In theory, dividends should only be paid to shareholders from profits generated during a trading year. Profits arise from excess trading income over expenses. On the other side of a set of accounts are capital items like assets and shareholdings in the company.
According to the new book "Bean Counters" by Richard Brooks, historically speaking, English common law allowed companies to pay dividends only out of profits. The books goes on to describe how some of the large and badly managed railway and shipping companies of the 18th and 19th centuries were found to have paid dividends from shareholders funds (capital) converted into income, which allowed them to boost their share price further. These companies eventually needed Government bailouts when the bubble burst.
Both Irish and UK law presently allows companies to reduce their share capital and use the funds for distribution i.e. paying dividends, once certain procedures have been followed. This is known as "Capital Reduction". As part of the process, the company must apply to the High Court for approval. Alternatively, the directors must sign a statement of solvency for which they could be held liable if it turns out to be false.
Greencoat Renewables, which owns around 300MW of Irish wind farms, made a loss last year, yet were still able to declare a dividend. They did this though a capital reduction where the share premium account of €267,000 was converted to Distributable Reserves of € 250,000. It was from this that dividends of € 11 million were paid to shareholders. In effect, shareholders were paid a dividend out of their own money (to which the shareholders would have agreed to). Greencoat obtained High Court approval for this capital reduction.
Greencoat are not alone in this. Other Irish companies have also applied to the High Court for a capital reduction - Bank of Ireland in 2012 and AIB in 2017 both were successful in their applications. Irish News and Media applied to the High Court in 2017 but the outcome I have been unable to ascertain.
When the Irish economy crashed in 2008, government decided to bail out secured sovereign debt and unsecured bond holders. They had a treasure chest which included the National Pension Reserve Fund which they raided for get the money at the behest of the EU. There is a lot of talk that the Irish economy is bloated and in danger of collapsing.
ReplyDeleteThere is an article in to-days Irish Independent that present debt levels are unsustainable. It goes on to say that this tine round there is not source of funds now. We can see a rush by wind farm owners to sell wind farms. This is to be expected because we know they are not making enough money and can never do so. There is no mystery as to why the renewable energy obsessed government is pouring our money into it, but why are investors doing so. It is likely they were asked to lend a hand by government in return for some kind of tax breaks.
Strange things are happening in the Irish economy, sounds familiar.