Interim dividends in Lithuania

Triniti

Amendments to the Law on Companies of the Republic of Lithuania came into force on 1st March 2012 which entitled companies to pay dividends for a period shorter than a financial year (interim dividends).

Interim Dividends Payment Process and Conditions

The Law stipulates that shareholders having more than 1/3 votes of the company (if the Articles of Association of a company do not stipulate higher threshold) may initiate payment of interim dividends. After receiving a shareholders’ application, the management of the company shall ensure that the interim financial statements and interim report of the company would be prepared. Moreover, if the annual financial statements shall be audited according the laws and/or Articles of Association of the company, the interim financial statements shall be also audited.

The Law defines obligations of other management organs too: the Board analyses and evaluates the interim financial statements and the draft decision of shareholders concerning payment of interim dividends and submit it to the Supervisory Board. The Supervisory Board should present its opinion to General Meeting of Shareholders by providing suggestions on the draft decision on the allocation of dividends. Thus the Legislator intends to ensure that there would be adopted reasonable decision which would not threaten to further company’s operations and shareholders’ interests. However, it should be noted that neither the Board’s nor the Supervisory Board’s opinion or recommendation to shareholders may not restrict the shareholders to allocate dividends. Therefore the Law imposes additional conditions which shall be met in order to allocate interim dividends.

The Law stipulates that the beginning of that period of interim dividends would coincide with the beginning of the current financial year of the company. Also the dividend payment decision-making process can not be longer than 3 months. In addition, the repeated interim dividends may be appointed not earlier than after 3 months. With all those limitation the Legislator seeks to prevent abuse of the interim dividends when dividends are paid only for period during which the company was profitable although latest company’s results are negative.

In addition, it is required that the company would be profitable during the interim period. Therefore companies which although have accumulated undistributed profits but operate at a loss during the reporting period, may not pay interim dividends. This provision is essentially designed to prohibit dividend payment for loss-making companies which have accumulated undistributed profits for the previous periods.

Practical issues

The requirements for interim dividend payment procedure are extremely strict and the initiative is reserved only to the shareholders having not less than one third of total votes. The company itself can not initiate the payment of interim dividends and only after shareholders’ request shall ensure that interim financial statements are prepared and General Meeting of Shareholders is properly convened.

Therefore, companies seeking to pay, for example, dividends on a quarterly basis, should not only prepare quarterly (audited) financial statements, but in each case convene a General Meeting of Shareholders and a decision on interim dividends shall be adopted by qualified majority vote, what makes regular payment of interim dividends unattractive. Therefore it is hard to expect that companies in Lithuania will pay regular interim (semi-annual, quarterly) dividends, as it is usual in USA or UK.

Interim dividends, in terms of the Law on Companies of the Republic of Lithuania, are not identical to the interim dividends, which are common in countries like the UK or USA.  Unlike Lithuania or Germany, the USA and UK dividend payment is allocated exclusively to the company’s management, due to this there is no requirement in each case of the payment of dividends to convene a General Meeting of Shareholders and get its approval. This is based on the fact that the company’s management has fiduciary duties to shareholders and it works exclusively for their and the company’s interests; moreover the dividend payout is only one of the alternative ways of investing company funds. Theoretically the dividends should be paid only if the shareholders could use the funds more profitable than the company itself. Therefore, the dividends are usually associated with well-established companies, while newly established and rapidly growing companies do not pay dividends and dedicate all the money to the further development of business.

Since the dividend payout process in the USA and UK is simpler, it allows companies to pay regular interim dividends. Meanwhile it is most likely that in Lithuania companies will use the interim dividends only in those cases, when revenues from a non-primary activity, for instance, the sale of a part of the business, are received  and thus distribution of the profit to shareholders would be done without waiting for the end of the financial year (aka. Special dividends). Meanwhile, it would be rather difficult to expect regular interim dividends in Lithuania.

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