely enjoy regardless of the company’s business results. Therefore, in this case, fixed dividends are naturally a debt that the company must pay as per regulations and the aforementioned provision, we understand that there are no binding conditions for enterprises before paying fixed dividends to shareholders. Accordingly, enterprises are required to pay fixed dividends to shareholders at the specified dividend level on time recognized in the terms and conditions of dividend preference shares, in the company’s charter, in the agreements between enterprises and shareholders, or as prescribed in the Law on Enterprise 2020 if there are no above documents. Any delay or incompletement of payment is considered a breach of debt payment obligations and the shareholders have the right to take responsibility for these violations.
2.2. Are non-fixed dividends a debt of an enterprise or when do dividends become a debt of the enterprise?
For non-fixed dividends, including dividends of ordinary shares, bonus dividends of dividend preference shares, and dividends paid to shares other than dividend preference shares, the payment of dividends in these cases is not the company’s obligation and depends on the financial situation, business results, and development strategy of the company.
The Law on Enterprise 2020 stipulates the conditions for paid dividends of enterprises, including:
(i) Conditions for the General Meeting of Shareholders to approve the resolution on payment of dividends:
+ Having profits;
+ The dividend payment must be extracted from the retained profits of the business;
+ The dividend payment must be submitted by the Board of Directors and included in the agenda of the Annual General Meeting of Shareholders.
(ii) Conditions for dividend payment:
+ There has been a resolution of the General Meeting of Shareholders approving the payment of dividends;
+ The tax obligations and other financial obligations as prescribed by law have been fulfilled ;
+ The company funds have been appropriated and losses have been boosted in accordance with the law and the company’s charter;
+ Immediately after paying all dividends, the company still ensures to pay all due debts and other property obligations.
Thus, there will be 2 important milestones in the procedure for dividend payment: 1- the time of passing the Resolution of the General Meeting of Shareholders on dividend payment; and 2- the time of conducting dividend payment. Each of them attaches to certain conditions and the shareholders are onlto y be paid the approved dividend amount in full if all such conditions are satisfied.
In relevance to this, whether an enterprise must pay dividends to the shareholders as a debt, a financial obligation after passing the Resolution on dividend payment? This has been a controversial issue. On the one hand, there is an observation that the approval of the General Meeting of Shareholders is merely a policy approval, while the implementation must depend on the practice of the enterprise. This opinion is normally provided by businesses or business managers. On the other hand shareholders – those who directly benefit from the dividend payment policy of the enterprisey believe that once the General Meeting of Shareholders has approved the dividend payment, it means that the source of dividend payment has been determined, so the internal authorities of the enterprise are forced to conduct the payment accordingly. At that time, the dividend that has been determined to be paid in the Resolution of the General Meeting of Shareholders is considered a debt of the enterprise to shareholders.
To determine which views are appropriate, ATA will analyze the legal provisions related to dividends and dividend payments.
a. Regulations of the Law on Enterprise 2020
Clause 4 Article 135 on the time limit for dividend payment stated that: “Dividends must be paid in full within 06 months from the end of the Annual General Meeting of Shareholders”.
Given the above provision, many people understand that dividends, once approved by the General Meeting of Shareholders, naturally become the payment obligations of joint-stock companies to shareholders and the companies will have to complete the dividend payment within the above time limit.
However, Clause 2, Article 135 of the Enterprise Law 2020 stipulates that a joint-stock company “may only pay dividends of ordinary shares when the following conditions are fully satisfied:
a) The company has fully its tax liabilities and other liabilities as prescribed by law;
b) The company’s funds are contributed to and the previous losses are made up for as prescribed by law and the company's charter;
c) After dividends are fully paid, the company is still able to fully pay its debts and other liabilities when they are due.”
Thus, according to Clause 2 Article 135, we understand that at the time the enterprise approves the payment of dividends (by a Resolution of the General Meeting of Shareholders), the payment of dividends is not a compulsory payment obligation of the enterprise. To proceed with dividend payments, an enterprise must determine whether the conditions under the law are met. Specifically, there will be steps to implement the Resolution of the General Meeting of Shareholders as prescribed in Clause 4 Article 135 of the Law on Enterprises as follows:
"4. Dividends shall be fully paid within 06 months from the ending date of the annual GMS. The Board of Directors shall compile a list of shareholders that receive dividends, dividend of each share, time and method of payment at least 30 days before each payment of dividends. The notification of dividend payment shall be sent by express mail to the shareholders’ registered addresses at least 15 days before the dividend payment date. Such a notification shall contain the following information:
a) The company’s name and headquarters address;
b) Full name, mailing address, nationality, and legal document number if the shareholder is an individual;
c) Name, EID number or legal document number and headquarters address if the shareholder is an organization;
d) Quantity of each type of share; dividend of each share and the total dividends receivable by the shareholder;
dd) Time and method of dividend payment;
e) Full names and signatures of the company’s legal representatives and the President of the Board of Directors.”
At the same time, in Article 136 of the Law on Enterprises, there are provisions on “Return of payments for repurchased shares or dividends” as follows: “In case the repurchased shares are paid for against the regulations of Article 135 of this Law, the shareholder shall return the money or assets received. Otherwise, all members of the Board of Directors shall have a joint liability for the company’s debts and liabilities which is equal to the value of unrecovered money or assets.”
In the spirit of the Law on Enterprises as above, it can be understood that when the Board of Directors approves the implementation of dividend payment and notifies shareholderaton the time of dividend payment, the Board of Directors must be responsible for ensuring the shareholders’ right to receive actual dividends.
In short, the above spirit of the Law on Enterprises indicates that dividends become financial obligations of enterprises when the notice of the Board of Directors on the dividend payment is made.
b. Regulations on accounting regime of enterprises:
In Circular 200/2014/TT-BTC on corporate accounting regime, regarding accounting methods for dividend issues, the Ministry of Finance guides the basis and time of recognizing dividends as a “receivable” (Account 138) – for the company receiving dividends; or as a “payable” (Account 338) – for the company paying dividends, are “upon notice of dividend payment”.
As a result, according to the law of the accounting regime, dividends are considered payment obligations/ debts/ payables of enterprises at the time of notice of dividend payment. This regulation completely coincides with the provisions of the Law on Enterprise 2020.
3. Whether enterprises must take responsibility for the infringement of the dividend payment obligations.
As analyzed, the law currently stipulates dividends, of which payment once notified, will become a payment obligation of the enterprise and the enterprise must complete the payment within 06 months from the end of the Annual General Meeting of Shareholders. However, at present, the law charges the ge responsibility of enterprises and enterprise managers in case of paying dividends when they are not qualified, without binding their responsibilities nor providing any sanction in cases where they are qualified but do not fulfill the payment obligation. Therefore, it is a fact that many enterprises violate the dividend payment obligation but are not sanctioned due to insufficient legal basis.
Specifically, for cases of violating dividend payment obligations for years as mentioned at the beginning of this article, the State Securities Commission has not taken any clear action against these enterprises. In addition, right in Clause 5, Article 11 of the Regulation on the exercise of rights for securities owners issued together with Decision No. 09/QD-HDTV dated August 10, 2023: “At least 02 working days before the date of dividend payment..., the issuer must fully transfer the payable amount to the owner of depositary securities to the money account to VSDC. In case of delay in payment transfer or change of payment time, at least 01 working day immediately before the payment date, the issuer must send a written notice to VSDC clearly stating the reason and take responsibility for the delay in money transfer/change of payment time.” Accordingly, VSDC is also silent on measures to limit the extension/ change of dividend payment time.
4. Recommendationstions on legal regulations to ensure and enhance the responsibilities of enterprises in paying dividends in particular and the interests of shareholders in general
Firstly, it is necessary to define a principle that the Law on Enterprise 2020 is a basic law – the original law to regulate dividends. All specialized legal documents must comply with this original legal document.
Secondly, stemming from the above principle, we believe that, for the dividend payment procedure at VSDC as mentioned, the acceptance of VSDC and/or the State Securities Commission on applications to extend the dividend payment period beyond the provisions of the Law on Enterprises is inappropriatInsteadead, we propose to supplement the basis for the payment time limit as prescribed in Clause 4, Article 135 of the Law on Enterprises 2020 in the regulations of VSDC or related documents.
Thirdly, it is necessary to clarify and provide more sanctions or binding regulations to improve the responsibility of enterprises as well as business managers. Accordingly, in addition to sanctions, the law may also stipulate in the direction that enterprises violating obligations to shareholders to pay dividends will be determined as failing to ensure reputation with shareholders and the market, thereby not being able to register or approve registration documents related to share issuance/charter capital increase.
5. What could shareholders do when the enterprise/enterprise manager breaches the obligation to pay dividends or other obligations/commitments:
Obviously, with the current regulations, it could be understood that shareholders – specifically shareholders identified in the dividend list – must be entitled to request and require the enterprise to fulfill the dividend payment obligation on time and as committed. In fact, for large shareholders that “dominate” the enterprise, holding the right to actively select and elect enterprise managers as well as taking the initiative in approving corporate decisions, they can completely use the statutory right to ensure decisions in their favor.
However, the remaining shareholders, especially minor shareholders will not be able to use measures that "with the internal operations of the business. At that time, they will usually only be able to rely on regulations on sanctions or binding legal responsibilities of enterprises and managers.
Here, when there is no sanction for administrative violations, shareholders can consider and implement legal measures to protect their interests when the enterprise/manager violates the statutory obligations as follows:
- Proposing to management authorities for enterprises to request their request enterprises to explain or carry out inspections to determine the error of the enterprise/manager in complying with obligations as prescribed by law (in this case, the delay in paying dividends);
- For public companies that must register to exercise rights at VSDC, shareholders can petition VSDC and the State Securities Commission not to approve documents to extend the time limit for paying dividends due to violations of legal provisions and shareholders' interests, forcing these companies to comply with the previously announced contents;
- Request the competent Court to request the cancellation of resolutions/decisions that violate the law (in this case, resolutions/decisions on extending/changing the time limit for dividend payment contrary to the provisions of the Law on Enterprise 2020);
- Initiate a lawsuit requesting the Court to settle disputes between shareholders and enterprise managers to clarify the manager's responsibilities in the operation of the enterprise as prescribed in Article 165 of the Law on Enterprise 2020.
Of course, to assess the case and implement the above measures is not easy. Shareholders who want to protect their interests, in addition to fully grasping information about the enterprise, especially about the business situation and internal finances of the enterprise, must also understand the relevant legal bases to apply appropriately to their cases. Shareholders should consider consulting legal experts or lawyers knowledgeable about corporate, securities, corporate governance, finance, and accounting to obtain comprehensive and appropriate assessments before officially taking relevant legal measures.
[1] https://s.cafef.vn/pfl-538645/pfl-thay-doi-ngay-thanh-toan-co-tuc-dot-2-nam-2010-bang-tien.chn
[2] https://s.cafef.vn/l44-1913897/l44-doi-ngay-thanh-toan-co-tuc-nam-2012-2013.chn
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