The Court found that to construe the phrase “profit of the Company available for dividend purposes” in a company’s constitution to extend to the consolidated profits of the company and its controlled entities was contrary to the clear and ordinary meaning of “profit of the Company”.  Further the Court refused to rectify the relevant constitutional provision, finding that a commercial expectation that dividends would be paid out of consolidated profits did not equate to a common intention that there be a contractual obligation to this effect. This case is a useful reminder to shareholders of the need to consider very carefully the terms of any dividend rights and, where necessary, to ensure controlled entities have paid dividends to their parent, so the parent’s shareholders can access the consolidated profits of the group.

Sumiseki Materials Co Ltd (Sumiseki) held B Class shares in Wambo Coal Pty Ltd (Wambo) which, under Article 2.1B of Wambo’s constitution, entitled Sumiseki to 25% of “the profit of the company available for dividend purposes”. 

Sumiseki argued that Article 2.1B should be construed as meaning the consolidated profits of Wambo and any controlled entities (of which there were two).  In support, Sumieski argued that the Accounts were required to be prepared on a consolidated basis, consolidated profit represented the most commercially relevant measure of Wambo’s profitability and all profit of Wambo and its controlled entities was capable of being paid as dividends.  However, Hammerschlag J rejected this construction on the basis that it was contrary to both the clear and ordinary meaning of “the profit of the Company” (as referring to the profit of Wambo alone) and the well-established principle that dividends can only be paid out of the separate profits of the company paying them.  Hammerschlag J also pointed out that the requirement to prepare consolidated accounts does not relieve a company of the obligation to also prepare individual accounts.

Sumiseki also argued that Article 2.1B should be rectified to reflect the common intention of the parties that the B Class dividend would be calculated on the basis of consolidated profits.  While Hammerschlag J found that it was undoubtedly the commercial expectation of both parties that the dividend yield a return reflecting the profitability of Wambo and its controlled entities, His Honor refused to find that this expectation amounted to a common intention that there be a binding contractual obligation on Wambo to that effect.  Hammerschlag J also noted that the question of whether rectification requires outward expression of the common intention has been left open by the High Court, but to the extent that outward expression was a requirement, Sumiseki’s claim did not meet it.

See the case.