Right to dividends following redemption of shares: Swedish Supreme court case T 7245-23

The Supreme Court examined in case T 7245-23 whether decided dividends for preference shares could still be claimed despite the shares having been redeemed before the record date occurred. A limited liability company whose share are registered in a CSD (central securities depositary) register (the “CSD Company“) decided at a general meeting to distribute quarterly dividends. Before the full distribution was paid out, the CSD Company, in accordance with a redemption provision in the articles of association, redeemed the outstanding preference shares. A former preference shareholder (the “Former Shareholder“), which had acquired the preference shareholders’ rights, argued that the preference shareholder had a simple monetary claim against the CSD Company through the dividend resolution, which was obtained before and independent of the redemption of the preference shares. The CSD Company countered that the claim was contingent on the shareholder being registered in the share register on the record date (which they were not after the redemption).

The Supreme Court began its reasoning by affirming the requirement under Chapter 4, Section 37 of the Swedish Companies Act that a shareholder must be registered in the share register to have exercisable shareholder rights against the company, including the rights to dividends. This provision implies that the right arising from registration in the share register endures as long as the shareholder is registered therein.  This principle is further confirmed by the legitimacy rules in Chapter 4, Sections 39 and 41 of the Swedish Companies Act, according to which a company may, with discharging effect, distribute dividends to the shareholder recorded in the share register and the central securities depository register on the record date.

A fundamental principle of Swedish company law regarding the transfer of shares is that an outstanding dividend claim follows the share. A right to returns after share redemption, as in this case, since there is no valid shareholder to receive the dividend, would thus result in an unjustified deviation from the rules applying to the transfer of shares. Chapter 20 of the Swedish Companies Act contains rules on the reduction of share capital, and of particular interest here, the Supreme Court highlighted Chapter 20, Section 1, Paragraph 2 of the Swedish Companies Act, which allows for the redemption of shares by applying an agreed provision in the articles of association. Consequently, a shareholder can expect that shareholder rights may be invalidated through regulated redemption decisions but, it will be entitled to compensation in return. In this case, the amount was explicitly predetermined in the CSD Company’s articles of association. The Supreme Court ruled that a company’s ability to reduce share capital through law or its articles of association is based on the premise that a shareholder should not, in addition to the right to the redemption amount, be entitled to dividends from a future record date when the share is invalid.

In conclusion, the Supreme Court found that it was in line with, among other things, company law principles that dividends could only be paid for shares that were valid and registered on the record date. This requirement also does not need to be explicitly stated in the articles of association to be applicable. Instead, the Supreme Court emphasized that if any other rule to the contrary is to apply regarding dividends, it must be expressly stated in the articles of association. In this particular case, this meant that the claim arising from the CSD Company’s dividend decision was conditional on the share still being in existence on the record date. Since the CSD Company had redeemed the preference shares prior to the record date, the Former Shareholder was therefore no longer entitled to the dividend.