Distributions of dividends (ordinary and interim), share premium and account 115 in Luxembourg

Dividend

What is a dividend, under what conditions can a dividend be distributed and who can decide to distribute a dividend?

A dividend is a portion of the profits made by a company and paid to its shareholders out of distributable amounts as defined by Luxembourg law.

The right to receive a dividend is conditional on the existence of distributable profits and a decision of the competent body of the company.

Existence of distributable profits

Every year, the board must prepare a balance sheet and profit and loss accounts and determine the company’s net results. This is achieved by comparing expenses to revenues in accordance with applicable accounting principles. When the difference between a company's revenue and expenses is positive, it shows a profit. Once taxes have been paid, we have the net profit.

Article 461-2 of the Luxembourg law of 10 August 1915 on commercial companies as amended, provides, inter alia, that:

“Except in the case of reductions in the subscribed share capital, no distribution may be made to the shareholders where, on the closing date of the preceding financial year, the net assets as shown in the financial statements are, or further to such distribution would be, less than the amount of the subscribed share capital plus those reserves whose distribution is proscribed by law or the articles of association.”

Article 461-2 also provides that “No distribution may be made to the shareholders in an amount exceeding the amount of the profits from the previous completed accounting year plus retained profits and advance deductions from reserves available for that purpose and less carry-over losses and sums to be allotted to reserves according to law or the articles of association.”

This article refers to distributions which are larger than the distribution of dividends and these provisions seal the pillar of the distribution restrictions (see below).

Notion of distributable profits: it includes the net profit for the year, to which is added any profit carried forward (distributable reserves) minus previous losses, less sums allotted to mandatory reserves. In other words, distributable profits means:

• the profit of the year (if any);
• distributable reserves;
• profits of the preceding years carried forward;

Minus:

• losses of the preceding years;
• mandatory allocations to the legal reserve (until 10% of the share capital);
• allocations to statutory reserve (very rare).

It should be noted that ordinary dividends can also be distributed out of distributable reserves in the absence of a profit for the year.

Decision of the general meeting of the company

In principle, the decision rests with the shareholders.

If the shareholders’ decision to distribute a dividend out of distributable profits during the annual general meeting approving the annual accounts of the preceding financial year does not give right to any discussion, one question often arises: can the shareholders distribute a dividend later and under what conditions?

No text prohibits a general meeting other than the annual general meeting from deciding to distribute a dividend taken from the balance sheet reserves recorded by the previous ordinary annual general meeting.

According to the Belgian Court of Cassation, the general meeting may, at any time during the financial year, decide to distribute to the shareholders a dividend taken from the available reserves. Moreover, the conditions under which the board is authorised to distribute an interim dividend as an advance on the dividend to be finally distributed to the shareholders on the results of the financial year do not prevent the general meeting from disposing, at any time, of available reserve.

In other words, even if the annual general meeting approving the annual accounts has decided not to distribute a dividend, the general meeting may later, during the year, decide to distribute a dividend out of distributable profits as shown in the last annual accounts approved by the shareholders. Any authorisation given in the articles of association of the company to the board to pay an interim dividend does not prevent the general meeting from doing so (in this case, it qualifies as “ordinary” dividend distribution and not an “interim” dividend distribution).

Does the general meeting need an interim balance sheet?

Luxembourg law only imposes the drawing up of interim accounts in the case of interim dividends. The reason lays down in the fact that an interim dividend would be paid out of interim profits not yet shown in any annual accounts, not yet approved by the shareholders (because they have been realised after the end of the preceding financial year for which annual accounts have been drawn up). Moreover, if the dividend is paid during the annual general meeting, some time has elapsed since the end of the relevant financial year and a decision to distribute dividends is not conditional on the drawing up of interim financial statements. Thus we take the view that an interim balance sheet is not necessary in this case.

Interim dividend and management board decision

The interim dividend is an advance payment on the next coming dividend. It is subject to several conditions laid down by Luxembourg law.

• The articles of association of the company must authorise the management board to distribute interim dividends.
• The management board must draw up interim accounts showing that sufficient profits and other reserves are available for distribution.
• The amount to be distributed may not exceed the profits made since the end of the last financial year for which the annual accounts have been approved, if any, increased by profits carried forward and distributable reserves, and reduced by losses carried forward and sums to be allocated to any statutory reserves (including the legal reserve).
• The management board's decision to distribute the interim dividends may not be taken more than two months after the date at which the interim accounts referred to above have been drawn up.
• The statutory auditors (commissaires) or the approved external auditors (réviseurs d'entreprises agréés), if any and as applicable, must prepare a report addressed to the management board which must verify whether the above conditions have been met.

It should be noted that the interim dividend includes two parts:

• The profits made since the end of the last financial year for which the annual accounts have been approved, this part being in fact the sole specific feature of the interim dividend.
• The profits carried forward and distributable reserves, reduced by losses carried forward and sums to be allocated to any statutory reserves (including the legal reserve). This part is in fact common to the ordinary and the interim dividend and there is a concurrent competence between the general meeting of shareholders and the management board.

As the interim dividend lies on interim/provisional profits, if the interim dividends paid exceed the distributable profits at the end of the financial year, such difference shall be considered as an advance on the following dividend.

A dividend (ordinary or interim) is usually paid in cash but could also be paid in kind, which is subject to additional consents, conditions and formalities.

Finally, before carrying out a dividend distribution (ordinary or interim), one must review the contractual arrangements binding upon the company (including debt financing and joint ventures contractual arrangements) as they can include prohibitions or restrictions of such distributions.

Share premium account and account 115

The legal regime applicable to the share premium and account 115 is characterized by its flexibility.

Definitions

There is no legal definition of share premium as such. Nevertheless, Luxembourg doctrine unanimously considers that the share premium constitutes the excess of the issue price over the nominal value of the shares. This additional contribution by a shareholder is not incorporated into the share capital of the relevant company.

Traditionally, the function of this premium is to restore equality between old and new shareholders in the context of a capital increase. In practice and for the reasons we will examine below, it is very common that a portion of the contribution be allocated to the share premium account at incorporation or during the life of the company, even in the case of a single shareholder. In practice, the share premium has lost its primary function. A share premium contribution must occur on the issuance of new shares.

The so-called 115 account was introduced by the new Luxembourg standard chart of accounts (PCN) in 2009 and refers to the contributions by a shareholder to the equity without issuance of shares. The PCN has formalized the Luxembourg practice. The main reason for using the account 115 contribution is to allow distributions to shareholders even in the absence or insufficiency of distributable reserves and profits without going through a share capital reduction. Although the account 115 contribution is different from a share premium payment, it is part of the same section of the PCN (section 11 – share premium and similar premiums). It should be noted that the 115 account should also be distinguished from the reserve accounts (section 13 of the PCN) which include the distributable reserves.

Repayment conditions

The reimbursement of the share premium and account 115 is a subject of debate. We cannot assimilate in all aspects the distribution/reimbursement of share premium/account 115 to the payment of dividends/distribution of interim dividends as it does not constitute a distribution of distributable profits and reserves. However, there are some limits to the distribution/repayment of share premium/account 115. As mentioned before, article 461-2 of the Luxembourg company law refers to “distributions.” This is a larger concept than the mere distribution of profits/dividends and these provisions seal the pillar of all distribution restrictions. Thus the repayment of share premium/account 115 should in any case respect the conditions of article 461-2 of the law. Thus, such repayment cannot be made if the effect of the distribution would be that the net assets as shown in the closing date of the preceding financial year would be less than the amount of the subscribed share capital, plus those reserves whose distribution is proscribed by law or the articles of association.

However, subject to the foregoing, the repayment of share premium/account 115 can be made even if the company has made losses (including previous losses carried forward that would not be offset with profits).

Subject to the above, the share premium/account 115 is at the free disposal of the company, which can freely distribute/repay them or otherwise be used to offset losses etc. The articles of association of the company may differ from this principle and state, for example, that part of all the share premium/account 115 accounts will constitute mandatory non-distributable reserves. They could also provide, subject to the prohibition of leonine clauses, that such amounts are reserved to some classes of shareholders only.

Like a dividend distribution, the repayment of share premium/account 115 is usually paid in cash but could also be paid in kind, which is subject to additional consents, conditions and formalities.

Finally, before carrying out a repayment of share premium/account 115, one must review the contractual arrangements binding upon the company (including debt financing and joint venture contractual arrangements) as they can include prohibitions or restrictions of such distributions.

Competence

In principle, the decision to repay/distribute the share premium/account 115 rests with the shareholders. The question of whether the board can distribute the share premium/account 115 as part of the distribution of an interim dividend is also the subject of a debate in legal doctrine. To the extent the share premium account and account 115 are different from the distributable reserves accounts, in the absence of an authorisation given to the board in the articles of association of the company to distribute the share premium account/account 115 as part of the interim dividend distribution, we take the view that the distribution decision must be submitted to the shareholders’ meeting for approval. The legal provisions allowing the board to distribute interim dividends include the distributable reserves but not the share premium and similar premium accounts. Furthermore, the amounts included in the share premium account and account 115 do not result from profits made by the company but from contributions from, and decided by, the shareholders. Thus, in the absence of an express authorisation to the board, the board should not be allowed to distribute/repay these amounts.

In any event, if any part of the share premium/account 115 has been rendered non-distributable by the articles of association of the company, an amendment of the articles by the shareholders will be required before any distribution/repayment.