The Swedish Supreme Court’s judgment on 14 November 2024 in Case No. T 7245-23, ”De inl?sta preferensaktierna” (”The redeemed preference shares”)

SUMMARY

On 14 November 2024, the Swedish Supreme Court issued a judgment in a case between Kapatens R4 AB (“Kapatens”) and Victoriahem AB (“Victoriahem”). The court concluded that a claim based on a company’s decision to issue a dividend is conditioned on the continued existence of the shares on the record day for the dividend payout. In its reasoning, the court referred inter alia to the general principle that someone who seeks to assert rights in relation to shares must be entered into the share register.

Background

Victoriahem, a company registered in the Swedish Central Securities Depository (“a CSD company”), had issued preference shares. At a general meeting of shareholders, the decision was made to issue a dividend to the holders of preference shares, payable on a quarterly basis (“Record dates”). Before all dividends had been paid out, Victoriahem redeemed the preference shares (the “Redemption”), in accordance with a redemption clause in Victoriahem’s articles of association. A dispute subsequently arose concerning whether Victoriahem had an obligation to pay the former shareholders the dividends pertaining to the Record dates that occurred after the date of the Redemption.

The dispute

Kapatens, which acquired the former shareholders’ claims, brought legal action against Victoriahem, alleging that the former shareholders received an ordinary monetary claim for the entire dividend amount through the dividend decision at the general meeting of shareholders. According to Kapatens, the claim was not extinguished by virtue of the Redemption. Kapatens thus asserted that the lack of shareholders and entries in the share register on the Record dates were of no legal significance for the question of whether the former shareholders had a claim. Victoriahem, for its part, submitted that the claim pertaining to dividends is subject to that all conditions for the right to receive dividends are met on each Record date. According to Victoriahem, those conditions consist of – in a CSD company – that the shares have not been redeemed and that the shareholder is recorded in the share register on the record date.

The Supreme Court’s judgment

At the outset of the Supreme Court’s opinion, the court concluded that the current dividend decision instantly gave the former shareholders a claim on Victoriahem, even though the dividends became due for payment on later Record dates. The question before the court concerned the character of the claim; was it unconditional, independent of the shares, its owner and the share register? Alternatively, did the continued existence of the claim require that the shares had not been redeemed and stricken from the share register, when the dividend became due for payment on the subsequent Record dates?

The court noted that, according to chapter 4, section 37 of the Companies Act, a shareholder in a CSD company may not exercise vis-à-vis the company the rights which vest through the shares until he or she is entered in the share register. The court reasoned that this provision of the Companies Act expresses the general principle that someone who seeks to assert rights in relation to shares must be entered into the share register. The court further reasoned that it is inherent in the statutorily prescribed scheme for the redemption of shares, that shareholders must take account of the fact that shares can become invalid through such a process. In return, shareholders are entitled to a redemption amount that is designed to compensate for the loss of future returns once the shares have been redeemed.

The court opined that the statutorily prescribed process for the redemption of shares must be understood such that a shareholder cannot also, apart from his or her right to the redemption amount, enjoy dividends from a future record day, at a time when the shares have become invalid. The court noted that this conclusion is consistent with the corresponding rule for the assignment of shares, which prescribes that a claim based on a dividend, which has not become due for payment by the time of assignment, is an accessory right of the share. The court likewise found support for its reasoning from the scenario when a company purchases its own shares before the record day for a dividend payout. In such a case, a claim based on a prior dividend decision ceases in connection with the acquisition of the shares.

The court concluded that a claim based on a company’s decision to issue a dividend is conditioned on the continued existence of the shares on the record day. The court noted that this rule applies, absent a provision to the contrary in the company’s articles of association. Against this backdrop, the court dismissed Kapatens’s appeal.

It is lastly worth noting that two justices filed a dissenting opinion, concluding that a claim based on a prior dividend decision remains even after the shares have been redeemed, absent a provision to the contrary in the company’s articles of association.