A dividend in kind is a dividend paid to shareholders through the distribution of assets belonging to the company. This involves the distribution of assets by a company to its eligible shareholders, and when these dividends are paid, they are recorded at market value.
These dividends may take the form of a distribution of tangible assets owned by the company, such as real estate, equipment, etc. Additionally, the company could offer shares of a subsidiary as payment for the dividend. Following the payment of this dividend in kind, shareholders may choose to sell the assets received or hold onto them until they appreciate in value.
Since a dividend must normally be paid in proportion to the shares held by each shareholder in the class covered by a dividend declaration, this can lead to certain problems.Indeed, problems could arise when distributing the property among several eligible shareholders, since each shareholder could then be considered a co-owner.
For example, if there are several shareholders in the class covered by a declaration of a in-kind dividend and if the corporation is in the manufacturing sector, the problem will not be acute; thus, each of these shareholders may receive, for example, a television manufactured by the corporation.
However, if there are several shareholders in the category covered by the declaration of a dividend in kind and the declared dividend pertains to a single item of property belonging to the corporation, it will be very difficult for all these shareholders to divide this single item of property among themselves. In fact, these shareholders would then become co-owners of that single asset, which is distributed to them in the form of a dividend in kind. And in the event that one of these shareholders were to withdraw from the company’s shareholder base following the sale of their shares, what would happen to their share of the dividend paid to them in kind, of which they are a co-owner? Would his co-shareholders then be required to buy back his share of the dividend paid to him in kind?
In fact, this form of declaring a dividend meets very specific needs for both the shareholders receiving such a dividend and the corporation declaring it, and this form does not always align well with the economic realities faced by businesses.
The issues associated with using this form of dividend mean that it is rarely used by companies, even though provincial and federal corporate laws permit it.