According to article 675 of the Swiss Code of Obligations, “dividends can only be paid out of the profit resulting from the balance sheet and the reserves created for the purpose.” However, in practice, the interpretation of this legal stipulation has evolved with time, and there can be more than one dividend payment per year.
Below is a summary of current dividend distribution practices during the financial year.
Extraordinary dividends This matter is not specially regulated under Swiss law. Nonetheless, a payment for such a dividend could be permitted when certain conditions under article 660 of the Swiss Code of Obligations are met. Those conditions are as follows:
– The profit and the free available reserves are sufficient for such payments;
– The payment of extraordinary dividends doesn’t result in any liquidity issues for the companies;
– The company must draw up an interim balance sheet;
– The decision of the board of directors to approve payment of extraordinary dividend must comply with the law and, as such declared by an auditor;
– The payment of extraordinary dividends must be authorized by the general meeting of shareholders.
- Advanced dividends
Advanced dividends are usually offered to the shareholders out of the profit from the current year. In legal terms, this payment is treated as a loan, which should be compensated by the dividends once the general meeting of shareholders is held. In such a situation, the auditors should draft a report stating which payments have been made throughout the financial year.
- Interim dividends
The interim dividend usually comes out from the profit of the current financial year. Not long ago, such a dividend was considered an infringement of the Swiss Code of Obligations.
However, according to modern legal theorists, payment of interim dividends is possible if specific criteria are met. The same conditions for extraordinary dividends apply to interim dividends also. With one difference, however, payment of interim dividends requires the drawing up of an interim balance sheet and approval of that balance sheet by an auditor when audits are obligatory for the specific company.
- Proposal for new law
A new addition to the Code of Obligation has been proposed by the Swiss Federal Council, according to which an interim dividend can be approved by the general meeting of shareholders when possible according to CO, and when an interim balance sheet is drawn up for the first half of the financial year.
In cases where the company is subject to obligatory auditing, the balance sheet must be checked and approved.
Such dividends must also be governed by the same rules that refer to the standard annual dividends.
By violating the dividend distribution rules, the decision of the general meeting of shareholders is nullified, while violation of formal dispositions (such as the drawing up of an audited interim balance sheet and the approval of the auditors) can be contested.
In certain circumstances, the company may be able to reclaim dividends paid in an undue manner. In the event of a severe violation, the board of directors and/or auditors may also be held responsible civilly or criminally.
- Final words
Interim dividends were treated as illegal until recently. However, significant steps in eradicating such a view have been made with the emergence of new modern practices, legal theories, and the proposal for revision of the Swiss Law of limited companies.
This change is to be welcomed since it reflects the needs of business practice and respects the principles of protection of corporate capital.