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Shareholders and Directors Section 4 Payment of Dividends A dividend is effectively a payment of the company's profits to its shareholders. It is a way in which a company can distribute any profits, which it has made, to its shareholders. A shareholder does not, however, have an automatic right to a dividend. There are various rules as to whether a dividend may be paid, in particular the availability of distributable reserves (ie profits which the company may distribute to its members). The directors of the company will usually recommend to the shareholders what dividend, if any, should be declared by the company. Shareholders must then vote on whether it should be declared and whether the dividend should be less than that recommended by the directors. Shareholders are not usually permitted to declare higher dividends than those suggested by the directors. Usually the payment of dividends tends not to be relevant at the spin-out stage, as many spin-out companies may not produce any profits for some time. In other words, there are unlikely to be surplus distributable reserves for the payment of dividends during the early stages of the company's development. In any event, the goal in relation to a spin-out is usually to sell the company within five years or so of its formation in order to make a capital gain so that founding shareholders are not so interested in receiving an income from dividend payments. Role of a Director The main difference between the directors and the shareholders of the company is that the directors are responsible for the day to day management of the company and as such are answerable to the shareholders. The directors are also subject to various obligations and duties, which are intended to protect the position of the shareholders in a company in which they may have little, if any, day to day involvement. The Institute of Directors runs courses around the country for aspiring directors as well as discount schemes for things like insurance (see section 8). 20

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