Shareholders have no direct claim against non-declaration of dividend or its low amount. But their can exercise some internal controls against directors, like voting them out of office. In exceptional cases, suit based on breach of directors duties or on unfair prejudicial dealings may suffice, but breach of an agreed term or interest must be proved. Another option is an insolvent claim on ground of just and equitable to so do, but rarely can a court wound up a company on such claims.

Dividends are usually declared at the AGM.

The Annual General Meeting is a compulsory yearly gathering of the company’s shareholders. At the Meeting, the directors present an annual report about the company’s performance and strategies.

One of an interesting matter presented at the AGM is dividend (money paid to shareholders out of company’s profit).

Who has the power to declare dividend?

Investors or shareholders have no absolute entitlement to dividend. It’s the directors who play a leading role. However the constitution can direct otherwise (warning: theoretically it’s unwise to confer such powers to shareholders).

Usually in AGMs, for final dividends, director’s recommends the amount to be distributed and the shareholder approves it. Ordinarily shareholders cannot claim an amount above that which is recommended. And for interim dividend, shareholders play no role.

Some things which might prevent declaration of dividend are creditor’s covenants and statutory requirements.

Why directors declare moderate dividends?

Dividend attracts investors. But a retained-earnings is also important in order to support new ventures. The balancing of interests, of investors and future company growth is tasking to most directors. Thus strategic directors, considering the company’s interest (some also consider personal interest), are willing to distribute the profit only to the extent where it either shows; they confidence in the company; or informs investors about company’s viability; or reduces agency cost.

Out of what funds are dividends declared?

Dividend should be out of realized company’s profit. Or else it’ll be characterized as unlawful distribution, ultra-vires a company. But there other ways in which investor’s value can be returned.