The dividend policy of business entities and the analogy of law

Mikryukov Viktor Alekseevich ORCID: 0000-0002-6856-1627 PhD in Law Assistant Professor of the Entrepreneurial and Corporate Law Department, Kutafin Moscow State Law University (MSAL) 125993, Russia, Moscow, Sadovaya-Kudrinskaya str., 9 vmikryukov@yandex.ru Other publications by this author

It is known that the dividend policy of business companies has a significant impact not only on their own financial stability ^{[18, p. 1-28]}, but also on the welfare of participants (shareholders) ^{[9, p. 6-10]} and the interests of creditors ^{[10, p. 91-131]}. Thus, regardless of the country, corporations can apply a dividend policy associated with less manipulation of income to mitigate agency costs and create a reliable commercial reputation ^{[17, p. 267-286]}, as well as to reduce conflict potential within the corporation ^{[14, p. 1807-1840]}. At the same time, the policy of refusing to pay dividends ultimately makes the structure of assets and capital of the corporation untenable, since the incomes of successful corporations exceed their investment opportunities ^{[15, p. 95-287]}.

Whatever specific dividend policy a particular business corporation chooses at a certain point in time, whatever specific goals it pursues, the fundamental importance of its consistent implementation and the significance of the relevant external and internal economic consequences require a fairly clear, defined and at the same time flexible civil law regime of dividends.

The participants of business companies clearly need not only guarantees of the possibility of real participation in the distribution of corporate profits, but also sufficient freedom to determine the frequency (periodicity) of the announcement and the timing of payment of dividends. It is no coincidence that the period of actual fulfillment of the company's obligation to bring previously announced dividends to the participants (shareholders) is considered one of the key indicators of the dividend policy included in the "golden formula" of the legal regime of dividends of business entities ^{[12, pp. 111-126]}.

Under normal conditions, such freedom would allow, in particular, not only to adequately ensure the signaling function of the dividend policy (its ability to inform investors about the current financial condition of the company) ^{[13, p. 1232-1247]}, but also to effectively distribute free cash flows, and when crisis socio-economic phenomena affect the activities of a particular corporation – adequately to respond to a situation where the availability of distributable net profit at a certain moment is not provided with the necessary amount of working capital. So, at present, in the conditions caused by the sanctions impact of unfriendly foreign states, for many Russian corporations forced to suddenly abandon profit distribution or postpone the payment of dividends, the availability of appropriate legal parameters is becoming particularly relevant ^{[4, pp. 95-99]}.

However, despite this need and the presence in special Russian legislative acts regulating the corporate life of business companies (Federal Law No. 14-FZ dated February 08, 1998 "On Limited Liability Companies", hereinafter – Federal Law "On LLC", Federal Law No. 208-FZ dated December 26, 1995 "On Joint Stock Companies", hereinafter – the Federal Law "On JSC"), there are enough detailed rules on the procedure for making decisions on the distribution of profits and the conditions for the actual payment of dividends, it can be stated that there is a gap in establishing the boundaries of freedom of choice of the frequency of making decisions on payment (accrual) the so-called "non-monotonic" ^{[16, p. 21-56]} (irregular) dividends and the timing of the actual payment of accrued dividends.

In the provisions of Article 28 of the Federal Law "On LLC", as well as in Article 42 of the Federal Law "On JSC", which enshrine the right of business companies to make a decision on the distribution of their net profit among the participants of the company (to make decisions (declare) the payment of dividends on outstanding shares), an indication is made that such decisions are possible "quarterly, semi-annually or once a year." At the same time, these laws determine that the period for payment of dividends to shareholders of joint-stock companies should not exceed twenty-five working days from the date on which the persons entitled to receive dividends are determined, and the period for payment of part of the distributed profits of limited liability companies should not exceed sixty days from the date of the decision on profit distribution.

These rules, formulated without any reservations, do not allow us to clearly answer the question of the possibility of distributing net profit generated over shorter periods of time (for example, monthly, weekly, daily). The question remains open as to whether a particular business company has the right, at the level of the charter or in a separate corporate act on profit distribution, to establish other (longer) terms for the actual payment of declared dividends. 

Most legal scholars interpret the legislation in such a way that participants in business companies cannot make a decision on the distribution of net profit more than once a quarter ^{[1, p. 9]}, and circumventing this prohibition by issuing interest-free loans to shareholders during the quarter with subsequent offset of counterclaims for the payment of quarterly dividends is fraught with negative tax consequences ^{[7, c. 25-27]}. Some courts, qualifying the monthly distribution of dividends as the actual payment of wages (assuming a different tax regime), emphasize that the law allows only a different procedure for the distribution of dividends to the distribution of part of the profit among its participants in proportion to their shares in the authorized capital, but not a change in the frequency of distribution of net profit (Decision of the Arbitration Court of the Volga District of 13 April 2016 N F06-7195/2016).

Similarly, the statement of the imperative nature of the above-mentioned default norms-deadlines ^{[3, pp. 40-45]} makes some authors unconditionally deny the possibility of changing the time frame for fulfilling the obligation to pay declared dividends and qualify the provisions of the charters of business companies containing extended deadlines as insignificant ^{[6, pp. 35-43]}. The opinion is expressed that the company has the right only to reduce the period under consideration in comparison with the legal maximum ^{[5, p. 3-11]}.  A similar approach also takes place in judicial practice, when, in the presence of a provision in the charter on a sixty-day period for the payment of dividends, which corresponded to the norm of the now abolished clause 4 of Article 42 of the Federal Law "On JSC" as amended before the adoption of Federal Law No. 379-FZ dated December 21, 2013, but contradicting the current clause 7 of Article 42 of the updated Federal Law "On JSC" on shorter deadlines, the court applied the latter (Resolution of the Tenth Arbitration Court of Appeal dated December 02, 2021 N 10AP-22719/2021).

It seems that, based on the analogy of law, based on the general principles and meaning of civil legislation (as established in paragraph 2 of Article 6 of the Civil Code of the Russian Federation), this uncertainty should be overcome more flexibly. Thus, the limitation of the frequency of making decisions on the payment of dividends can be justified and accepted only in the aspect in which it prevents the distribution of property (income) under the guise of dividends, which do not yet represent the generated net profit. In a similar sense, the courts really emphasize that the decision on the distribution of future profits cannot be recognized as a decision on the payment of dividends, since the possibility of distributing the income of an organization from a separate (single) business operation (and not net profit for a certain period) is not allowed by law (Resolution of the Arbitration Court of the Central District of January 29, 2018 N F10-5610/2016). However, if we take into account the admissibility of paying dividends at the expense of retained net profit of previous years (Letter from the Ministry of Finance of the Russian Federation dated March 20, 2012 N 03-03-06/1/133 ; Resolution of the Arbitration Court of the North Caucasus District dated October 14, 2016 N F08-7341/2016), with respect to the economic and legal status of which there is no doubt, and recognize if there is a technical (accounting) possibility to determine the amount of interim net profit generated for any reporting period that has passed since the last previous decision on payment (or non-payment) of dividends, then the conclusion arises that with the actual availability of net profit, its distribution is possible with any frequency. This conclusion is correlated with a new explanation from the financial department, according to which, in cases where the amount of net profit determined according to the annual accounting (financial) statements turns out to be less than the amount of interim dividends (distributed profits) paid on the basis of relevant decisions taken in accordance with the data of the interim accounting (financial) statements, does not change the economic qualification of the interim payments made specifically as dividends (Letter of the Ministry of Finance of the Russian Federation dated October 15, 2020 No. 03-03-10/90152).

In general, as it is possible to establish a correct understanding by the courts of the essence of the issue, the main condition for qualifying a specific payment as a dividend is the very existence of net profit, due to which the corresponding payment is made. In particular, in the absence of a mention in paragraph 1 of Article 28 of the Federal Law "On LLC" (similar to the norm of paragraph 1 of Article 48 of the Federal Law "On JSC") on the possibility of transferring dividends to a participant in kind (property) to the courts, despite the objections of some experts who deny the admissibility of an analogy when deciding on the payment of dividends to participants of these independent types companies ^{[2, pp. 46-50]}, recognize the payment of dividends by real estate as lawful (Resolution of the Third Arbitration Court of Appeal dated January 26, 2021 N A33-21086/2020).

In turn, limiting the maximum delay in the performance by business entities of the obligation to actually pay declared dividends is clearly aimed at protecting the dividend rights of minority shareholders ^{[11, pp. 60-65]}, and therefore cannot be perceived unambiguously and unconditionally. For example, if absolutely all participants (shareholders) of a particular limited liability company (joint stock company), realizing the objective difficulties of management in attracting working capital, intend to help their own corporation and provide preferential payment terms, then their intention can and should be considered reasonable and conscientious in the light of the basic principles of civil legislation.

Finally, assessing the discovered legal uncertainty through an analysis of the nature of the noted legislative norms, it seems possible by analogy to refer to the explanations that were formulated in the Resolution of the Plenum of the Supreme Arbitration Court of the Russian Federation dated March 14, 2014 No. 16 "On Freedom of Contract and its limits" in relation to clarifying the imperative or dispositivity of the norms defining the rights and obligations of the parties to the contract:

· a norm is mandatory if it contains an explicit prohibition on the establishment by agreement of the parties of a different (than provided for by this norm) condition of the contract;

· in the absence of an explicit prohibition in the norm to establish otherwise, it is imperative if, based on the purposes of legislative regulation, this is necessary to protect particularly significant legally protected interests (interests of the weak party to the contract, third parties, public interests, etc.), to prevent gross violation of the balance of interests of the parties, or the imperative of the norm follows from the essence of legislative regulation of this the type of contract.

The analogous application of these clarifications to corporate legal legislative provisions defining the frequency and time frame for the payment of declared dividends shows that in the absence of explicit prohibitions on the customization of these provisions (the establishment of shorter accounting periods for the purposes of calculating and distributing net profit, lengthening the timing of dividend payments) they should be considered dispositive until this does not violate the balance of interests of the corporation, its participants, management and creditors.

It can be concluded that in order to quickly overcome the uncertainty in the legal regime of dividends of business entities, it is possible and necessary not to be afraid of reproaches for excessive liberalization and dispositivity of the content of corporate legal regulation ^{[8, pp. 5-13]}, but to actively use the analogy of law (paragraph 2 of Article 6 of the Civil Code of the Russian Federation), which will increase the insufficient degree of freedom according to to determine the frequency (periodicity) of declaring dividends, to ensure the flexibility of the mechanism for setting the timing of their actual payment and, ultimately, will make it possible to form such a dividend policy that would balance the private interests of the corporation, its individual participants (including majoritaries and minority shareholders), members of management bodies and counterparties that are equivalent and subject to comparable protection.