As a general rule, the calculation and payment of dividends to shareholders are carried out annually, after the close of each financial year. Moreover, and also as a general rule, the payment of dividends to shareholders depends on a prior decision made by these shareholders. Nevertheless, Portuguese law envisages a deviation from this basic regime in respect of public limited companies (sociedades anónimas) and limited partnership with share capital (sociedades em comandita por acções), making the early payment of dividends to shareholders during a financial year possible, subject to certain conditions.
Here it is important not to confuse this legal tool with the possibility of distributing (balance sheet) profits already recorded on the last approved balance sheet, but that have yet not been distributed at the option of the shareholders. Indeed, provided the principle of inviolability of the share capital is respected, the shareholders may deliberate to distribute such profits, at any time. On the other hand, the early payment of dividends concerns advances to shareholders of part of the profits that the company expects to achieve at the end of the current year (with accounts not yet closed). This operation is decided upon and performed by the company’s management body.
With this exceptional regime, the legislature intended to make investments by shareholders more attractive, above all when compared to other financial instruments available in the market. However, given the far from negligible danger of this legal mechanism being abused – with early payments of dividends despite losses being expected in the remainder of the financial year – the law built various safeguards into the possibility of early payment of dividends to shareholders.
The early payment of dividents to shareholoders during a financial year is subject to the following rules:
a) The possibility of early payments of dividends must be expressly authorised in the articles of association. If the articles of association did not originally admit this possibility, but was altered to this end, the first early payment of dividends may only be in the year following the year in which this alteration was made to the articles. However, for companies set up before 1 November 1986, it is not requisite for the articles of association to authorise early payments of dividends to shareholders.
b) Early payments of dividends must be the subject of a resolution of the management body (board of directors or executive board of directors, depending on the organisational structure adopted by the company). However, the management body may only pass resolutions on early payments with the consent of the supervisory body (supervisory board, audit committee or general and supervisory board, depending on the organisational structure of the company in question). Most legal theory rejects the possibility of making early payments on the profits of the current year outside this framework, rejecting, in particular, the power of shareholders to decide on this distribution, insofar as the system established by law, which only grants powers for this purpose to the management body, is exceptional. Furthermore, shareholders may not instruct or require the management to make an early dividend payout. This is a power granted to management, which therefore has discretion as to the decision taken to pay early dividends and the moment and conditions for any such payment.
c) The decision of the management body must be preceded by a mid-season review, drawn up at least 30 days in advance and certified by the statutory auditor, that demonstrates the existence, on this occasion, of amounts available for the early dividends, taking into account the results recorded in the earlier part of the year in which the early payment is to be made. It is also to be noted that early dividend payouts are subject to the limits established by law in relation any distribution of assets to shareholders: in particular, they must guarantee respect for the principle of inviolability of the share capital and profits of the year necessary to cover losses brought forward or to form or rebuild legal or statutory reserves may not be distributed.
d) Of the amounts available, only half may actually be distributed to shareholders. The imposition of this restriction is related to the unpredictability of the results that will be generated in the remaining part of the year (after the early dividend payment).
e) Only one early dividend payment can be made in each financial year and always in the second half of the year.
In addition to compliance with these rules, which are imperative, the company’s management body may be obliged, with regard to the operations in question, to comply with any other demands or requirements that might be laid down in the articles of association.
At the end of the year, the annual accounts having been drawn up and approved, if dividends are to be paid to shareholders, the amounts already paid mid-term must be deducted. It is to be noted, however, that, even if losses or profits lower than the profits that were paid as early dividends are recorded at the close for the year, in principle shareholders are not required to return these amounts to the company. This will only be the case if i) the early dividend payment did not comply with the applicable legal framework and ii) the shareholders knew that the payment was irregular or, given the circumstances, should have known.
The system in private limited companies
The Commercial Companies Code only provides for the possibility of early dividend payments to shareholders of public limited companies (sociedades anónimas) and limited partnership with share capital (sociedades em comandita por acções). Portuguese law is silent on private limited companies (sociedades por quotas). However, most Portuguese legal theory supports the application of that legal framework to private limited companies by analogy, since the reasons for these rules also have legal basis with regard to such companies.
Given the specific characteristics of private limited companies, the application of the legal framework under consideration to this type of company implies the adaptation of some of the rules described above. On the one hand, when a private limited company does not have a statutory auditor, an ad hoc independent auditor must be appointed, to certify the mid-season review that attests to the existence of profits to be distributed. On the other hand, the differences in terms of legal distribution of powers between the corporate bodies of public limited companies and those of private limited companies must be taken into account. Indeed, in private limited companies, the management is required to respect and comply with the decisions of shareholders, for which reason, if the shareholders take a decision to make an early dividend payment, the managers of the company must carry out this operation.