Dividend distributions in times of COVID-19

In view of the massive economic challenges resulting from the global COVID-19 crisis, the ECB and the FMA issued an urgent recommendation on 27 March 2020 to the banks they supervise to refrain from paying dividends for the past financial year. According to the press release, both institutions assume that banks will postpone such decisions for at least six months for the time being, or in any case until there is clarity about the further economic development.

Also, in the case of companies outside the banking sector, management may be faced with the question of whether an originally planned profit distribution based on the annual financial statements for the past financial year is still permissible to the extent planned due to current developments or a possible negative outlook respectively.

The GmbH-Act contains a relevant provision to this effect in section 82 paragraph 5 GmbH-Act: If the managing directors (or the supervisory board) become aware in the period between the end of the financial year and the resolution of the shareholders on the annual financial statements that the assets have been "significantly and probably not just temporarily reduced" as a result of losses or reductions in value, the balance sheet profit is excluded from the distribution to the extent of this reduction in assets and shall be carried forward to new account; only an amount exceeding this amount may be distributed to the shareholders. Such an amount shall be determined by means of an interim balance sheet, if necessary. As a creditor protection regulation this provision is mandatory.

In connection with the outbreak of the coronavirus, two cases can currently be distinguished:

• Companies that are currently still preparing their annual financial statements as of the last balance sheet date and have not yet formally adopted them;
• Companies that had already prepared and formally adopted the annual financial statements for the previous financial year before the outbreak of the coronavirus.

In the first case, i.e. in the case of the still ongoing preparation (which in many cases will still be pending at a standard balance sheet date of 31 December), losses are to be considered which occurred after the balance sheet date and "eat up" the balance sheet profit shown on the balance sheet date. Insofar the provision stipulates a deviation from the balance sheet key date principle. Depending on the extent to which the company is affected by the effects of the coronavirus, it is necessary to examine to what extent such losses will lead to a "substantial and probably not merely temporary" reduction in assets. Only profits in excess of this amount may be distributed to the shareholders. From a practical point of view, an interim balance sheet can be drawn up to determine the amount blocked for distribution. In any case, the management is required to closely and carefully monitor the economic situation of the company and to evaluate it continuously (based on the course of the crisis).

The management (and possibly also the supervisory board, if set up) must draw attention to losses that have occurred in the meantime in advance of the resolution on the annual financial statements and - if these losses are significant in terms of the regulation on the restriction on dividend payments - refrain from making any distributions, even if the shareholders do not agree with them. According to jurisprudence on section 82 paragraph 5 GmbH-Act, a managing director shall even refuse to pay out profits if relevant losses are incurred - despite a resolution to the contrary by the shareholders. Such a resolution of the shareholders would then be irrelevant for the management since it is unlawful. Shareholders, in turn, have to vote against a profit distribution in fulfilment of their fiduciary duty if they are aware of the existence of the mentioned conditions and if this would contradict the distribution prohibition.

In the other case, i.e. if the annual financial statements were already prepared and adopted before the outbreak of the Corona crisis, losses occurring after the resolutions are not covered by the mere wording of the provision of section 82 paragraph 5 GmbH-Act. This therefore affects, for example, companies which prepare their balance sheet as at 31 December and which had already adopted the annual financial statements very quickly and thus before the outbreak of the corona crisis, or companies which prepare their balance sheet on a different balance sheet date and which therefore adopted the annual financial statements earlier. It is questionable whether in such a case the provision of the profit distribution payout block must be applied by analogy. Relevant case law is not applicable. According to the prevailing opinion in literature, the profit payment claim that has already arisen remains. Part of the literature takes however the view that an analogous application of the profit distribution payout block of section 82 paragraph 5 GmbH-Act shall also be applicable in the case of later occurring losses.

Since the legal situation in this case must therefore be described as uncertain, a deterioration in the financial situation should be carefully observed and assessed by the management even after a resolution has already been passed to approve the annual financial statements and the appropriation of profits and, in case of doubt, any profit distribution that has already been decided should not be carried out for the time being. In the opinion of the management, a profit distribution - despite a resolution already passed - must not lead to the company being plunged into a crisis by the payment. A profit distribution that is not affordable for the GmbH could possibly be challenged on the basis of the Austrian Avoidance Code and Austrian Insolvency Code. A liability of the managing directors may under circumstances also be possible.

The managing directors should therefore closely observe further developments in connection with the crisis and, in case of doubt, not carry out a profit distribution already decided upon in order to maintain sufficient liquidity in the company. From a shareholder's point of view, it may result from the fiduciary duty that the shareholders are temporarily obliged to waive liquidity.

A comparable provision to section 82 paragraph 5 GmbH-Act does not exist in Austrian stock corporation law. Here too, however, an analogous application of the profit distribution payout block could be considered.

Please note: This newsletter merely provides general information and does not constitute legal advice of any kind from Binder Grösswang Rechtsanwälte GmbH. The newsletter cannot replace individual legal consultation. Binder Grösswang Rechtsanwälte GmbH assumes no liability whatsoever for the content and correctness of the newsletter.