The fourth criterion for arrangements to be reasonable is that
the company has a mechanism in place to deal with dividends that
are in fact paid in respect of an excessive shareholding but are
being withheld pending action by the shareholder. This might happen
if the company has not been notified that a shareholding is
excessive. These arrangements must be designed to prevent the
holder of excessive rights (HoER) becoming beneficially entitled to
the dividend – which would also prevent a HoER from making a
treaty claim in relation to the tax deducted on payment (since
beneficial entitlement is a necessary condition of treaty claims).
The same mechanism could also be used if the company has
reason to believe a shareholding had become excessive but were
awaiting information to prove the point one way or the other, or
where it appeared to them that a certificate to say that rights to
dividends had been transferred was not valid.
One way to achieve this is for the company to put in place
trust arrangements where the excessive shareholder does not dispose
of their rights to dividends, as described below.
The Articles of Association could provide that dividends paid on
shares forming part of an excessive shareholding were to be held on
trust for any person (not themselves a holder of excessive rights
(HoER)) nominated by the shareholder to which the dividend had been
paid. This could include the purchasers of the shares if the HoER
is in the process of selling down their holding so as not to cause
the company to breach the 10% rule. There would also need to be
default arrangements where no nomination was held, for example in
favour of the company.
It is possible that the recipient of the dividend may not
know that the shares in respect of which the dividend was paid were
part of an excessive shareholding and may pass it on to some other
person (for example if the shareholder is a nominee with no
knowledge of the total interests of the underlying holder). It
would be acceptable for the Articles of Association to provide that
in these circumstances the shareholder should have no liability for
having passed on the dividend. The ultimate recipient, if a HoER,
is likely to receive the dividend as constructive trustee, subject
to the trust set out in the Articles, so the objective set out
above would still be satisfied.
