BP, the Dividend and the Board (Part 3)

With all of that background, where does it leave the dividend issue? 

It is unequestionably a political problem.  Clearly, the nonpayment of the dividend will annoy shareholders and may result in a decline in share prices (although in theory it shouldn't; if the company keeps the money, the value of the shares ought not to decline; nonetheless, shareholders expecting dividends may sell and these sales will exert downward pressure on share prices, at least in the short term). On the other hand, paying the dividend will anger politicians in the United States (not only President Obama) and may encourage the adoption of legislation that will cause greater harm to BP in the long term. 

But there is more to it.  In truth, the pressure from the US Government is effectively putting the Board and shareholders on notice about the extent of the liability associated with the spill.  This will force the Board to consider legal issues associated with the payment of the dividend.  The law on dividend payments indicates that unrealized losses must be taken into account when paying the dividend.

BP is incorporated not in Delaware (unfortunately for BP) but in England and Wales.  The law with respect to dividends, therefore, arises from the Companies Act of 2006.  Section 830 provides that dividends may be paid "only out of profits available for the purpose."  This amount essentially equals realized profits (not otherwise distributed or capitalized) less realized losses.   Section 831 imposes additional restrictions on public companies (including the obligation to take into account net unrealized losses). 

In addition to the Code, dividends are regulated under common law and subject to fiduciary obligations.  This likewise may require the Board to take into account unrealized losses.  As a memo from Norton Rose described:  "the directors must consider whether, subsequent to the relevant balance sheet date, the company has suffered losses which might affect the company’s ability to make a distribution."

The Board and its shareholders are now aware of the growing liability associated with the spill.  While it is far too early to quantify these liabilities, some possibility exists that they will exceed the Company's profits (as the term is used in the Companies Act) or its assets (some have put potential liability at $80 billion but in fact no one knows what the final number will be).  Thus, directors could, if they authorize the dividend, be potentially liable and shareholders with knowledge could potentially be obligated to pay the amount back (see Section 847 of the Companies Act).  

Payment of the dividend may anger politicians but it also may result in legal liability.  While the former is a judgment call, the latter is not.  Directors will not order the payment of a dividend to the extent they have any risk of personal liability.  And, after that sentence was written, BP in fact announced that it would not pay the dividend and would in fact place $20 billion in a fund to be used to pay claims connected to the spill. 

Comments

[Hugo E. Dunker]

It always gets nasty when politics and economy collide. This is a tough case. I am really exited how it will end (can the global player survive such a catasrophe?).

[pam k reed]

I understand the seriousness of the American Gulf spill but I think that B.P. should have by now written to its share holders to say what is happening and when we can expect dividends to be paid! As an OAP with large heating bills and no other income we are on the poverty line also. We rely on this small but essential dividend. We have been patient and not heard one word from BP in all this time I find this difficult to understand.