Legal Definitions - passed dividend

A passed dividend occurs when a company's board of directors decides not to declare or pay a dividend to its shareholders for a specific period, even if it has paid dividends in the past or was expected to do so. This decision means that shareholders will not receive a distribution of the company's profits for that particular quarter or year. Companies typically pass dividends due to financial challenges, a need to conserve cash for reinvestment, or to strengthen their financial position during uncertain economic times.

Here are some examples illustrating a passed dividend:

• Example 1: Financial Difficulties

  Scenario: "MediCare Innovations Inc.," a publicly traded pharmaceutical company, experiences unexpected setbacks in its clinical trials for a new drug, leading to significant research and development costs and a substantial drop in projected revenue. As a result, the company reports a net loss for the fiscal year.

  Explanation: The board of directors at MediCare Innovations Inc., after reviewing the company's dire financial situation, decides to announce that they will not be issuing the usual annual dividend to shareholders. They state that conserving cash is critical for the company's operational stability and to fund ongoing research. This decision by MediCare Innovations Inc. constitutes a passed dividend, as they chose not to distribute profits (which were non-existent in this case) to shareholders for that period.

• Example 2: Strategic Reinvestment for Growth

  Scenario: "FutureTech Solutions," a rapidly expanding software development firm, has consistently paid a modest quarterly dividend to its investors. However, the company identifies a groundbreaking opportunity to acquire a smaller competitor with proprietary artificial intelligence technology, which could significantly enhance FutureTech's market position and product offerings.

  Explanation: To fund this strategic acquisition and the subsequent integration and expansion, FutureTech Solutions' board votes to suspend the dividend payment for the upcoming two quarters. They communicate to shareholders that the capital saved will be directly invested in the acquisition, which they believe will generate greater long-term value and higher returns. This action is a passed dividend, as the company prioritized reinvestment into a strategic growth initiative over immediate shareholder distribution for that period.

• Example 3: Economic Uncertainty and Cash Conservation

  Scenario: "Oceanic Cruises Ltd.," a major player in the travel and leisure industry, operates in a sector highly sensitive to global economic conditions and public health concerns. Forecasters predict a significant downturn in consumer spending on discretionary travel due to rising inflation and geopolitical instability.

  Explanation: Anticipating potential revenue declines and increased operational expenses due to fluctuating fuel prices and reduced bookings, Oceanic Cruises Ltd.'s board of directors decides to temporarily halt its quarterly dividend payments. Their rationale is to build up a stronger cash reserve to navigate the anticipated economic headwinds, maintain liquidity, and ensure the company's resilience. By withholding the expected dividend payment, Oceanic Cruises Ltd. has passed its dividend for the foreseeable future to safeguard its financial health.