According to provisions of the Companies Act relationship between the joint-stock company and stockholders shall be defined with rights and obligations as follows:
- Right to a dividend
- Limitations on payments to stockholders
- Pre-emptive subscription right of the stocks
- Financial Support of the company in acquiring stocks
- Withdrawal and cancellation of stocks due to failure to pay or enter the contribution.
It is also important to emphasize that all shareholders are treated equally under the same circumstances.
Right to a Dividend
Upon approval of financial statements for a business year, the profit for that year is distributed in the following sequence:
- For covering of losses brought forward from previous years
- For reserves, if they are prescribed by a separate act (statutory reserves).
If upon distribution of profits for purposes referred to previous paragraph a part of the profit remains undistributed, the general meeting may distribute it for the following purposes:
- For reserves, if the company established them by articles of association (statutory reserves)
- For dividend, pursuant to the Companies Act
- For payment to employees.
A resolution may approve payment of dividends to stockholders on profit distribution passed at an ordinary session of the general meeting whereby the amount of the dividend and the time limit for dividend payment are established (resolution on payment of dividend) which may not be longer than six months from the day of the passing of the resolution on payment of dividend. Upon passing the resolution on payment of dividend, a stockholder who is entitled to dividend payment becomes the company’s creditor for the amount of that dividend.
The joint-stock company shall inform the stockholders to whom the dividend is paid about the resolution on payment of the dividend within a term 15 days from the day that resolution is passed, by mutatis mutandis application of provisions of the Companies Act on notification of stockholders about the session of the general meeting.
Dividend on stocks is paid to stockholders according to the rights attached to the type and class of the stock they hold on the day of the dividend, in proportion to the number of stocks they hold in the total number of stocks of that class.
An agreement or a company bylaw by which the company grants unique benefits to some stockholders within the same class of stocks in respect to payment of a dividend is null and void.
A dividend may be paid in cash or joint-stock company stocks, pursuant to the resolution on payment of dividend.
If dividends are paid in the form of stocks of the joint-stock company:
- Such payment shall be approved by the stockholders of the class of stocks to which such payment is made under the rules on the voting of stockholders within a class of stocks; and
- Payment to each stockholder of a class of stocks who are entitled to the dividend is made in stocks of that class.
As an exception, a dividend may be paid in the form of stocks of some other type or class only if any such payment is approved by a three-quarter majority of the present stockholders holding the stocks of the class of stock to which such payment is made and by the same majority of votes of the stockholders of the class of stock in whose stocks the dividend is paid.
The joint-stock company shall inform the stockholders to whom the dividend is paid on such payment immediately before or after the executed payment, by mutatis mutandis application of the provisions of the Companies Act on notifying stockholders of a general meeting
Temporary Dividend (Interim Dividend)
Unless otherwise provided for in the articles of association, a joint-stock company may pay an interim dividend (interim dividend) at any time between ordinary sessions of the general meeting, if:
- The reports on the joint-stock company’s business and its financial results produced for that purpose indicate that the joint-stock company has achieved profit in the period for which the interim dividend is paid and that available cash assets of the company are sufficient for payment of that interim dividend
- The amount of interim dividend that is being paid is not higher than the total profit made after the end of the previous business year for which the financial reports were made, increased by retained earnings and the amounts of reserves that may be used for those purposes, and decreased by determining losses and the amount that has to be contributed to reserves, pursuant to law or articles of association.
Payments of interim dividend to stockholders may also be authorized by a decision of the board of directors, i.e. supervisory board if the joint-stock company has a two-tier management system if so provided in the articles of association or resolution of the general meeting.
If payments of interim dividend are authorized by the decision of the board of directors, i.e. supervisory board, if the joint-stock company has a two-tier management system, the interim dividend may be paid in cash only.
Joint-stock company and Dividend Day
The articles of association may determine a day or method of fixing a day, as of which the list is made of stockholders who are entitled to a dividend, i.e. entitled to a payment on account of reduction of capital or account of liquidation surplus (dividend day). If the articles of association do not determine the dividend day, that day is determined by a resolution on payment of dividend, pursuant to the method for its determination, if provided so in the articles of association.
A stockholder transferring his stocks based on which he acquired the right to a dividend after the dividend day, but prior to the payment of dividend, retains that right.
Limitations on Payments to Stockholders
A joint-stock company may not make payments to stockholders if, according to the latest financial statements, the company’s net assets are lower or would become lower due to such payment, than the amount of paid up share capital increased by the reserves that the company has to maintain pursuant to the law or articles of association, if any such reserves are in existence, except in the case of reduction of share capital.
Total amount of the payments made to stockholders for a business year may not be higher than the profit at the end of that business year, increased by retained earnings from previous years and the amounts of reserves provided for distribution to stockholders, and decreased for the losses brought forward from previous periods and the amounts of reserves that the company has to maintain pursuant to the law or articles of association, if any such reserves are in existence.
Notwithstanding the above a joint stock company may always pay its stockholder who is a natural person on the grounds of an employment agreement.
The stockholders who received payments contrary to the provisions of the Companies Act shall make a return of the same amount to the joint-stock company, in case they knew or must have known that payment was made contrary to the provisions of the Companies Act.
The joint-stock company’s claim to who received payments contrary to the provisions of the Companies Act reaches the statute of limitations within five years from the day when the payment was made.
Pre-emptive Subscription Right of the Stocks
A stockholder is entitled to a pre-emption right to subscribe the stocks from a new emission on the day of adoption of the resolution on the issue of stocks, in proportion to the number of the fully paid stocks of that class he holds on the day of adoption of the resolution on the issue of stocks, concerning the total number of stocks of that class. A stockholder is also to the acquisition of the type and class of stocks that a stockholder already holds.
The articles of association may determine that a stockholder is also entitled to a pre-emptive subscription right in respect to the issue of stocks of the types and classes other than those he holds, but only upon execution of that right by the stockholders who hold the stocks of the type and class that are being issued.
The procedure of exercising pre-emption right is determined by the articles of association, provided that a joint-stock company shall:
- Notify each stockholder who has a pre-emptive subscription right about the decision on the issue of stocks, or other securities
- Secure that the term for the exercise of this right is not shorter than 30 days from the day of sending the notification on the decision to issue stocks, i.e. other securities.
The above rules do not apply to the issue of new stocks when they are issued in the procedure of a status change of a company.
Exclusion of the Pre-emptive Subscription Right of the Stocks
The pre-emptive right to subscribe the stocks may be limited or excluded only in case of an offer in regards to which a prospectus publishing is not mandatory in terms of the law governing capital markets, in particular by a resolution of the general meeting that is passed on a written proposal of the board of directors, i.e. supervisory board, if the company has a two-tier management system, which shall contain:
- Reasons for the limitation, i.e. exclusion of the pre-emptive right to subscribe; and
- A detailed explanation of the proposed issue price.
The resolution on the limitation, i.e. exclusion of the pre-emptive right to subscribe the stocks is passed by a three-quarters majority of the votes of present stockholders of that class and is registered in keeping with the registration act.
The decision on the limitation, i.e. exclusion of the pre-emptive right to subscribe the stocks may not be implemented before the expiration of the term for challenging that resolution, i.e. before the expiry of the term of 30 days from the day of learning for the resolution of the general meeting, i.e. from the day of registration if the resolution was registered under the registration act, but not later than three months from the day the resolution was adopted.
If a board of directors, i.e. supervisory board, if the company has a two-tier management system, is authorized to issue authorized stocks, the pre-emptive subscription right may only be limited or excluded on the basis of a resolution of the general meeting that was passed by a three-quarters majority of votes of present stockholders of that class.
The above rules do not apply when new stocks are issued in a procedure of the company’s status change.
Financial Support of the Company in Acquiring Stocks
A joint-stock company may not, directly or indirectly, provide financial support of any kind to its shareholders, employees or third parties for the purchase of stocks in the joint-stock company, in particular, to grant loans, guarantees, sureties and the like.
A legal transaction that is contrary to the previous ban is null and void.
Withdrawal and Cancellation of Stocks due to Failure to Pay or Enter the Contribution
In case a shareholder fails to perform his obligation of paying, or entering a certain contribution to the company and in an additional term which may not be shorter than 30 days from the day of dispatch of a written invitation to perform that obligation, the general meeting adopts the decision on withdrawal and cancellation of stocks by a three-fourths majority of the votes of the present stockholders. In the case, a public joint-stock company, the board of directors is obliged to pass this decision without delay, i.e. the supervisory board if the management of the company is two-tier.
The decision on withdrawal and cancellation of stocks may be made only in respect of all stockholders who have failed to fulfil their obligation to paying or entering a certain contribution to the joint-stock company, even in the subsequent time limit. which may not be shorter than 30 days from the day of dispatch of written invitation to perform that obligation.
Read more:
Types and clases of stocks which issue company »
Contributions of the company »
Change in Share Capital »