What is a dividend in kind?
According to the Polish Commercial Companies Code (“CCC”), a company’s profit declared in its annual financial statements can be paid out to its shareholders. Detailed rules for calculating the distributable profits are set out in the CCC. Though the division of profits is generally paid in cash, some companies choose to pay in non-cash forms, called dividends in kind. Payment of such dividends usually takes the form of a distribution of the company’s assets, e.g. the shares held in subsidiary companies, claims, real estate or the company’s products.
Why companies decide to pay a dividend in kind?
In practice, there are some cases when a dividend in kind may be considered better than its cash equivalent. With capital being in short supply, a company may choose to dispose of overstocked goods and to retain cash for other investments. It is also a way of simplifying the payment procedure, as the company does not need to capitalise its assets first. Avoiding the sale of the company’s stakes at a lower than expected price may also be a reason to distribute shares held in other companies. Transfer of the subsidiary companies’ shares or intragroup claims as a dividend in kind can be useful in restructuring the capital groups. Lastly, payment of a dividend in kind can be used to optimise tax processes.
A dividend in kind is not often used, but over the years the number of examples of key corporations distributing dividends in kind has increased. The sophisticated and complex procedures which included, among others, transferring parts of a gas pipeline of the biggest Polish oil and gas company to the State Treasury in the form of a dividend in kind, lead the State Treasury to acquire 100% of the shares in gas Transmission System Operator in 2005. Another transformation in the energy sector worthy of mention was completed in 2008 when electricity Transmission System Operator distributed the shares of its subsidiary company to the State Treasury. Payments of dividends in kind are also increasingly used by smaller companies from the private sector.
Polish legislation regarding dividends in kind
Despite being broadly approved of in practice, dividends in kind are not legally regulated. The CCC does not set out any provisions regarding distribution of a non-cash dividend. Some legal practitioners are of the opinion that in order to protect minority shareholders from receiving useless assets, a company’s articles of association should explicitly allow for payment of a non-cash dividend. This topic is still the subject of discussion. However, it seems that when there is only one shareholder, or all shareholders have granted consent to payment of a dividend in kind, authorisation in the company’s articles of association is not required.
Payment of a dividend in kind
In a limited liability company, a shareholder’s claim to a dividend arises once a resolution on the distribution of the company’s profit between its shareholders is adopted in an ordinary shareholders’ meeting. Only shareholders holding shares on the date thereof are entitled to a dividend. In addition, the resolution should also set the date of payment. A company that decides to pay a dividend in kind should comply with the specific conditions regarding the legal means through which to assign assets or rights, e.g. a notarial deed is required to transfer real estate. Currently, companies willing to benefit from a dividend in kind are left to rely on the competence of lawyers in order to use this attractive and useful instrument. A separate issue that should be taken into consideration is the tax treatment of a dividend in kind.
As is often the case in reality, legislation regarding dividends is not necessarily aligned with practice. Legal practitioners propose explicit regulation of dividends in kind under Polish commercial law, and clarification of the issues arising from such regulation are required to rectify this reality-practice imbalance e.g.: authorisation and forms of approval, conditions of payment, methods of asset valuations and potential liability for misrepresentation, tax aspects or the warranties for physical and legal defects of the transferred assets.
Currently, companies willing to benefit from a dividend in kind are left to rely on the competence of lawyers in order to use this attractive and useful instrument.