The bill’s explanatory note states that there are different views within the legal profession about the effect of section 53(2). One view is that the section prevents a board from exercising discretion when authorising a dividend for some shares in a class but not others. However, according to this view, it does not prevent a company’s constitution from containing a rule that some holders of shares in a class are not entitled to receive dividends on those shares. If this is the case, a board that authorises dividends, where the constitution provides that these must be paid on a differential basis, would not be discriminating between shareholders. It would instead be giving effect to the rule in the constitution.

Conversely, other lawyers consider that section 53(2) prevents a constitution from containing such a rule. This is because it would result in a board authorising dividends for some of the shares in the class (the wet shares) but not the other shares in the same class (the dry shares), which is thought to be prohibited by this section.

To remove this uncertainty, the bill as introduced would insert section 53(2A). This new section would specify that section 53(2) does not prevent the constitution of a company providing for differential dividends in the circumstances stipulated in the constitution.

We note that under clause 4 of the bill as introduced, a company’s constitution could provide for some shares to receive no dividend. However, we consider that the bill is unclear as to whether a company’s constitution could provide for an increased or reduced dividend entitlement for some shares compared with others. Therefore, we recommend replacing this clause to set out when a constitution could authorise a different level of dividends for some shares than for others of a class.

Our proposed new clause 4 would replace section 53(2), and would:

• retain the three existing exclusions for when a board may authorise a differential dividend, as currently set out in section 53(2) of the Act

• make it clear that a company’s constitution may provide for differential dividends and that the board may authorise a dividend in accordance with the constitution.

We do not consider that the policy intent of the bill is to allow a company’s board to exercise discretion or an opinion about which circumstances would lead to shares receiving different dividends. Therefore, we recommend inserting new section 53(2A). This new section would make it clear that a company’s constitution could only provide for shares in a class to receive differential dividends if this is based on objective criteria.

We recommend including a definition of “differential dividend” by amending clause 4 to insert section 53(4). This definition is based on the current content of section 53(2)(a) and (b) of the Companies Act.