2019 resolutions for selling your business
Thomas Clark | 07.01.2019
20.03.2018 Hayleigh Sears
The company must have “distributable profits” available (section 830(1) of the Companies Act 2006 (‘CA 2006’)). This is defined as a company’s “accumulated, realised profits (so far as not previously utilised by distribution or capitalisation) less its accumulated, realised losses (so far as not previous written off in a reduction or reorganisation of capital)”.
The distribution must be justified by reference to the “relevant accounts” of the company (ss. 836 – 839 CA 2006). These are always the Company’s individual accounts (as opposed to the group accounts, if any) and are usually the company’s most recent annual accounts. However, specially prepared interim accounts may also be used.
The provisions of the company’s articles of association should be checked to determine how dividends should be declared. Typically, final dividends are recommended by directors but declared by the shareholders, whereas interim dividends are often declared by directors alone.
The provisions of any shareholders agreement or investment agreements should also be checked. These types of agreement will often set out a policy as to how and when dividends should be declared (and whether shareholder approval is required).
If there is a loan or facility in place, the provisions of the facility agreement should be checked. The facility agreement may contain a covenant preventing the payment of dividends, or may specify that lender consent is required. Alternatively, it may be that an amendment to the agreement can be negotiated. Similarly, if the facility is secured, any future dividends may be covered by the security, and the debenture or other security documents should also be reviewed. It may be that the security will need to be partially released or the security documentation amended before a dividend can be declared.
Finally, the directors should consider their statutory duties to the company under the CA 2006. In particular, directors have a duty to act within their powers (section 171), to promote the success of the company (section 172) and to act with reasonable care, skill and diligence (section 174). Similarly, if the directors are also shareholders of the company (and therefore likely to benefit personally from the payment of the dividend), that may be a conflict of interest. This interest may need to be declared in accordance with the provisions of section 175, 177 and/or section182 of the CA 2006.