Under the Commercial Law, dividends are paid to shareholders in proportion to the total nominal value of the shares held by them, unless the company’s Articles of Association provide for a different dividend distribution procedure. Accordingly, the Articles of Association may also provide for a disproportionate distribution of dividends, including by establishing different dividend rights for different classes of shares.
Disproportionate dividend distribution mechanisms are commonly used in employee share option programmes, as well as in situations where shareholders have agreed on different investment terms or specific economic rights. We will therefore look at how such a dividend distribution mechanism can be properly reflected in a company’s Articles of Association from a legal perspective.
Although the possibility of providing for a different dividend distribution procedure in a company’s Articles of Association is not new, it has not always been clear how detailed the Articles of Association should be when setting out a disproportionate dividend distribution mechanism.
On 17 August 2026, the Register of Enterprises published guidance on how disproportionate dividend distribution procedure should be reflected in the Articles of Association. The key practical takeaway is that it is not sufficient merely to provide in the Articles of Association that dividends may be distributed disproportionately. The Articles of Association must set out a dividend distribution procedure that makes it possible to determine the principles, criteria or methods according to which dividends are to be distributed.
What does this mean in practice?
1. The dividend distribution procedure cannot be left solely to the discretion of the General meeting
Although the Commercial Law provides that dividends are determined by a decision of the General meeting, this does not mean that the shareholders may also be left to determine the underlying principles for the distribution of dividends on a case-to-case basis.
For example, it would not be sufficient to provide in the Articles of Association that the holders of Class A shares decide each year what proportion of the distributable profit is to be allocated to the holders of Class B shares. In such case, the Articles of Association would not actually establish a dividend distribution procedure – as the mechanism would effectively be determined afresh by the shareholders each time. This position would remain the same even if the Articles of Association provided that such decision must be adopted unanimously.
2. A shareholders’ agreement cannot replace the provisions in the Articles of Association
Setting out the dividend distribution procedure in a shareholders’ agreement or another document is, by itself, not sufficient.
For example, a provision in the Articles of Association stating that “dividends payable to the holders of Class B shares shall be determined in accordance with the shareholders’ agreement” does not resolve the issue, as it would still not be possible to determine from the Articles of Association themselves the principle according to which dividends are to be distributed.
This, of course, does not prevent the shareholders from regulating their mutual arrangements in detail in a shareholders’ agreement. However, where an agreement concerns the actual mechanism for the disproportionate distribution of dividends, the relevant provisions must also be reflected in the Articles of Association.
3. The mechanism for disproportionate dividend distribution may take different forms
A disproportionate distribution of dividends does not mean that the Articles of Association must necessarily contain a complex mathematical formula. The chosen mechanism may be relatively simple.
For example, the Articles of Association may provide that holders of Class A shares are entitled to 70% and holders of Class B shares to 30% of the distributable profit as available for dividends, regardless of the respective proportion of the shares of each class.
A more complex mechanism is also possible, linking the amount of dividends to specific criteria or parameters set out in the Articles of Association. In such case, it is particularly important to formulate those criteria sufficiently clearly enough so that the agreed dividend distribution procedure can be applied in practice without the parties having to reach a new agreement on its substance each time.
At the same time, it should be borne in mind that when reviewing the Articles of Association, the Register of Enterprises does not assess the economic rationale of the chosen mechanism or whether the criteria selected by the shareholders are objective or whether the formula is economically appropriate. Accordingly, the registration of a new version of the Articles of Association does not, in itself, mean that the chosen mechanism will be suitable for the particular company and its shareholders. The shareholders themselves remain responsible for the substance of the chosen mechanism and its practical application.
4. Different classes of shares should reflect genuine differences in shareholders’ dividend rights
A disproportionate distribution of dividends is often linked to the creation of different classes of shares. However, the existence of different classes of shares does not, in itself, mean that each class must necessarily carry different dividend rights.
Different classes of shares may also differ in other rights attached to the shares, such as voting rights or rights to a liquidation quota. However, where Class A and Class B shares are intended to be distinguished specifically by reference to their dividend rights, that difference should also be reflected in the dividend distribution procedure set out in the Articles of Association. Otherwise, where several classes of shares carry an identical scope of rights both in respect of dividends and in respect of other rights attached to the shares, a question arises as to the legal significance of distinguishing those shares into separate classes in the first place.
What should be checked in existing Articles of Association?
Companies whose Articles of Association already provide for a disproportionate distribution of dividends should consider checking not only whether the Articles of Association formally contain a reference to such possibility, but also whether the prescribed procedure can be actually applied in practice and whether the mechanism is consistent with the current practice of the Register of Enterprises and the interpretation of the relevant provisions of the Commercial Law.
This is particularly important when planning amendments to other provisions of the Articles of Association. When a new version of the Articles of Association is submitted to the Register of Enterprises for registration, the Register’s review covers not only the provisions that are specifically being amended, but also other provisions included in the new version of the Articles of Association (including provisions on dividend distribution) that are not being amended at that time. Therefore, if such provisions do not comply with the requirements of applicable laws and regulations or with the current practice of the Register of Enterprises, registration of the proposed amendments to the Articles of Association may be deferred until the deficiencies are remedied – even if the amendments initially planned by the company are entirely unrelated to dividend distribution.
Article authored by Marija Majore and Gatis Flinters, Co-Heads of the Corporate Practice Group.
