Bonus v. Dividend — What Is Your Company Paying?
In Yates v. Holt-Smith, May 14, 2009, the District 4 Court of Appeals confronts an issue that frequently arises in shareholder disputes, particularly in smaller companies that have grown significantly, or been otherwise successful: When is a payment a dividend?
In Yates, the company typically paid a year-end bonus to its two shareholders, based on annual profit over a certain amount. Because this payment was based on the company’s profits, and paid based on ownership interest, rather than productivity, contribution, or the desire to retain either shareholder’s services, the payment was a dividend.
The court goes on to discuss the existence and breach of fiduciary duty and the business judgment rule — less interesting, but still a good refresher.
It’s pretty apparent, even from a quick read, that neither of the two shareholders is a model citizen. However, the trial court certainly found one more convincing than the other, which, I think, was the key to both the trial court and appellate court outcome.
