The recent distribution of dividends by the TASE traded Fox-Wizel Ltd., while in receipt of emergency funding from the Israeli government, did not only raise a moral question, but also directed the spotlight on the complexity facing many companies during these times. A key question facing companies is how to balance between dealing with the difficulties and uncertainties of the Covid-19 era, on the one hand, and the desire and responsibility to continue and conduct themselves as commercial enterprises, on the other hand.
So what about dividends in these times? The distribution of dividends is challenging at any time. The board of directors considering a dividend distribution can be compared to a person standing at a top of a mountain and having to look at both directions – backwards to the past and forward into the future.
Looking back, as dividends are distributed out of past profits. The first condition required to a distribution is that the company has sufficient profits generated by its past activities. Setting aside revaluation profits, the distribution would be coming out of profits the company created through its activities, and paid taxes for them. In the absence of any other designation, these profits are intended for the shareholders.
While the look to the past is simple, almost technical in nature, looking into the future is far more complex. The board of directors has to confirm that the distribution of dividends would not render the company insolvent. Back in 2009 the Israeli Securities Authority published its opinion that when considering the future solvency prior to a dividend distribution, a board of directors of a public company must complete a thorough review. Such review is to include consideration of the sources of funding available to the company, the projected cash flows of the company and its ability to realize profits, and the impact of the distribution on the company’s current activities and future investment plans.
The complexity involved in resolving that the distribution is not expected to impact the solvency of the company, is further enhanced by the potential consequences of a wrong decision. The sanction imposed on a board member who erred in his decision could be harsh, personal and direct. A director who did not object to a prohibited distribution, may find himself liable for breach of his personal duty of care as an officer, and consequently bear personal liability to any loss or damage caused. This is one of the instances where the distance between a decision by a director and his personal liability could be very short.
So, if under normal circumstances the board of directors needs to take a careful and considerate view while resolving to distribute dividends, how should the board act when the visibility is limited and uncertainty reigns? In such times is it at all possible to resolve to distribute dividends, or should the boards shy away from the risk, batten down the hatches and wait for calmer days?
The age of Covid-19 is upon us, and looks like it will be part of our reality for the foreseeable future. It is only true and appropriate that in this era, businesses and their management would adopt a responsible mode of conduct, taking into consideration the interests of all stake holders in the community. These stake holders include, alongside and sometimes even ahead of shareholders, the employees, customers and suppliers of the business as well as the public at large.
However, the challenges of the Covid era do not mean a moratorium on business conduct. If the economy is to survive and prosper businesses must have a lust for life and endeavor to succeed. Not at any price and not at the expense of the weaker parts of society, but definitely to succeed and to grow. The success of businesses is the promise for our future. It is inevitable that the times of crisis will bring certain businesses to their end, but it will have others grow and gain strength. Our best talents should guide our businesses, and we must embrace their considerate success. Success in also creating profits and profits then distributed as dividends to shareholders.
One must remember that distribution of dividends is not just about moving wealth into the hands of major shareholders. In the above referenced case of Fox-Wizel Ltd., major shareholders hold less than half of the company’s shares, and consequently more than fifty percent of dividends distributed will end up in public hands. Moreover, many public companies adopt and implement a dividend policy. The existence of a dividend policy creates an expectation among the shareholders, and withholding this distribution may harm the value of the shares held by the public. The conclusion must be that distribution of dividends in the Covid-19 times should not, in itself, be considered as negative or be stopped.
But, and there is a big but here, this is the place to remember the old cliché of not holding the stick at both ends. When resolving to distribute dividends, a board of directors expresses it view, quite unequivocally, that it carefully considered the position of the company and then concluded that even with the distribution of dividends it would remain solvent and meet all of its liabilities. Having done that, particularly after the economic effects of Covid-19 became known, the board of directors limits its abilities to later ask for emergency assistance.
Once dividends will be distributed it will be difficult to claim that as a result of the Covid-19 crisis the company is on the brink and may collapse unless it will receive external emergency help. When resolving to distribute dividends the board of directors may limit the company’s ability to seek assistance in the future. If the company will seek assistance, the board members may find themselves facing the claim that these actions are proof that the decision to distribute dividends was mistaken and that the directors should bear its consequences.
In this day and age, a board of directors resolving to distribute dividends should bear in mind it is placing real limitations on the company’s ability to seek financial assistance in the future. It is not wrong to distribute dividends but it does place limitations that must be considered.
So, what do we have in these challenging time? responsible business conduct – yes; future distribution of dividends – yes, with caution; distributing dividends and crying for help – absolutely not.