Viewpoint | Illegal Dividend Distribution – The Legal Red Line Behind Shareholder Equity
Published:
2025-06-14
In business operations, profit distribution (dividends) is the core way for shareholders to realize return on investment. However, not all "dividend distribution" behaviors are legal. Illegal dividend distribution may not only lead to civil recovery and administrative penalties, but also trigger criminal liability, and will severely damage the company's solvency and market credit.
Introduction: In corporate operations, profit distribution (dividends) is the core way for shareholders to realize investment returns. However, not all "dividend" actions are legal. Illegal dividends may not only lead to civil compensation, administrative penalties, and even criminal liability, but also seriously damage the company's debt repayment ability and market credit.
I. What is "illegal dividend distribution"?
Illegal dividend distribution refers to the act of a company distributing profits to shareholders in violation of statutory distribution conditions or procedures. Its essence is to infringe on the company's capital maintenance principle ，and undermine the creditor protection mechanism. The core illegal situations include:
1. Violation of substantive conditions: distribution without profit
Legal bottom line: The company must make up for losses and extract statutory reserve fund afterwards, using after-tax profits as the basis for distribution.
Typical illegal scenarios: Fabricating profits or financial fraud for dividend distribution; distributing without making up for previous year's losses; failing to extract the statutory reserve fund (10% of profits, can be stopped after reaching 50% of registered capital).
2. Violation of procedural conditions: Decision-making deviation
Prioritization of shareholder meeting resolutions: Deliberating and approving profit distribution plans is one of the statutory powers of the shareholder meeting.
Typical illegal operations: Private distribution by major shareholders without a resolution procedure; defects in the resolution procedure (such as failure to notify minority shareholders).
3. Restrictions on special entities: Dividend distribution despite insolvency
If the company has overdue debts that cannot be repaid, or if the distribution of dividends leads to the inability to repay debts, this act can be revoked and property can be recovered.
II. Legal consequences of illegal dividend distribution
1. Article 211 of the Company Law stipulates: "If a company violates the provisions of this law to distribute profits to shareholders, the shareholders shall return the profits distributed in violation of the regulations return the company; if it causes losses to the company, the shareholders and those responsible directors, supervisors, and senior management personnel shall bear the liability for compensation".
(1) Correct understanding of "violation of the provisions of this law": This indicates that the illegal dividend resolution is illegal. According to Article 25 of the Company Law, "the resolutions of the company's shareholders' meeting and board of directors that violate laws and administrative regulations are invalid", therefore, the illegal dividend resolution should be deemed invalid.
(2) Legal basis for return: In China, the legal basis for company shareholders receiving profits is the right to dividends and the specific dividend resolution, and the substantive rules for company dividends are that profits cannot be distributed to shareholders before losses are made up and statutory reserve funds are extracted. This indicates that the exercise of the right to dividends is limited to legally distributable profits. If the dividend resolution is invalid due to illegality, the dividend profits received by the shareholders lose their legal basis, constituting unjust enrichment, and the shareholders should return them to the company.
(3) Defining "causing losses to the company": After company shareholders receive dividend profits based on the dividend resolution, if the right to dividends is lost and the dividend resolution is deemed invalid, the shareholders should return the distributed profits. If all shareholders can return the illegally distributed profits to the company in full, the company generally does not suffer actual losses. However, if shareholders are unable to return the profits, it will cause losses to the company, and causing losses to the company is also one of the requirements for establishing liability for damages.
(4) Scope of subjects bearing compensation liability:
① "Shareholders": First, it can be clearly stated that the shareholders here cannot be directly equated with all shareholders, and a distinction needs to be made. This article believes that classification should be made based on the specific role of shareholders in the company's governance process in terms of decision-making, control, and influence, and at least the shareholders who played a role similar to that of a "principal offender" in the specific process of illegal dividend resolutions and subsequent illegal profit distribution should be considered. Secondly, in the practice of corporate governance, the control of the company is often long-term held by some shareholders, and the will of controlling shareholders plays a decisive role in the deliberation of motions. Therefore, for shareholders who cannot return the dividend payment and shareholders who play an assisting role, the influence and role played in company decision-making should be carefully considered and further judgment should be made.
② "Directors, supervisors, and senior management personnel who bear responsibility": As analyzed above, "those who bear responsibility" here does not refer to all directors, supervisors, and senior management personnel. On the one hand, from the perspective of attribution, it should be understood that the directors, supervisors, and senior management personnel who bear responsibility have subjective fault, which is a determination applicable to fault attribution, and at least the principle of attribution of general fault should be applied. Whether fault presumption can be applied should be analyzed on a case-by-case basis. On the other hand, from fiduciary duty From the perspective of analysis, in the context of illegal dividend distribution, the management generally first prepares the distribution plan and submits it to the board of directors for improvement. After the board of directors forms a motion, it is submitted to the shareholders' meeting for resolution. After the shareholders' meeting passes the resolution, it is handed over to the board of directors for execution, and the board of directors then entrusts the management to implement the specific dividend arrangements. At the same time, the supervisory board or audit committee has the responsibility of supervision in the above process. It can be seen that in this situation, it is difficult to avoid the negligence of directors, supervisors, and senior management. This is also a situation where directors, supervisors, and senior management violate their fiduciary duties. The fiduciary duty of directors, supervisors, and senior management is a core legal system of corporate governance, and fiduciary duty is divided into loyalty duty and diligence duty. Directors, supervisors, and senior management who bear responsibility for violating this duty have no right to claim compensation from shareholders.
2. In addition, illegal dividend distribution may also trigger administrative and criminal accountability:
Administrative liability: (1) Order to correct; (2) Fine of 10,000-100,000 yuan (in case of false reporting of profit distribution).
Criminal liability: Obstruction of liquidation crime : If the company becomes insolvent after dividend distribution and enters bankruptcy, the directly responsible person can be sentenced to a maximum of 5 years in prison.
III. Compliance and remedial paths
1. For enterprises, a safe dividend mechanism should be established to prevent risks from both substantive compliance and procedural compliance.
(1) Substantive compliance: Conduct a verification of the authenticity of the financial statements, and have an independent audit institution issue a profit audit report before dividend distribution, and ensure that assets are still sufficient to cover liabilities after distribution.
(2) Procedural compliance: Standardize decision-making processes. For example, shareholders' meetings should notify all shareholders 15 days in advance; resolutions should specify the amount of distributable profit and the distribution ratio. At the same time, focus on minority shareholder protection: shareholders who vote against the dividend plan may request the company to repurchase their shares, establishing dissenting shareholder appeal channel, etc.
2. Directors' Liability Firewall
It is recommended to retain written objections. For example, if a director votes against an illegal dividend resolution, it should be recorded in writing and exempt from liability. Due diligence obligation: Directors need to carefully review the authenticity of financial reports (refer to (2020)最高法民终479号判决, (2021)京02民终12345号).
3. Creditor Remedies
Post-event relief is the main approach, but creditors can also fully utilize contracts to isolate risks in advance. For example, relevant business contracts can stipulate that the debtor company's profit distribution is restricted until the loan principal and interest are repaid or collateral is obtained, or require the profit distribution plan to be approved by creditors.
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