A company is a separate legal entity from its shareholders and owns property in its own right. This means that the property of a company is its own and is not held on trust for its shareholders. Hence, when a listed company sells a subsidiary, the sale proceeds it receives form part of the listed company’s assets. The shareholders of the listed company are not entitled to demand for any form of direct compensation or benefit. The listed company will often have good reasons to apply the sale proceeds for purposes other than distribution to its shareholders and whether distributions should be made to the shareholders out of any such sale proceeds are within the purview of the board of directors.
While it is not compulsory for a listed company to make any form of compensation or distribute any benefit to its shareholders when it sells its subsidiary, the sale of the subsidiary may require the approval of the shareholders. Such approval may be conditional upon or tied to a commitment to make a distribution of the sale proceeds and, if so linked, the company will be required to honour that commitment after the sale proceeds are received.
There are a number of options available to a listed company should it decide to distribute the sale proceeds to its shareholders. These are discussed below. For ease of further discussion, we will assume (as is commonly the case) that the consideration for the sale of its subsidiary is cash.
Distributions out of profits
Dividends may only be paid out of profits of a company. Such profits need only be available at the time that the dividends are declared and it is not necessary for profits to be available when the dividend is actually paid. However, a shareholder does not have an unconditional right to receive dividends. Assuming that profits are available, the decision as to whether to declare a dividend and the quantum of such dividend is a matter for the board of directors to determine. A shareholder cannot compel a company to declare dividends. How and when dividends are to be declared is a matter left to the articles of association of a company. Typically, the directors will recommend a particular rate of dividend and the company in general meeting will declare the dividend subject to the maximum recommended by the directors. The articles also may vest the power to declare dividends with the directors or provide that dividends will be payable without the necessity of a declaration.
Dividends may be paid otherwise than in cash and can be in the form of shares. A company that wishes to distribute sale proceeds may thus do so by issuing shares that are fully paid up to the members. A disadvantage of dividends in the form of shares is that shareholders may end up with odd lots, which may be difficult to sell.
If a company does not have any accounting profits, any distribution of cash or assets will have to be made pursuant to a capital reduction procedure.
A non-court sanctioned capital reduction requires (i) shareholders’ special resolution and (ii) a declaration of solvency by all the directors. A creditor may at any time within 6 weeks of the resolution apply to court to have the resolution cancelled. Hence, companies may prefer the court sanctioned capital reduction procedure on the assumption that such a reduction is less likely to be susceptible to legal challenge by creditors.
A capital reduction need not be expressly authorised by a company’s articles of association. It is sufficient if the company’s memorandum and articles of association do not exclude or restrict its power to reduce its share capital in this way.