Directors’ concerns: distributions and dividends

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Ever since the legal concept of the company was created, there has been discussion about what the purpose is of companies and why they should exist.

Despite the sometimes rather abstract nature of these debates they do matter to directors because it is the directors who are responsible for the company; what it does and how it goes about it. Directors are under a duty to exercise their powers in the best interests of the company but one of the issues that directors need to consider when running the company is the interests of the shareholders, the owners of the company. Jack Welch is famous both for emphasising the importance of shareholder value and describing the idea of having shareholder value as a strategy as “the dumbest idea in the world”. His comments are not as contradictory as might, at first, appear: increasing shareholder value is a desirable outcome of the strategy that the company follows but it should not be a strategy in itself. From the perspective of the directors, in addition to the strategy creating the value, they must also consider how that value should be distributed. It is a fundamental principle of company law that the property of a company belongs to itself and not to its shareholders. For that reason a company cannot simply pay or  distribute its property to its shareholders: the Jersey Companies Law sets out requirements that must be satisfied before such a payment or distribution may be made…

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