The share capital of certain companies may include discretionary dividend shares , which allow the board of directors, within the limits set by the articles of incorporation and applicable law, to exercise discretion regarding the declaration, rate, or amount of the dividend and, depending on the share capital structure, its allocation among certain classes of shares. These shares may also have tax implications.
A discretionary dividend share in the share capital of a company may consist of a share having particular characteristics with regard to voting rights, the right to participate in the company and a dividend decided at the discretion of the board of directors , in accordance with the rights, privileges, restrictions and conditions attached to this class of shares.
Notwithstanding the above, discretionary dividend share structures can take various forms:
a) Ordinary shares with discretionary dividends: shares with the right to participate in the remainder of the assets in the event of liquidation, of which one class may receive a dividend to the exclusion of other classes, when the rights attached to the shares allow it;
b) Discretionary dividend preferred shares: shares without the right to participate in the remainder of the assets in the event of liquidation, often referred to as "preferred" shares, and of which one class may receive a dividend to the exclusion of other classes, in accordance with the rights attached to it;
c) Shares with discretionary dividend rate: shares of a class whose dividend rate can be fixed, at the discretion of the board of directors, between a minimum rate and a maximum rate, according to the parameters provided for in the articles of association;
d) Unlimited dividend shares: shares giving the board of directors the power to determine the amount of the dividend to be allocated to holders of shares of that class, subject to the rights attached to the shares , the articles of association and the requirements of applicable law.
Generally, the rights attached to discretionary dividend shares may stipulate that their holders are entitled to a dividend whose rate or amount is not fixed in advance and whose declaration and payment are at the discretion of the board of directors . However, whether the dividend is priority or non-cumulative, its calculation basis, and other applicable terms depend on the rights, privileges, restrictions, and conditions set forth in the articles of incorporation for the relevant class of shares.
In the case of a discretionary dividend, the articles of incorporation may allow the board of directors, at its discretion, to allocate all or part of the available dividend to holders of shares of a particular class to the exclusion of other classes of issued and outstanding shares, or to distribute it among different classes of shares with a discretionary dividend in the proportions it determines. Such distribution must, however, comply with the provisions of the articles of incorporation, the rights attached to the different classes of shares, and the obligations imposed on directors by law.
Thus, discretionary dividends can allow holders of different classes of shares to receive dividends that are not necessarily proportional to their respective shareholdings in the company's capital. This can provide greater flexibility in allocating profits or dividend funds among different classes of shareholders, when the share capital structure permits.
It is important to note, however, that a discretionary dividend remains subject to the requirements of applicable law regarding the declaration and payment of dividends. The discretionary nature of the dividend therefore does not allow the board of directors to disregard applicable financial criteria or the rights attached to the different classes of shares. Furthermore, the use of discretionary dividend shares may have tax implications and, depending on the circumstances, specific tax obligations.
Finally, while discretionary dividends may offer greater flexibility in allocating dividends among different shareholder classes, the board of directors' discretion is not absolute. It must be exercised in accordance with the company's articles of incorporation, the rights attached to the shares, the directors' obligations to the company, and applicable legislation.