Spotlight: Dividend and Share Buyback Considerations
In response to pending or expected financial constraints, one of the first tasks for the board and management is to identify ways to increase or preserve the issuer’s cash position. For example, in the wake of COVID-19, several Canadian and American public companies suspended or halted their dividend or buyback programs to prepare for the uncertain impact of the pandemic. 26 However, the decision to suspend, halt and/or terminate these programs is not always a simple one – especially for reporting issuers with a long history of paying dividends and/or buying back shares. This history can create investor expectations about the program’s long-term availability, especially in the early days before the issuer’s deteriorating financial condition has been generally disclosed. Under Canadian law, generally, a corporation cannot pay dividends or repurchase or redeem issued shares if it is, or after the payment would be, insolvent. 27 However, the term “insolvent” has different meanings under different laws, leading to situations in which it may be unclear whether the issuer is subject to the restrictions on such payments. Other statutory considerations may also apply. For instance, access to government support through the Coronavirus Aid, Relief, and Economic Security (CARES) Act in the United States might preclude the continued payment of dividends or buybacks even if a board wished to continue the
program(s). 28 On the other hand, if a board has already declared a dividend, that declaration created a debt obligation by the issuer to its shareholders, and the board cannot simply reverse its decision absent clear insolvency issues. A variety of other factors will also be relevant to the board’s decision whether to suspend, delay or reduce future dividend payments, as will be the case with buyback programs. Dividend and buyback decisions form part of an issuer’s broader capital allocation and liquidity strategy, which the board (or a special committee) will want to re-evaluate holistically. The timing of these decisions, particularly in the context of potential future insolvency proceedings that have not yet been disclosed, will need to be carefully considered. Additionally, any policy changes with respect to dividends, buybacks or other capital allocation or liquidity decisions should take into account the issuer’s disclosure record and obligations, both past and future. For example, a decision to suspend dividends and/or halt buybacks will often constitute a material change. 29 A board that is even in the preliminary stages of considering such a course of action should consult with legal counsel to avoid potential secondary market liability for the issuer and its directors and officers.
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Governance Insights 2020
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