334 10 Exit of Shareholders
silent on who may declare a dividend and thus does not require the dividend to be declared
by shareholders in general meeting. The model articles which apply as default articles of
association for public companies (Table A) distinguish between final dividends and interim
dividends. (a) According to Table A, “the company may by ordinary resolution declare
dividends in accordance with the respective rights of the members, but no dividend shall
exceed the amount recommended by the directors”.^32 (b) On the other hand, interim divi-
dends may normally be paid by the directors from time to time.^33 Before declaring an in-
terim dividend, the directors must satisfy themselves that the financial position of the com-
pany warrants the payment of such a dividend out of profits available for distribution.^34
Where the power to pay interim dividends is vested in the board of directors, shareholders
in general meeting cannot interfere with the directors’ exercise of this power.
Sanctions. The Second Directive further provides that any distribution made con-
trary to such rules must be returned by shareholders who have received it if the
company proves that these shareholders knew of the irregularity of the distribu-
tions made to them, or could not in view of the circumstances have been unaware
of it.^35 The threshold is quite high. In practice, it is difficult to recover improperly
made distributions from shareholders. However, even this is a minimum require-
ment.^36 Shareholder liability is typically complemented by the personal liability of
board members for breach of duty of care or otherwise.^37
Intra-group transfers. Intra-group payments and asset transfers are not treated
differently under the Second Directive. There is therefore a risk that dividend
payments in excess of distributable assets, unusual transactions, the sale of assets
at an undervalue, or the purchase of assets at an overvalue, are regarded as a
breach of the mandatory provisions of company law.
10.2.3 Redemption of the Subscribed Capital
The company can also make payments to shareholders through redemption of the
subscribed capital without reducing the subscribed capital. The redemption of sub-
scribed capital can be an alternative to the payment of dividends for tax reasons.
For public limited-liability companies, the most important legal constraints are
again based on the Second Directive and contain the following:^38
(^32) Table A, regulation 102.
(^33) Table A, regulation 103.
(^34) Table A, regulation 103.
(^35) Article 16 of Directive 77/91/EEC (Second Company Law Directive).
(^36) Schwarz GC, Europäisches Gesellschaftsrecht. Nomos, Baden-Baden (2000) p 380. For
German law, see § 62 AktG.
(^37) For German law, see §§ 62 and 117 AktG (shareholder liability) and § 93(3) AktG (li-
ability of board members). For English law, see section 171 of the Companies Act 2006
(duty to act within powers) as well as section 847 (consequences of unlawful distribu-
tion). See also Re Exchange Banking Co, Flitcroft’s Case (1882) 21 Ch D 519; Bairstow
v Queen’s Moat Houses [2001] 2 BCLC 531; It's A Wrap (UK) Ltd v Gula [2006]
EWCA Civ 544.
(^38) Article 35, 38 and 40 of Directive 77/91/EEC (Second Company Law Directive).