Unequal dividend allocations must be set out in company articles

A Latvian company that wants to distribute dividends on a basis other than shareholders' aggregate nominal share values must put the allocation mechanism in its articles of associationUR. The Enterprise Register's explanation makes clear that a general statement permitting unequal dividends does not, by itself, specify an adequate distribution arrangementUR.

The statutory starting point is proportional distribution by the total nominal value of the shares heldUR. Company articles can provide another arrangementUR. The Register says that alternative must be sufficiently clear, understandable and capable of being appliedUR. The practical task for those preparing the articles is to identify how the proposed allocation will actually be determined.

The explanation identifies three approaches that do not meet that requirement. Articles cannot simply allow non-proportional distribution while omitting a mechanismUR. They cannot leave the arrangement to be decided separately at each shareholders' meeting, even if the future decision would require all votes attached to voting share capitalUR. Nor can they merely state that the arrangement appears in another document, such as a shareholders' agreement or board rulesUR.

The Register's accompanying FAQ gives examples of criteria that a company might choose, including a shareholder's contribution to the company's activities or the position they hold. The explanation does not require excessive detail, but the principles, criteria or method of allocation must be understandable from the articles themselvesUR. The shareholders remain responsible for agreeing the arrangement and putting it into practice.

When examining submitted articles, the Register checks whether they contain a dividend-distribution arrangement where shareholders depart from proportional distribution and whether the articles meet legal requirements. It does not examine the arrangement's commercial merits, justification or fairness. The explanation also says it does not verify whether the criteria can objectively determine dividend amounts or whether a formula is free of errors. Registration should therefore not be treated as validation of the company's calculation method.

The legal basis is Komerclikums, Section 161(2)UR, as explained in the Enterprise Register's guidance on non-proportional dividend distribution.