Shareholders Agreement: Options for Resolving Dividend Payment Matters
How can we effectively address the issue of dividend payments when drafting a partnership agreement to ensure fair profit distribution and prevent conflicts in the future?
Continuing our series of articles on the nuances of drafting an SHA.
In practice, we observe the following trend:
If a company is outsourcing-oriented, partners usually agree on regular profit distribution, which helps maintain stable cash flows and meet the needs of all participants.
On the other hand, in the case of a product company, partners often prefer to postpone profit distribution until the product achieves significant success in the market. This allows for reinvestment in further development and scaling, ensuring maximum returns from the product in the long term.
Let's move on to the options directly:
1. Discretionary Dividends are payments made at the discretion of the shareholders' meeting. In this case, the company is not obligated to pay dividends every year but decides on payment based on the current financial situation and strategic plans.
For example, if a company plans significant investments in development, shareholders may decide not to pay dividends in the current year and instead allocate profits to implementing new projects.
2. Conditional Dividends are payments that depend on meeting specific conditions. For instance, a company may establish that dividends will be paid only upon achieving certain financial indicators or after completing a key project.
For example, dividends may be paid only if the company's profit for the year exceeds a certain threshold, ensuring the company's financial stability.
3. Dividend Lock-up is a mechanism that prohibits dividend payments for a certain period. This mechanism is often used to protect investors' interests or as part of a company's strategic development plan.
For example, a dividend lock-up may be set for the first three years after attracting investments to maximize returns on the invested funds.
It is advisable to address the profit distribution question at the initial stage to immediately determine partners' positions on this important issue. Secondly, established agreements contribute to strengthening partnerships and lay the foundation for successful collaboration.
