Dividend Rights
What does "Dividend Rights" mean in law?
Dividend rights are the entitlements of shareholders to receive distributions of corporate profits as declared by the board of directors. The declaration of dividends is generally within the business judgment of the board, and courts rarely compel dividend payments absent a showing of fraud, bad faith, or abuse of discretion, as illustrated in Dodge v. Ford Motor Co., where the Michigan Supreme Court ordered Henry Ford's company to distribute a special dividend to shareholders. Preferred shareholders typically have priority dividend rights specified in the articles of incorporation, which may be cumulative (unpaid dividends accumulate) or non-cumulative. State statutes impose solvency restrictions on dividend payments, generally prohibiting distributions that would render the corporation unable to pay its debts as they come due or that would reduce net assets below the liquidation preference of senior shares.
Definition
Dividend rights are the entitlements of shareholders to receive distributions of corporate profits as declared by the board of directors. The declaration of dividends is generally within the business judgment of the board, and courts rarely compel dividend payments absent a showing of fraud, bad faith, or abuse of discretion, as illustrated in Dodge v. Ford Motor Co., where the Michigan Supreme Court ordered Henry Ford's company to distribute a special dividend to shareholders. Preferred shareholders typically have priority dividend rights specified in the articles of incorporation, which may be cumulative (unpaid dividends accumulate) or non-cumulative. State statutes impose solvency restrictions on dividend payments, generally prohibiting distributions that would render the corporation unable to pay its debts as they come due or that would reduce net assets below the liquidation preference of senior shares.
Example
Minority shareholders in a closely held corporation sued the board for refusing to declare dividends for five consecutive years while the company accumulated $10 million in surplus, arguing, as in Dodge v. Ford, that the board was abusing its discretion by withholding dividends to benefit the controlling shareholder.