Looking at species in relation to company law and reporting.
Where a dividend is declared in cash, but satisfied by a transfer of assets, it is called ‘dividend in specie’. This type of dividend falls under Article 34 of model articles for private companies limited by shares (see Schedule 1, The Companies (Model Articles) Regulations 2008 (SI 2008/3229)).
A distribution in specie occurs where a company makes a distribution of an identified non-cash asset, such as without first declaring an amount in cash. Distributions in specie fall under section 845 of Companies Act 2006. Most commonly such assets may be property or machinery or the benefit of a debt. A distribution in specie may also occur if an asset is transferred at below market value (for example, as part of an intra-group reorganisation), where the value of the transferred asset is subsidised partly or in full by the transferring company.
The requirement of distributable reserves applies to both dividend in specie and distributions in specie in accordance with section 845 and section 846 of the CA 2006, by reference to a company’s most recent annual accounts, per section 836(2) of CA 2006.
If a company’s distributable reserves are NIL, no distribution is lawful. However, as long as distributable reserves exceed NIL, under section 845 a company can transfer assets, on condition that it receives consideration equal to the book value of the asset. Where the consideration is less than book value the shortfall must be covered by distributable profits.
The CA 2006 does not specify who shall declare dividends, including dividends in specie. The authority to declare a dividend in specie is likely to be defined in the articles which should be checked to ensure that the company is authorised to pay all or part of a dividend by transferring non-cash assets of equivalent value. Such authority should cover both interim and final dividends. In the absence of express authority, per or similar to article 34, the company must pay all dividends in cash (Wood v Odessa Waterworks Company (1889) 42 Ch D 636), or change the articles.
If articles allow payments of dividends in specie, they should also determine who has the authority to declare it (there is no reference in Companies Act regarding this). If the articles are silent on this point, dividends in specie could be declared by the directors, without the permission of shareholders.
The generally accepted practice, however, is that final dividend, including dividend in specie, is recommended by directors and declared by members, either at AGM or by way of written ordinary resolution. The value of the dividend declared by members cannot exceed the value recommended by the directors.
As the provisions in a company’s articles only apply to dividends, shareholder approval is not required for a distribution in specie (except in limited circumstances, for example, where the transfer amounts to a substantial property transaction under section 190 of the CA 2006). A distribution in specie does not have to be declared.
Accounting treatment – timing
FRS 102 fails to make specific reference to dividends or distributions in specie. Distributions and dividends in specie are recognised in the accounts when payment becomes a legal obligation of the entity to pay or the right to receive it.
There is no legal obligation to pay interim dividends, even when they have been approved by the directors, as the board can revoke its earlier resolution to pay an interim dividend at any time up to the time of actual payment. Unless steps have been taken to establish a legally binding liability through a deed of an acknowledgement of the liability to pay, interim dividend in specie should only be recognised when the asset is transferred.
Final dividend in specie is likely to meet the recognition criteria when it is declared.
Value of dividend / distribution in specie
A company making a lawful distribution in specie may consider making the distribution at a value, being:
actual consideration to be paid in respect of the transfer (if any)
book of the asset (as recorded in the accounts of the company selling the asset or, where the asset is not stated in the accounts at any amount, zero) (section 845(4))
market value of the asset.
If an asset is distributed for consideration equal to its book value, section 845 permits the transaction and treats it as a distribution of zero.
If an asset is transferred for a consideration of less than its book value, transaction is only allowed if distributable reserves before the transfer are sufficient to offset the net reduction in the reserves equal to the value of the asset transfer less the consideration received. For example the distribution of an asset with a book value of 10k for which the company receives £8k is only allowed if the reserves before the transaction amounted to at least £2k.
In a situation where the asset is transferred at book value for no consideration, company reserves before the transfer have to be at least equal to the book value of the asset.
Where to report
For companies preparing statement of changes in equity, the amount of dividend or distribution in specie will be shown in that statement.