European Company Law Text, Cases and Materials

Dividend Distribution

As already mentioned, ECL provides not only capital formation rules, i.e. rules ensuring correct assessment of assets contributed for the formation of the legal capital, but also capital maintenance rules. These include a rule requiring that dividends are only paid when a company is showing a profit above the level of historically recorded legal capital. More precisely, Article 17(1) Directive 2012/30/EU makes reference to the value of the net assets shown in the company's annual accounts.

Neither the Annual and Consolidated Accounts Directive (Directive 2013/34/EU or new Fourth and Seventh Directive), nor the new Second Directive provide a definition of net assets. This concept corresponds to that of equity, which is also defined neither by the new Second nor the new Fourth and Seventh Directives. However, depending on the balance sheet layout adopted by Member States, net assets or equity are shown in Item A. Capital and reserves of the column Capital, Reserves and Liabilities of the horizontal layout, or in Item L. Capital and reserves of the vertical layout. These Items measure the resources contributed to the company or accumulated by it, which are not liabilities or debts towards third parties. Contrary to US law, under ECL not all these resources are available for distribution to shareholders.

ECL requires that, prior to a distribution, the company performs a so-called balance sheet test, confirming that assets corresponding to the value of the legal capital and to reserves which may not be distributed under the law or the statutes are not reimbursed to shareholders as dividends. Reimbursement of these resources may only occur after dissolution of the company, or following a reduction of the subscribed capital, in case the general meeting provides accordingly and creditors do not object within a certain time limit. In any case, a reduction of capital below the minimum set out by the law is not permitted.