quick question for anybody who knows about small company shareholdings / dividends.
I've just agreed to purchase a 10% share in my company (there are 6 other existing shareholders). This was first offered to me on 5th June and it's dragged on a bit, mainly because of delays with my boss and the company accountant both going away on long holidays, and because of confusion about the price. That's been sorted now and although I haven't actually paid my money yet, I've said I can pay immediately and we've agreed that my role will be effective from 1st September (the company's financial year ended on 31st August). I have also had my linked payrise backdated to 1st July to compensate for the delay.
I'm just slightly concerned as when I had the final conversation with my boss, he mentioned that "we will probably take a dividend now" which I sort of took to mean, they will pay one out to the existing shareholders just before I come on board. I haven't clarified this with him but I'm a bit put out by this as I don't want them to make a big payout just before I come on board and I miss out on it (we've had a really good last 3 months) - particularly given that if the process hadn't been delayed by them, the deal would probably have been done 2 months ago. It's a difficult position as I don't want to ruffle feathers etc and I suppose it seems greedy to expect a big dividend the moment I come on board - but am I within my rights to kick up a fuss about this, especially given that we've agreed my role will be effective from 1st September so presumably I should be entitled to any dividend payout made after this time (even though I haven't actually paid the money yet, although I've said I can pay it tomorrow if they want)?
I'm very new to all this sh*t but anyone got any thoughts / knowledge on it?
Cheers
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http://www.intouchaccounting.com/resources/guides/paying-yourself-a-wage-limited-company-dividends/
http://www.intouchaccounting.com/resources/guides/combining-salary-with-dividends/
You are right to be put out....
The key is that the price that you agree to pay for the shares should represent the value of the company at the time you acquire the shares. A dividend will reduce the value of the company's assets, and therefore will also reduce the value of the shares - which you could reasonably expect to translate into a reduction in the price you pay.
However, if you have had a good 3 months since agreeing the original price, this conversely will increase the value of the company and therefore you could be expected to pay more.
It really comes down to what sort of level of investment you are making. If it's fairly incidental (i.e. you're being offered shares at a significant discount to their true value, as a valued employee), then you can't really complain. However, if you're making a substantial investment you're entitled to make sure you're getting your money's worth, and would do well to consider engaging an accountant or adviser to look into the deal for you before handing over any money.
First, were the shares you are acquiring newly issued shares or are you buying them from someone else? Newly issued shares MAY not be entitled to a dividend whereas previously issued ones would be and the dividend will go to whoever the holder was at "the record date". So the date you acquired the holding is key, that is when your shareholding was formerly recorded in the Register of Members. (This will in all likelihood be the date on your share certificate too.)
Second, if the shares were pre-existing, you will need to know whether you are acquiring the shares ex-div or not. This is usually a date a couple of days after the record date for traded securities because it takes a couple of days for the transaction to be recorded. But for small companies it may be the same as the record date.
Third, what is the proposed dividend payment date? This can be weeks or months after the record date.
All this is important for a number of reasons. First of all, if there is a new tranche of shares issued (yours) that could have the effect of devaluing all the other shares. So, to explain, if the company was worth £100 and there were 100 shares, each one could be fairly valued (setting aside all the other crap like projected future value, etc) as a £1. If 100 additional shares are issued for no consideration, then the value of each of the now 200 shares becomes 50p each because the value of the shares has been diluted. If, however, the new shares were bought at £1 each and that money was made available to the company, then, perhaps each of the shares would still be worth £1. Still with me?
Now, if the dividend that is proposed is significant in terms of the company's overall value, that too will have an impact on the value of your shares which will be less. In the above example, if each of the original 100 shares got a 50p dividend per share, it is likely that the value of the now 200 shares would decrease to, say, 75p each because there is less value in the business. So if you'd paid a £1, you wouldn't be very happy. Certainly, what you wouldn't want to see happening is for your investment to be the funds that were used to payout a dividend to everybody else would you?
Finally do you really want a dividend and when? There are tax considerations that impact the timing of such receipts, particularly if it moves you into a new tax band. The are also significant changes coming in next year on the treatment of dividends for tax purposes. Read this telegraph.co.uk/finance/personalfinance/investing/shares/11737430/New-dividend-tax-how-it-works-and-how-to-avoid-it.html
I'm buying the shares from another shareholder - not a new share issue. The agreement we have is clearly "effective from 1st September" but I suppose the record date may not reflect this as it won't have been formerly recorded in the Register of Members.
I don't know if I am acquiring the shares ex-div or not - I suppose that's an important question - because that essentially clarifies whether any soon to be declared dividend belongs to me (the buyer) or the seller?
The settled trade position on record date will determine who gets pai the dividend.
If you buy cum div and the trade is unsettled at record date then you should receive the div from the seller.
I wouldn't agree that the payment of a dividend affects the share price. The share price builds in expectations of dividends already. Not paying a dividend will be negative on the share price. A dividend is paid out of profits not assets, so if a dividend isn't paid it becomes part of the shareholders' capital and is not lost to shareholders. It can be paid as a distribution at a later date and in the meantime is a positive in valuing the shares.