Removal of the Dividend per Share Cap under new Regulations as of 1 October 2014
New legislation coming into force on 1 October 2014 aims to have the effect of encouraging social investment whilst continuing to protect community assets. The Community Interest Company (Amendment) Regulations 2014 (the "2014 Regulations") sees the removal of the maximum dividend per share cap (currently 20%) imposed upon community interest companies ("CICs").
The results of a consultation by the Office of the Regulator of CICs (the "Regulator") published on 10 December 2013 found that the complexity of the system in calculating the maximum payments (by firstly calculating the maximum aggregate dividend and then the dividend per share) meant that few CICs have declared dividends correctly, or even at all. Accordingly, the Regulator recommended that the maximum dividend cap should be retained at the current cap of 35% but the dividend per share cap should be removed.
The intention behind having a single aggregate cap is to remove the complexity which CICs have been faced with under the current regime and offer members of CICs a fair dividend reward whilst continuing to protect community assets. Retaining the cap at 35% ensures that 65% of distributable profits are still used for the benefit of the relevant community or reinvested back into the CIC.
The Regulator does not have the power to set a new cap, but the Secretary of State for Business, Innovation and Skills has implemented its recommendations in the 2014 Regulations, which amend the Community Interest Company Regulations 2005. The explanatory note to the 2014 Regulations states that any dividends declared or proposed by CICs on or after 1 October 2014 will be subject to the 2014 Regulations, regardless of when they are paid.
The Regulator has indicated that the reforms are hoped to increase the percentage of CICs which are limited by shares rather than limited by guarantee - over the last eight years, less than 25% of the CIC sector has been companies limited by shares CICs which have currently adopted the limited by shares model will need to consider amending their articles of association to reflect the 2014 Regulations.