Should water and sewage undertakers pay dividend?

Of course, an answer to such a perverse question must be positive.

The customer of our Law Firm, being a minority shareholder of a water undertaker, has had its claim for overruling a resolution on profit distribution secured through suspension of the effectiveness of that resolution.

As water and sewage undertakers that exist as a joint stock company should share their profits with their owners like all other companies.

The dividend is payable provided that the undertaker earns a profit.

The dividend is not payable if:

  1. the undertaker’s statutory capital reserve is less than 1/3 of the joint stock’s share capital;
  2. the undertaker’s financial standing is bad;
  3. the undertaker plans to incur necessary investment expenses which are specified in its documents and cannot be paid from external sources of funding.

Unfortunately, in comparison with other water and sewage undertakers in Poland, Rejonowe Przedsiębiorstwo Wodociągów i Kanalizacji w Tychach S.A. (hereinafter referred to as the “Company” or “RPWiK Tychy”) stands out in a negative way because it has not paid dividends to its owners since the beginning of its operation. Given, for example, a report prepared the Polish Supreme Chamber of Control (NIK) and entitled “Pricing water supply and sewage disposal services” of 2015 concerning 5 largest water undertakers in Poland (Kraków, Wrocław, Poznań, Szczecin and Lublin), profit sharing in the form of a dividend is a standard procedure. Companies in those cities allocated 11.72% of their profit to dividends on the average.

Given open documents of RPWiK Tychy, in 2019 the Company earned a net profit of PLN 815,291.80 and allocated it fully to its statutory capital reserve. In previous years the Company’s profit was as follows: 2018: PLN 2,716,303.92, 2017: PLN 2,459,658.40, 2016: PLN 3,619,328.41 and was also fully allocated to the statutory capital reserve.

Pursuant to Art. 396 § 1 of the Code of Commercial Companies, a joint stock company must hold a statutory capital reserve, which is an element of its equity and is used to cover financial losses, if any. A company must transfer at least 8% of its profit of a given financial year to such a capital until the statutory capital reserve constitutes at least ⅓ of the share capital.

Since the share capital of RPWiK Tychy is PLN 56,581,970.00, the minimum statutory capital reserve should be PLN 18,860.656.7. In turn, the Company’s statutory capital reserve has exceeded a 1/3 of its share capital and in 2020 amounts to PLN 50,541,984.76! And … it was increased again with the profit of 2019 at the expense of minority shareholders, in particular.

It is an “interesting” point that the Company does not share its profit with its owners, but incurs non-deductible expenses all the time.

For example, expenses for sports activities (sponsorship, donations, funding, etc.) amount thousands of zloty, including expenses, for example, for the activity of hockey, football or American football.

The Company is not a municipal company (based on its share book, 262 of shareholders are natural persons and companies that are not municipalities), but it plays a role of a municipal company or even its largest shareholder, i.e., the Municipality of Tychy, in funding physical culture and sport. It is a mysterious issue that the Company shares its money with sports clubs and the Company’s shareholders do not receive any return on their funding. The Company carries out its activities by use of funds invested by the Company’s shareholders, which have the right to expect some return on their investment in the Company.

Thus, the Company’s dividend policy is managed wrongly by municipalities being the Company’s shareholders, whose goals are different than goals of the Company’s minority shareholders.

This means that majority shareholders (municipalities) vote against dividend because the Company achieves their municipal goals. Therefore, the municipalities – shareholders are not interested in the Company paying any dividend because the greatest advantage for them is the Company’s core activity, i.e., supplying water to residents.

However, minority shareholders do not achieve their goals stemming from their own plans on the use of the Company’s income. While the Company’s activity is also financed from their assets. Thus, they have the right to have their basic corporate rights met and the profit distributed. The lack of dividend constitutes an actual harm to the minority shareholders, which, together with the violation of good habits (meaning a respect for reasonable corporate interests of all shareholders), forms the basis for overruling the resolution on profit distribution.

In addition, the Company’s authorities (members of the Board of Directors and the Supervisory Board) receive high remuneration. In 2019, the owners allocated over PLN 1,200,000.00 for that purpose, including PLN 840,000.00 for two members of the Board of Directors, and each representative of the municipality is represented in the Supervisory Board.

Has the shareholder the right to demand that the resolution on profit distribution should be overruled? Of course, and prior to that they had the right to demand that the effectiveness of the resolution should be suspended immediately.

And that was the case.

At the shareholder’s request, the District Court in Katowice secured the shareholder’s claims for overruling the resolution on the distribution of profit of RPWiK Tychy for 2019 and suspended the effectiveness of the resolution, which means that the resolution is not in force.

Therefore, the Company should, as soon as possible, summon the general meeting and pass a fair resolution on profit distribution which will respect rights and interests of minority shareholders. Pursuant to Art. 20 of the Code of Commercial Companies, the Company’s shareholders should be treated identically in the same circumstances. The Company’s sole beneficiaries must not be municipalities, which only implement their own municipal policy. Other shareholders also have the right to have a sharing in the Company’s success.

Common court judicature clearly points out in such cases that the shareholders are harmed and good habits are violated if there is no dividend for shareholders at companies of such a good financial standing like RPWiK in Tychy.

For example, in the judgement of 29.06.2018 (Ref. No. I AGa 471/18, 1883435 Legalis), the Court of Appeal in Katowice pointed out that: “Depriving a shareholder of a right to dividend may be, in turn, considered as contrary to the principle of loyalty, which means an obligation to respect fair corporate interests of all shareholders, if this is not justified by the company’s economic standing and disturbs a balance between the company’s interests and rights of minority shareholders”.


Leszek Paterek, attorney-at-law