Search for:

As COVID-19 continues to spread and market uncertainty surrounding it persists and intensifies, a number of ASX-listed companies have taken the unusual step of withdrawing, deferring payment of, or reducing, their previously announced dividends in order to preserve cash for the uncertain times ahead.

Last week, for example, saw companies including Vita Group Limited (ASX: VTG), Adairs Limited (ASX: ADH), Alliance Aviation Services Limited (ASX: AQZ), Air New Zealand Limited (ASX: AIZ), Vista Group International Limited (ASX: VGL), and Auckland International Airport Limited (ASX: AIA) withdraw their dividends altogether. AP Eagers Limited (ASX: APE) also announced a reduction of its dividend, and companies including Qantas Airways Limited (ASX: QAN), KIP McGrath Education Centres Limited (ASX: KME), Corporate Travel Management Limited (ASX: CTD), and Ariadne Australia Limited (ASX: ARA) deferred payment of their dividends to later in the calendar year.

Australian companies1 ought to think twice, and carefully consider their constitutions, before doing so. Typically, a company does not incur a debt merely by fixing the amount or time for payment of a dividend. Instead, the debt arises when the time fixed for payment arrives.2 Accordingly, a decision to pay the dividend may be revoked before then. However, section 254V(2) of the Corporations Act is critical – if the company has a constitution and it provides for the declaration of dividends, the company incurs a debt when the dividend is declared.

Ultimately, it all turns on the drafting of a company’s constitution, and whether it “provides for the declaration of dividends”.

Most public company constitutions drafted in the last decade specifically and deliberately frame the board’s power as a power to ‘determine’ dividends, ‘authorise’ dividends, or ‘pay’ dividends, to ensure that they do not enliven section 254V(2). However, the Courts have had cause to consider section 254V(2) on a number of occasions in recent years and, based on the outcomes in those cases, the application of section 254V(2) is not as simple as just confirming that the rule in the constitution that refers to dividends does not specifically reference ‘declaration’. The Courts have, instead, looked at the drafting of the constitution as a whole, and what can be deduced in relation to the objective intention of that contract.

Regardless of whether or not section 254V(2) applies, withdrawing a dividend is not without risk in circumstances where investors may have relied upon the form and substance of market announcements regarding the payment of a dividend, and a company’s subsequent silence after announcement of the dividend, in order to trade (or not trade) shares in the company, potentially opening the door to a misleading and deceptive conduct claim or other class action risk. Particular care needs to be taken if a listed company cancels a dividend after its “ex” entitlement date, as the market price may well have built this in with the effect that there may be shareholder losses if the dividend is then cancelled.

In the case of any ASX-listed company (Australian-registered or not), any delay in notifying the market of a decision to withdraw a dividend may also result in a breach of ASX Listing Rule 3.21, which would be considered by ASX separately to any alleged contravention of the Corporations Act.

With the full impact of the unfolding COVID-19 crisis on business and the market not fully understood at the time many companies reported half-year earnings, and announced dividends, we expect more boards understandably focussed on the preservation of cash in uncertain times will want to test executives on whether dividends ought be withdrawn, deferred or reduced.

We are here to help. Please let us know if you would like to discuss any of the issues raised in this alert, or require any assistance.


1 Section 254V of the Corporations Act applies to ‘companies’.  A ‘company’ does not, in respect of those provisions, include a ‘Part 5.7 body’ (that is, a foreign-registered company which is registered as doing business in Australia, and which may or may not also be listed on ASX).  Foreign-registered companies will need to comply with applicable legislation in their place of registration when considering withdrawal of a dividend.

2 Section 254V(1) of the Corporations Act

Author

Arthur Apos joined Baker McKenzie in February 2015 as a partner in the Corporate Markets team in the Melbourne office. He was previously with a multinational law firm where he was the head of the corporate practice in Melbourne and Perth. Arthur completed a one-year part-time secondment with Goodyear as their acting general counsel. As a member of the senior management team, Arthur gained firsthand insights into the broad range of issues which confront businesses and the importance of tailoring timely, cost effective and pragmatic legal solutions. Arthur is recognised by Best Lawyers for 2016 for his extensive knowledge in corporate law.

Author

Frank Castiglia is a partner in Baker McKenzie's Sydney office, and as one of Australia's leading capital markets lawyers, Frank has advised on some of the largest transactions in recent times.

Author

Adrian Chin acts for a wide range of predominantly global companies and has been doing so since the early 1990s.

Author

Simon De Young, a partner in Baker & McKenzie’s Melbourne office, has extensive experience in private equity, public and private treaty M&A and equity capital markets transactions. He is a member of the Firm's Global Health, Pharmaceutical & Biotechnology team, and has practiced in Australia and the United Kingdom.

Author

Bill Fuggle is a partner in the Sydney office of Baker McKenzie where he is a leading adviser in financial services, capital markets and funds management transactions. Bill has been instrumental in drafting innovative structured products in Australia and has been engaged in key advisory roles in significant transactions in the Australian and Asian market.

Author

Peter Ickeringill is a partner in the Corporate Markets group, based in Melbourne. He has been based in London, Hong Kong, and Beijing as well as Melbourne, where he has been a partner of first tier national law firms as well as a director and group general counsel for one of the largest global media groups.

Author

Kate Jefferson joined Baker McKenzie’s Sydney office in 2005 and worked in the Firm’s New York office in 2007 and 2008. Kate also undertook a four month secondment to at a global investment bank. Kate previously worked for Herbert Smith Freehills from 2001 to 2005 and as a management consultant to the London Stock Exchange from 2000 to 2001.

Author

Andrea Kennedy is a partner in the Corporate Markets Practice Group of the Firm's Melbourne office, where she advises on telecommunications, M&A, and government and regulated industry work, among others. She has over 20 years of experience in top-tier law firms and has held in-house legal positions in Australia and internationally.

Author

Richard Lustig — a partner in the Firm’s Melbourne office — is the Australian head of mergers and acquisitions and has 30 years experience in acting for bidders and targets. Richard focuses on public mergers and acquisitions including takeovers and schemes of arrangements, as well as initial public offerings and capital raisings. Richard is recognized as a leading recommended lawyer by Chambers Global, APL500, Chambers Asia Pacific, Best Lawyers in Australia, Doyles and IFLR. Chambers Global recognizes Richard's prominence in takeover transactions and those conducted by schemes of arrangement.

Author

Ben McLaughlin is the chair of the Global Healthcare Industry Group and a partner in Baker McKenzie's Sydney office. He has over 25 years' experience in advising leading Australian and international public companies on mergers and acquisitions (M&A) and equity capital markets. Ben conceptualized the Baker McKenzie Healthcare MapApp, an acclaimed mobile application that enables clients to access over 1,000 pages of legal summaries. He has been recognized by Chambers for his work in Australian and international M&A matters, as well as in pharmaceuticals and life sciences. Ben is admitted to practice law in Australia and the US, and is an adjunct member of the Faculty of Law at the University of Sydney.

Author

Lawrence is a partner in the Corporate practice group in Sydney and advises strategic investors, private equity sponsors and large corporations on complex M&A and related transactions. In addition to his Australian experience, he has also spent two years advising on domestic US and Australian inbound M&A transactions whilst based in Baker McKenzie's Chicago office.

Author

Jim Peterson is one of Queensland’s leading corporate lawyers and has extensive experience in resources, mining and corporate governance. Over the past 25 years Jim has advised many public and private sector entities, including blue chip companies, as well as many leading private clients. Jim is well known for his work with the finance sector on financial services reform and is a trusted adviser to the resources sector, particularly the coal industry. His expertise includes mergers and acquisitions (both regulated and unregulated), corporate structuring, joint ventures, private equity, equity capital markets, corporate governance and director’s duties, related part transactions, and compliance with various complicated provisions of the Corporations Act and ASX Listing Rules. Jim has been named Leading Corporate Lawyer by Doyle's Guide (Queensland, 2017) and Leading Commercial Lawyer (Queensland, 2017). He was also recognised by Best Lawyers (2018) and name a Recommend Lawyer by Legal 500 in 2016. He was a finalist in the Lawyers Weekly Australian Law Awards for Team of the Year in 2017.

Author

Antony Rumboll is a partner in the Sydney office of Baker McKenzie and is head of the Australian Equity Capital Markets group. Antony advises on capital markets and public M&A transactions and has a distinguished 20 year legal career in both private practice and as an in-house lawyer. Antony was a senior member of the in-house legal function at a global financial services firm for 10 years, where he advised on transactional matters across the full breadth of its market leading Australasian investment banking business. He draws on this significant experience to provide a unique insight to clients across a wide range of corporate finance transactions and other matters.

Author

Guy Sanderson is a partner in the Firm’s Sydney office, and co-leads the Firm's Australian Capital Markets team. He works mainly on public company mergers, acquisitions, equity capital market transactions, and cross-border listings.

Author

Rick Troiano is a partner in the corporate team at Baker McKenzie. Rick specialises in mergers and acquisitions, equity fundraising and corporate advisory. Rick previously worked as a lawyer at the Australian Takeovers Panel, the main forum for resolving takeover disputes in Australia. This has given him a solid understanding of the law and policy behind the regulation of takeovers and other control transactions in Australia. Rick is a member of the Corporations Committee (Law Council of Australia), a forum through which current legal issues affecting business are discussed and considered in the context of law reform in Australia.