Conditions and Tests: maximum shareholding: reasonable steps: dividends paid in respect of excessive shareholdings
The fourth criterion for arrangements to be reasonable is that the company has amechanism in place to deal with dividends that are in fact paid in respect of an excessiveshareholding but are being withheld pending action by the shareholder. This might happenif the company has not been notified that a shareholding is excessive. These arrangementsmust be designed to prevent the holder of excessive rights (HoER) becoming beneficiallyentitled to the dividend which would also prevent a HoER from making a treaty claimin relation to the tax deducted on payment (since beneficial entitlement is a necessarycondition of treaty claims).
The same mechanism could also be used if the company has reason to believe a shareholdinghad become excessive but were awaiting information to prove the point one way or theother, or where it appeared to them that a certificate to say that rights to dividends hadbeen transferred was not valid.
One way to achieve this is for the company to put in place trust arrangements where theexcessive shareholder does not dispose of their rights to dividends, as described below.
Trust arrangements for retaining dividends
The Articles of Association could provide that dividends paid on shares forming part ofan excessive shareholding were to be held on trust for any person (not themselves a holderof excessive rights (HoER)) nominated by the shareholder to which the dividend had beenpaid. This could include the purchasers of the shares if the HoER is in the process ofselling down their holding so as not to cause the company to breach the 10% rule. Therewould also need to be default arrangements where no nomination was held, for example infavour of the company.
It is possible that the recipient of the dividend may not know that the shares in respectof which the dividend was paid were part of an excessive shareholding and may pass it onto some other person (for example if the shareholder is a nominee with no knowledge of thetotal interests of the underlying holder). It would be acceptable for the Articles ofAssociation to provide that in these circumstances the shareholder should have noliability for having passed on the dividend. The ultimate recipient, if a HoER, is likelyto receive the dividend as constructive trustee, subject to the trust set out in theArticles, so the objective set out above would still be satisfied.