A discretionary dividend share in a company’s share capital may consist of a share with specific characteristics regarding voting rights, participation rights in the company, and a dividend determined at the discretion of the board of directors.
Notwithstanding the foregoing, there are several types of discretionary dividend shares:
(a) ordinary shares with : shares with a right to a share of the remaining assets in the event of liquidation, where one class may receive a dividend to the exclusion of other classes;
(b) preferred shares with : shares without the right to a share of the remaining assets in the event of liquidation, often referred to as “preferred” shares, and where one class may receive a dividend to the exclusion of other classes;
(c) shares with a discretionary dividend rate: shares of a class that cannot receive a dividend to the exclusion of other classes, but for which the dividend rate is set, at the discretion of the board of directors, between a minimum rate and a maximum rate;
(d) unlimited-dividend shares: shares that give the board of directors the authority to determine what portion of the available dividend, in whole or in part, will be allocated to the holders of shares of that class, without establishing any parameters regarding the amount that may be allocated to such holders.
Generally, shareholders holding discretionary dividend shares (as identified by the company’s board of directors), are entitled to receive, in priority over shareholders of all other classes of stock, a dividend that is not fixed in advance and is non-cumulative, calculated based on the amount paid for such shares upon subdivision of the issued and paid-in capital account issued and paid (for the jurisdiction of Quebec) or the stated capital account (for the federal jurisdiction) pertaining to the shares of that class, with the rate and amount of the dividend being determined by the board of directors, while the timing of the declaration and payment of this dividend is left to the sole discretion of the company’s board of directors.
In the case of a discretionary dividend, the board of directors may, at its discretion, allocate a portion or the entirety of such dividend to holders of shares of one class to the exclusion other classes of issued and outstanding shares, or distribute it among the classes of shares entitled to discretionary dividends in the proportions it determines, without being required to treat these classes equally, and without being required to comply with the presumptions of equality among shareholders.
Thus, the discretionary dividend allows holders of these shares to receive dividends that are not necessarily proportional to their ownership of shares in the company’s share capital. This is a valuable tool for ensuring greater flexibility in the distribution of a company’s profits among its shareholders—that is, a distribution that is not based on the percentage of shares held but rather on other criteria.
It is important to emphasize that a discretionary dividend should not exceed the profits the company has accumulated since the shares were issued, as a discretionary dividend should not be viewed as a scheme allowing a shareholder to withdraw tax-free funds from the company in which they have invested, through a nominee.
Some legal experts are reluctant to advocate the use of discretionary dividends, as they see them as a potential means of favoring shareholders who hold this type of stock over other shareholders.