Dividends, the ex-date, pre-emptive rights, and passing shares to your children

Hook

A boss told me he had bought into a company specially to collect its dividend, going in the day after the dividend announcement came out. He did not receive a single sen. He had done nothing wrong — he had simply bought a day late. This episode covers three things: when you have to buy for a dividend to count, what rights you have when a company issues new shares, and — how these shares eventually pass to your children.

The four dates of a dividend

One dividend has four dates. Confuse them and you end up like that boss. First, the declaration date. The company announces how much is being paid. Second, the ex-date — this is the one that matters. Third, the record date. The company closes its register that day and pays according to the names on it. Fourth, the payment date. The money reaches your account. The rule is this: the ex-date is the trading day before the record date. Put some dates on it: if the record date is 12 September, the ex-date is 11 September. Which means anyone buying on 11 September or after does not get this dividend. The last day on which you can buy and still collect is 10 September. Why? Because settling a share trade takes time — you press buy today and your name does not appear on the register today.

Cold water: buying just before the ex-date is usually wasted effort

So does buying in the day before the ex-date earn you the dividend? Most of the time, no. Because on the ex-date the share price usually drops by roughly the amount of the dividend on its own. You collect the dividend with one hand and the price falls by about the same with the other. And in between you have paid the dealing costs. A dividend is the result of holding, not an arbitrage opportunity. While we are here, a word for bosses who are not listed: paying a dividend from your company has a threshold too — the Companies Act says it can only be paid out of profits available for distribution, and the directors must confirm that for the twelve months after paying it the company will still be able to meet its debts as they fall due. Confirm the debts can be met, and then talk about a dividend. The order cannot be reversed.

Pre-emptive rights: the part most relevant to you if you are not listed

This next part is the most important in the episode. Section 85 of the Companies Act 2016: when a company issues new shares of a class ranking equally with existing shares — equally meaning the same voting or distribution rights — it must first offer them to existing shareholders in proportion, so that everybody's relative percentage stays where it was. And the section is written in detail: a notice has to be given, stating the number of shares and the period; not accepting within the period is treated as a refusal; and only once the period has passed with nobody taking them up may the directors deal with them otherwise. That is the pre-emptive right. What it means is simple: before a company issues new shares, it asks you whether you want to come along. It sounds as though you are well protected. But — the first words of section 85 are "subject to the constitution". In other words: the constitution can write that right away. Which is why every year small shareholders come to us and say, "I had thirty per cent, the company raised capital once, and I am down to eight per cent — they never even asked me." You open the constitution and that provision was excluded long ago. Nobody broke the law; he just did not read it when he signed. So the point of this episode is one sentence: before you buy into any company, before you sign a shareholders' agreement — read the constitution and see whether the pre-emptive right is still in there.

Father to child: three roads

The last stretch: how do these shares pass to the next generation? Three roads. First: transfer during your lifetime. Sign a share transfer form and register it into your child's name. Stamp duty is payable, and if the constitution restricts share transfers you have to get past the directors first. Second: leave it to a will or the estate. After you have gone, the executor or the administrator handles it. The problem is that probate or letters of administration have to be obtained in between, and during that period the shares are stuck. Third: put them into a holding company or a trust. The shares go into a holding company and what passes later is the shares in that holding company. But there is a side effect very few people are warned about: once a company appears on your register of members, your company is no longer an exempt private company. Why does that matter? We have a separate episode on directors' loans — for many bosses the balance sitting on their books is held up by exactly that status. The day you build a holding structure, the nature of that money changes.

What really kills a family business is not tax

An honest word. Malaysia has no estate duty. So what breaks a family business has never been tax. It is the absence of an arrangement. The boss dies. The shares are stuck in the estate process for months, sometimes years. The board cannot meet because there are not enough directors. The bank account cannot move because the signatory is gone. Suppliers stop delivering and the staff do not get paid. The company is still there. It is only that nobody has the authority to sign. What you want to leave your children is not a stack of share certificates. It is a company that can move.

To close

Three things: for a dividend, watch the ex-date; for new shares, look at the pre-emptive right in the constitution; and for succession, look at whether there is an arrangement at all. None of the three is difficult. What is difficult is that nobody reminds you to look. Want to sort out the constitution, the shareholders' agreement and succession in one go? Grab a coffee first and talk about your business. For the accounting, come to LTT. I am LTT, helping SME bosses get their accounts straight. Follow us, and see you next time.