RE: Second Legal Opinion regarding declaration of Stock Dividend by Company 1.
We refer to your letters dated May 09, 2007, May 13, 2007 and May 20, 2007 and our letters dated May 12, 2007 and May 14, 2007 on the above subject.
From perusal of your letter and the provided documents it appears that, Company 1 (“COMPANY 1”) is offering its share through Initial Public Offer (“IPO”). The subscription started on May 06, 2007 and ended on May 10, 2007. The lottery for the allotment of the said subscription was held on June 12, 2007.
In these circumstances, you have requested us to give our legal opinion regarding the following issues:
a) Whether it will be in order for COMPANY 1 to recommend stock dividend against profit for the year 2006 in their board meeting to be held on May 14, 2007 and to declare the stock dividend in the AGM to be held within May 2007.
b) Whether the IPO allotees, in whose favour allotment letters will be issued by COMPANY 1 after 12 June 2007, can dispute the said action of COMPANY 1.
c) In case of delay or non-receipt of SEC approval, before the AGM for the issue of capital in the form of stock dividend, what other suitable alternative/remedies are available for COMPANY 1.
d) What are the other benefit that COMPANY 1 could offer to the existing shareholders in order to cover their existing entitlement to dividends.
Whether it will be in order for COMPANY 1 to recommend stock dividend against profit for the year 2006 in their board meeting to be held on May 14, 2007 and to declare the stock dividend in the AGM to be held within May 2007.
COMPANY 1 has a legal obligation under section 81 of the Companies Act 1994 to hold a general meeting called the annual general meeting every year but so that not more than fifteen months elapse between the meetings. Moreover, according to section 184 of the Companies Act, a report of the Boards of Director of COMPANY 1, with respect to, inter alia, the amount, which the Board recommends should be paid by way of dividend, has to be attached to every balance sheet and has to be laid before the company in the general meeting.
Dividend normally has to be declared and paid in accordance with the Articles of Association of a company.
The Articles of Association of COMPANY 1 states as follows:
“115. The Directors shall in every year calculate the net profit of the Company for the year remaining after deduction of all general expenses (including provisions for payment of taxes and allocations to any appropriate reserves as may be decided or required by the Government or Bangladesh Bank) and dividend may be paid from the balance of net profit.
116. The profit of the Company shall be divisible among the members in proportion to the shares held by them respectively.
117. Subject to the above the Company in the General Meeting may declare a dividend to be paid to the members according to their respective rights and interests in the profits and may fix the time for payment.
118. No larger dividend shall be declared than is recommended by the Directors but the Company in the General Meeting may declare a smaller dividend. No dividend shall be payable except out of the profits of the year or any other undistributed profits and no dividend shall carry interest as against the Company. The declaration of the Directors as to the amount of net profits of the Company shall (subject to the certificate of the auditors) be conclusive.
119. The Directors may from time to time pay to the members such interim dividends as in their judgments the position of the Company justifies.
120. A transfer of share shall pass to the transferee the right to any dividend declared but not paid thereon before the registration of the transfer.
121. Unless otherwise directed, any dividend may be paid by cheque or dividend warrant sent through the post to the registered address of the member or person entitled or in case of joint holders to that one of them first named in the Register of Members in respect of the joint holding. Every such cheque or dividend warrant shall be made payable to order of the person to whom it is sent. The Company shall not be liable or responsible for any cheque or dividend warrant lost in transmission or for any dividend lost to the member or person entitled thereto by the forged endorsement of any cheque or dividend warrant or the fraudulent or improper recovery thereof by any other member.
122. Dividend unclaimed for one (1) year after having been declared may be invested or otherwise used by the Directors for the benefit of the Company until claimed and all dividends unclaimed for six (6) years after having been declared may be forfeited by the Directors for the benefit of the Company provide that the Directors may at any time annul such forfeiture and pay such dividends.”
From perusal of the Articles of Association of COMPANY 1, we were unable to find any specific provision for declaring stock dividend i.e. payment of dividend through distribution of paid up bonus shares. Article 121 states that any dividend may be paid by cheque or dividend warrant. Therefore, we are of the opinion that, COMPANY 1 may not have the power to declare stock dividend. To avoid legal complications, we suggest COMPANY 1 to recommend cash dividend against profit for the year 2006 in their board meeting to be held before the AGM and to declare the cash dividend in the AGM to be held within May 2007.
If in subsequent years, COMPANY 1 wishes to declare stock dividend, then the Articles of Association of COMPANY 1 has to be altered accordingly by special resolution.
Whether the IPO allotees, in whose favour allotment letters will be issued by COMPANY 1 after 12 June 2007, can dispute the said action of COMPANY 1.
According to law a company is under a duty to pay dividends to those members whose name appear on the register of members at the time of declaration of dividend.
According to section 42 of the Companies Act, a company may, on giving seven day’s previous notice by advertisement in some newspaper circulating in the district in which the registered office of the company is situated, close the register of members for any time or times not exceeding in whole forty-five days in each year but not exceeding thirty days at a time.
As a general rule, companies rely on the said section 42 and close their register of members for a period of time up till holding the AGM. The shareholders, whose name appears in the register of members on the closing date of the register, are the ones who are entitled to the dividend of that year.
In the present case, COMPANY 1 shall recommend stock dividend against profit for the year 2006 in their board meeting to be held on May 14, 2007 and shall declare the stock dividend in the AGM to be held within May 2007. If the register of members of COMPANY 1 is closed for a period of time up till the holding of the 2006 AGM then the shareholders, whose name appear in the register of members of COMPANY 1 on the closing date of the register, shall be the only ones who shall be entitled to the dividend of 2006.
The IPO allotees will be issued allotment letters by COMPANY 1 after 12 June 2007. Consequently, their name will appear on the register of members at a date after 12 June 2007. As such, we are of the opinion that, the IPO allottees are not entitled to the stock dividend of 2006, which shall be declared on May 2007 by COMPANY 1. Therefore, the IPO allotees have no legal right to dispute the declaration of dividend for the year 2006 by COMPANY 1.
In case of delay or non-receipt of SEC approval, before the AGM for the issue of capital in the form of stock dividend, what other suitable alternative/remedies are available for COMPANY 1.
In our response to the first query we have given our legal opinion that, COMPANY 1 may not have the power to declare stock dividend. If COMPANY 1 does not have to power to declare stock dividends and if COMPANY 1 only declares cash dividend, then COMPANY 1 will not require to seek the approval of SEC.
What are the other benefits that COMPANY 1 could offer to the existing shareholders in order to cover their existing entitlement to dividends.
In accordance with Article 121 of the Articles of Association of COMPANY 1, the only benefit in relation to dividend that COMPANY 1 may offer to their shareholders is payment by cheque or dividend warrant.
If you have any further inquiries, please do not hesitate to contact us.
For: “The Lawyers & Jurists”