Apr 2025
As Hong Kong listed Bermuda and Cayman Islands exempted companies approach their annual results season, many may be considering paying their shareholders a dividend, whether due to a profitable financial year or as a gesture of gratitude towards the loyalty of their shareholders.
One reserve that Bermuda and Cayman companies can use to pay such a dividend is the amount credited to their share premium account as a result of having issued shares at greater than their par value. Such amounts can, over time, become substantial and are a way of unlocking shareholder value in the company.
Whilst the procedures in either case are relatively straightforward, it pays to bear in mind the relevant laws in Bermuda and Cayman on the use of share premium, which require quite separate approvals to be obtained and processes to be followed.
Bermuda
Share premium account is treated as paid-up share capital of a company under the Bermuda Companies Act. Section 40 of the Act restricts the use of the share premium account to:
- pay up unissued shares of the company to shareholders as fully paid bonus shares;
- write off preliminary expenses of the company (e.g. incorporation costs etc.) or expenses, commission or discount on any issue of shares or debentures of the company; or
- pay any premiums on redemption of any shares or of any debentures of the company.
As can be seen, payment of dividends is not a usage permitted under section 40 and, as such, the company cannot directly pay a dividend out of its share premium account.
Instead, the common approach would be for the company to reduce its share premium account in the manner required under the Companies Act. This requires, among other things, relevant board and shareholder approvals, declaration of solvency by a director, and filings to the Bermuda Registrar of Companies. After the reduction, any credit arising from the reduction would usually be transferred to the company’s contributed surplus account which is distributable under the Bermuda Companies Act and can then be used to pay dividends.
Cayman Islands
On the other hand, share premium is not treated as paid up share capital of the company under the Cayman Companies Act1. The Act very helpfully provides that the share premium account may be applied by the company to pay distributions or dividends to shareholders.
As such, payment of a dividend directly out of share premium is therefore possible for a Cayman company.
Any such payment is subject to the directors confirming that the company satisfies the statutory solvency test: that immediately following the date on which the distribution or dividend is proposed to be paid, the company shall be able to pay its debts as they fall due in the ordinary course of business.
In addition to the statutory procedures outlined above, Bermuda and Cayman companies often have further requirements in their bye-laws/articles which must be fulfilled prior to making a payment of a dividend out of share premium/contributed surplus. A common example would be the prior approval of members to authorise a dividend out of share premium/contributed surplus. Some older companies may require this approval to be passed by way of a special resolution. In all cases, both the requirements in the bye-laws/articles and the steps set out in the respective Companies Act should be complied with.
Tailored professional advice should be sought in respect of individual circumstances. Please reach out to your usual Conyers contact or one of the individuals listed below with any questions regarding the payment of dividends out of share premium or contributed surplus.
1 Except where the company issues shares without nominal or par value