Question about dividends and being a shareholder - please advise

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My ex-partner and I co-own a business. I own 49% and he owns 51%.

We separated 18 months ago and, for a number of reasons - including him spending so much money since that I couldn't take my share out of the business without it going under - it is taking a long time to divide our finances. We're now getting closer to resolving this, but have stumbled on a particular point.

We agreed to split the balance sheet value as at the time we separated, 49:51. We also agreed to add "good will" to the value of my shares, plus half of net profits since, and for the business (in effect my ex) to buy me out.

I continued to receive dividends over the last 18 months, as we tried to agree a way forward.

My ex's most recent calculations deduct my dividends since our separation from my 49% of the balance sheet value at the time we separated - reducing my overall investment by about a quarter. I had no idea that, according to him, I have effectively been living off my capital for the past 18 months; I thought I was living off the return of my continuing investment. He says it is quite right that my dividends have eroded my half of the balance sheet value because taking money out of a business reduces its value. Several of my friends have suggested otherwise: that dividends are effectively a reward paid for your investment - they do not erode your investment. For as long as someone is a shareholder, they own their original share (which fluctuates in value), and are paid dividends for having - not from - this share. My ex refuses to entertain this reasoning.

I'm confused. Who's right?

Thanks.

I would have thought that dividends shold be paid from profits not from the business capital. If there are no profits then dividends should not be paid.

I'm no expert, hopefully someone more knowledgable will answer.

He is wrong. If you have been receiving dividends then he can't just wipe out your shareholding to pay for this.

Thanks, trixymalixy. I think you're right. Perhaps the problem lies in my ex spending such a lot of money last year (which required him to pay himself, and in turn me, dividends), during one of the business's least profitable years. Really, we shouldn't have been paid much at all last year, since there were so few profits. Because hefty dividends were paid nonetheless, it could be that these had to come out of capital.

(He is the Managing Director, BTW. I've been a SAHM.)

Thanks, AxisofEvil.

He spent a lot last year (personally), and took his eye off the ball. Late summer, I said, look, where is the business at? What are the figures? I want my share. He didn't really know, and was surprised to find - when he'd done a bit of digging in the accounts - that the business hadn't been doing very well, and he'd been doing more spending than managing. Hence me being told that, if I wanted my money out then, the business would go under and staff would lose their jobs. I didn't want that responsibility.

My ex has since turned the business around, which he has been able to do because my share remained in the business. It is now profitable again.

He shouldn't have paid out such big dividends (I have been paid way more than I need, which has incurred a massive tax bill). I assumed that he was paying us dividends from profit. There was next to no profit last year.

This is starting to make sense. Thanks.

Hmm, you really need to go and see a business law specialist solicitor to go through this in detail. If there aren't distributable profits then the company can't pay dividends.

Hmm. Thanks, AxisofEvil.

There were distributable profits made before last year. These profits partly made up what the business was worth, in balance sheet terms, when my ex and I separated. However, last year the business made a slight loss overall - something my ex didn't realise until the end of the business's financial year. Nonetheless, massive dividends were paid throughout this time.

Unaware that the business was making a loss, I assumed the dividends I was being paid were additional to the earlier balance sheet value we had agreed to split; additional, newly made profits. I didn't think I was effectively being paid off, and living off my capital.

Really, I need to know if I have a case for pressing for my half of the business (in balance-sheet-plus-goodwill terms) without my dividends of the past 18 months being deducted from this figure. It's more than a bit puzzling. A business law specialist could be the way to go.

Thanks again.

I think there could be a bit of truth in what your ex has said. You are correct that dividends are a payment of profits and result from your underlying capital (ie shares held in the business) but I imagine that like most Limited companies you actually only hold around 49 shares at £1. So your shares par vaule ie the amount of the underlying share is £1 each.

If you are valueing the company based on the balance sheet value plus goodwill then the balance sheet is made up of your original share capital say £100 plus the distributable profits of the company ie the profits generated by the business less the dividends taken over the period. So if the company made a loss last year BUT you took dividends the balance sheet value of the company would have fallen and therefore you would be entitled to less.

HOWEVER you do need to see specialist as this is not the normal method of valuing a company. The most common way is using what is called a p/e ratio and this is calculating the potential earning of the company. This takes into account the fact that your ex has been withdrawing excessive amounts and also that the business has turned round and that the there is more potential moving forward.

Sorry to have gone on but as you have experienced this is a complex area. Have you also thought about the tax aspects?

Good luck

(ps I am a Chartered Accountant and value business regularly)

Thanks, zippys. That's a really useful post. You are right - the way he's looking at it does make sense, too. I feel angry that he paid out such hefty dividends when the business wasn't actually making money, though. He wanted to spend a lot, so 'had' to pay me corresponding dividends. I just assumed this was from newly made profits, IYSWIM - not eroding what was sat in the business. As I said earlier, I don't have the best head for business - hand-holding is necessary!

You sound like you know your stuff and may have the kind of expertise I need. Can I CAT you? (Will try in a mo.) Can we talk off MN about this? Happy to pay you for an initial chat. (I'm about this evening and on-and-off over the weekend while DS is with his dad.)

Thanks again.

Dividends aren't a "reward" for your investment, they are a share of the distributable profits of the business which you are entitled to as an owner of the business if a dividend is declared.

It will all depend on what you agreed in terms of how the amounts were to be calculated. I can't see how dividends can be automatically deducted from your 49% of the balance sheet value unless you specifically agreed to it - you are entitled to be paid dividends for so long as you remain a shareholder. However if the balance sheet value of which you're getting 49% somehow included the amount which was later paid to you in dividends (e.g. on the date you valued it was sat there as net profit but it was subsequently paid out in dividends) your ex may have an argument that he shouldn't have to pay that to you twice.

If you're talking about a significant amount of money you need to see a solicitor (not an accountant) and get their opinion on exactly what you agreed with your ex (assuming you have something in writing to show them).

Hi sorry for the late response I have been away over the weekend. I would be more than happy to chat but I think that LSEE is correct you would be better off seeing a solicitor who would then bring an accountant in as the legal side needs to be looked at as a priority.

Let me know if you need anymore help

Fair point about the 'reward' bit, LSEE. As I think I said earlier, I'm not as business-minded as I could do with being in this situation (hence this post!), and I'm sure am not phrasing this 'properly'.

Thanks, LSEE and zippys.