New restrictions on paying out dividends and bonus payments for management when taking up financial state aid due to Covid-19
The COVID-19 outbreak is having a major impact on the global economy and the financial and business performance of market participants. Over the last few weeks there have been several discussions about a possible implementation of a statutory prohibition to distribute dividends to shareholders or bonuses to management in cases where companies have drawn down governmental financial support from the Covid-19 emergency program. On 8 April 2020, the Austrian Ministry of Finance passed a regulation (Verordnung) implementing guidelines for granting financial measures which are intended to support companies that have incurred financial difficulties as a result of the COVID-19 outbreak in maintaining their liquidity (the Guidelines). Section 12 of the Guidelines provides a number of obligations an applying company (the Applicant) must submit to before it may receive a subsidy.
Among others, the Applicant has to commit to certain restrictions on the payment of dividends and salaries (in particular bonuses).
Restrictions on dividend distributions and payment of salaries
Section 12.1.6 of the Guidelines states that companies requesting financial support measures, such as (i) direct subsidies and repayable advances, (ii) assumptions of or guarantees for liabilities of a company, or (iii) direct loans from the newly established governmental COVID Financing Agency, COFAG, must commit to COFAG
- to refrain from paying out any dividend between 16 March 2020 and 16 March 2021 and to follow an economically appropriate dividend policy after 16 March 2021 until the end of the term of the financial support measure;
- not to release any reserves to increase the balance sheet profit;
- not to use the liquidity provided by the financial support measures to (i) distribute dividends, (ii) repurchase own shares and (iii) pay bonuses to members of the management board.
Pursuant to section 12.1.5 of the Guidelines the Applicant further has to commit that it shall – to the extent legally possible – not pay out any inappropriate remuneration, elements of remuneration or other inappropriate benefits to its shareholders, employees, managers, board members or agents. In particular, the company must commit not to pay out any bonuses to board members or managing directors for the current financial year that exceed 50% of the bonuses of the preceding year. This limitation in relation to the bonus amounts for board members and managing directors relates to bonuses granted for the financial year in which support measures are being requested from COFAG; any bonus payments being made during the current financial year which relate to periods prior to the current financial year and which are only paid in the current financial year, are not subject to this limitation.
Which companies are affected by these rules?
Companies which have not drawn any Covid-19 support from a governmental agency are, of course, not affected by the new regulation. However, these companies should take already existing restrictions into account (e.g. section 82 paragraph 5 of the Law on Limited Liability Companies (GmbhG) which restricts the payment of dividends in case substantial and not only temporary losses are being generated after the balance sheet date but before the resolution on the annual financial statements).
As the current wording of the Guidelines is limited to specific financial support handed out by COFAG and does not include the implementation of short-time work (Kurzarbeit), subsidies or other financial payments received in connection with the recently implemented "Corona Short-Time Work" scheme (Corona-Kurzarbeit) will not trigger the restrictions on dividend distributions and payment of salaries.
What is the legal nature of the Guidelines and who would be liable in case of a breach?
The Guidelines are not automatically applicable to companies. Rather the Guidelines are addressed to COFAG. COFAG then needs to ensure that the agreements between COFAG and the respective Applicant includes the commitments set out in the Guidelines.
While a breach of the commitments by the Applicant will constitute a breach of the agreement with COFAG, the extent of the consequences of such breach are yet to be determined. Continuing practice will tell how COFAG will approach this topic. COFAG may foresee a variety of remedies in its standard agreements ranging from repayment of only such part of the subsidies which have been paid out in violation of the commitments to terminating the entire agreement and reclaiming the entire subsidy. In due course, the government is set to issue a decree (Erlass) which may include further details on this.
While the Applicant is the primary counterparty of COFAG, another interesting question in this regard is whether COFAG may also be able to claim damages from recipients of payments made in breach of such commitments. There are several civil and corporate law provisions which COFAG may be able to rely on by way of analogy to try to reclaim such payments by way of damages. In case of dividends, for example, an analogy to section 82 paragraph 5 of the Law on Limited Liability Companies (GmbHG) might be used to argue that a payment of dividends occurred in breach of management’s fiduciary duties. Also, recipients of payments in breach of commitments to COFAG (e.g. shareholders, management) who are aware that a company has received financial aid from COFAG might face the risk that COFAG may try to reclaim payments made to them.
How does employment law interlink with the Guidelines?
It will need to be assessed from an employment law perspective how the Guidelines will affect individual bonus agreements and to what extent the regulation can actually impact such agreements as a unilateral deviation from existing agreements is generally not possible. Any potential impact will most likely depend not only on the scope of the agreement with COFAG, but also on the wording of individual bonus agreements and/or remuneration agreements, in particular whether such agreements provide for certain revocation rights of the employer, whether bonus payments are generally made in the sole discretion of the employer and without any obligation to commit to any future payments etc.
Against this background, it will be highly recommendable that employers who apply for financial subsidies from COFAG thoroughly assess their employees' or management's bonus or remuneration agreements in order to determine any impact on their application to COFAG.
Several details in connection with the new Guidelines remain open. For example it is hard to imagine how to assess whether a company has complied with its obligation not to use the liquidity provided by the financial support measures to pay bonuses to members of the management board as money is fungible and most of the times it will be impossible to determine whether specific liquidity has been generated by the company or granted through a subsidy by COFAG.
Our cross-practice Covid-19 specialist team is available anytime if you want to discuss any of the issues, require more information on certain topics and/or require immediate assistance.