Just recently, our client, a limited liability company (Perseroan Terbatas), was sued by one of its shareholders due to the reason that the company has never distributed dividends to him. Firstly, it is understood that the purpose of every person or party who establishes a limited liability company (“Company”) is to gain profit from the company’s business. In the same manner, a person who purchases shares of a Company expects to gain profit from the dividends. However, in practice, it is possible that such an expectation might not be realized. It may be that the Company does not or is unable to distribute dividends to its shareholders, which may result in a lawsuit by its shareholders.
Therefore, this article will discuss one legal issue: whether a Company is obligated to distribute dividends to its shareholders?
Basically, dividends may only be distributed to the shareholder if the Company has met certain requirements and conditions. Article 71 paragraph (2) and paragraph (3) of the Law No. 40 Year 2007 concerning the Limited Liability Company (“Company Law”) stated as follows:
“(2) All net profit after deduction for reserve as referred to in the article 70 paragraph (1) shall be distributed to the shareholders as dividends unless the GMS decided otherwise
(3) The dividends referred to in the article (2) may only be distributed if the Company has a positive profit balance”
Thus, there are some requirements and conditions that allow a Company to distribute dividends to its shareholders, as follows:
- The Company has net profit
Basically, dividends are Company profit that is distributed to its shareholders in accordance with the amount of ownership of the shares. Therefore, in order for a Company may distribute dividends to its shareholders, such Company must first have a positive profit balance. The profit here is the net profit, that is, the profit of the current year after the tax deduction. So, if the Company does not gain profit, then the Company is allowed to not distribute dividends to its shareholders in the current year.
- The Company has positive profit balance
After seeing whether the Company has a profit or not, in order to distribute dividends further it needs to know whether the Company has a positive profit balance or not.
A positive profit balance is the Company net profit in the current accounting year which has covered the accumulated losses of the previous book years (according to the Elucidation of Article 70 paragraph (2) of the Company Law). Therefore, if in the current year the Company has a net profit, then such net profit must first cover the losses that incurred in the previous years. If after the deduction to cover previous year losses, there is still extra net profit, then the extra net profit is the positive profit balance.
- The Company already has a mandatory reserve
After looking whether the Company has a positive profit balance, the next thing to check is whether the Company already has the mandatory reserve.
According to the provision of Article 70 paragraph (1), (2), and (3) of the Company Law, the Company is required to set aside a portion of its net profit every year for reserve. This requirement should be observed until the Company’s reserve has amounted to at least 20% of the value of the issued and paid up capital of the Company. Hence, if in the current year the Company’s reserve has not reached 20% of the value of the issued and paid up capital, then the positive profit balance which was acquired by the Company must first be set aside for this mandatory reserve. If after deduction for the mandatory reserve there is still an extra amount, then the extra amount may, but not must, be distributed as dividends to the shareholders,
- The GMS decides dividends distribution
Article 71 paragraph (1) of the Company Law states:
“The use of net profit and including the setting aside an amount for reserve as referred to in the article 70 paragraph (1) shall be decided by GMS”
The distribution of dividends is part of the use of net profit, and therefore it must first be decided by the shareholders in the General Meeting of Shareholders (“GMS”). As previously explained, that positive profit balance may, but not must, be distributed as dividends due to the reason that the use of Company’s net profit is not limited to dividends only. There are other Company’s needs in which the fund may be sourced from the Company’s net profit, such as:
- Setting aside for reserve, either the mandatory or other reserve;
- Distribution of tantiem for the member of Board of Directors and Board of Commissioners;
- Bonuses for the employees.
Other than that, the use of net profit may be considered for the interest of the Company itself, for example as the new capital for Company’s expansion. Therefore, a Company is not under an obligation to distribute the whole net profit, which has been deducted with reserve, to the shareholders as dividends. It may be, the amount of net profit that is distributed to the shareholders as dividends is only a small percentage from the total Company’s net profit. The GMS decides the uses of net profit, and the amount that will be distributed to the shareholders as dividends. Moreover, although all requirements and conditions to distribute dividends are met, the GMS may also decide to not distribute dividends to the shareholders, by reason that the Company’s net profit will be used for other Company’s need, such as business expansion.
After the GMS decides the distribution of dividends to the shareholders, then the dividends become an obligation of the Company to the shareholder.
M.Yahya Harahap, S.H., in his book “Hukum Perseroan Terbatas” (Limited Liability Company Law), 6th ed, Sinar Grafika, on page 292, stated that:
“… technically, dividends are a portion received by the shareholders from the Company’s profit. However, from the Legal, Laws and Articles of Association’s point of view the Company may regulate the limitation of dividends distribution. And it must be noted that dividends are not an obligation which must be automatically paid by the Company to the shareholders. The Dividends become Company’s obligation to the shareholder if the Company gets profit, and the profit has met the requirements of the Laws and Regulation and the Articles of Association. …”
The fact that the Company gets profit itself does not automatically create an obligation for the Company to distribute dividends to the shareholders because the Company must first find out whether the Company has positive profit balance and already has mandatory reserve, and after that, the dividends may be distributed based on the decision of the GMS.
Our conclusion based on the foregoing explanation is that the Company is not always obligated to distribute dividends to the shareholders due to the reason of requirements and conditions that must be met in order that the dividends may be distributed.
Hope this will be useful,
FREDRIK J. PINAKUNARY LAW OFFICES