The right to dividends

The right to a dividend is one of the three fundamental rights of shares provided for in corporate legislation, in addition to the right to vote and the right to the residue in the event of dissolution or liquidation. Under both the Quebec and federal systems, the right to receive "any declared dividend" must be included in at least one of the classes of shares authorized in the articles of the corporation. Moreover, one of the particularities of the provincial system is that any share is deemed to have the right to receive any dividend declared if no share issued has this right. The following is an overview of the dividend right in corporate law and its various variants.

Entitlement to any declared dividend

The right to receive "any dividend declared" by the board of directors is generally associated with the ordinary or surplus participating shares of the company. A share entitled to receive this dividend will often be subject to priorities of other classes of shares, but will ultimately be entitled to receive the remainder of the dividend, once the preferred classes have been paid. The power to declare a dividend is discretionary in nature: it is up to the board of directors to determine when a dividend is declared (unless a unanimous shareholders' agreement provides otherwise). However, the board of directors should ensure that the order of priority set out in the articles of association is respected.

Fixed dividend

The fixed dividend is a right possessed by the so-called "preference shares". The company's articles of association will provide for a dividend rate, usually calculated on the redemption value of the shares. The dividend may be monthly or annual, and cumulative or not.

Where the dividend is cumulative, the holders of the shares will be entitled to the accrued but undeclared dividend on their shares, whereas a non-cumulative dividend means that the right to the dividend is lost in the event that the Board of Directors does not declare the dividend during the period in question (during the month or year, as the case may be).

This dividend generally has priority over ordinary or participating shares, which means that holders of these shares will be entitled to be paid before any amount is paid to holders of ordinary or participating shares. Priorities may also exist between different classes of preference shares.

Discretionary dividend

The discretionary dividend has the same functions and features as the fixed dividend described above, with the exception that the Board of Directors has the discretion to set the dividend rate within the limits imposed by the Articles of Association. For example, a rate may be set between X% and Y%, or the by-laws may stipulate that the rate must not exceed a certain threshold, leaving the Board of Directors free to declare or not declare a dividend on the class of shares.

Unlimited discretionary dividend

Certain classes of shares will be entitled to an unlimited discretionary dividend. This right will most often be associated with non-participating and non-voting shares. The special feature of this dividend is that the board of directors has the power to declare a dividend on these shares in an amount it determines, at its own discretion, without any scale imposed in the articles (like the variable dividend above). This type of share can be very effective in distributing the surplus of a company among the shareholders without having to respect the percentage of common shares of each. Each shareholder will then have to have shares of a different class, as shares of the same class must be treated equally.

The right to a "discretionary" dividend should not be confused with the right to receive "any declared dividend". The latter refers to the remainder of the dividend, while the discretionary dividend is an amount allocated to the holders of a particular class, determined by the Board of Directors at its discretion.

Entitlement to any discretionary dividend declared

Instead of setting up a structure with common shares and unlimited discretionary shares, each shareholder can be issued participating shares of a different class, and the right of each class to receive "any dividend declared" will be subject to the power of the board of directors to allocate, at its discretion, the dividend among the different classes. The directors will then be able to "discriminate" between one or more classes of shares, and determine what portion of the declared dividend goes to one class or another. Note that this type of share was approved by the Supreme Court of Canada in 1990, in the Mcclurg case.