Nihon M&A Center: Interim dividends exceeded legal limits by ¥905m

Both the December 2024 and December 2025 interim dividends exceeded the distributable amount available on their respective payment dates. The combined excess was about ¥905 million, and the third-party committee found the dividends violated the Companies Act.

Both dividends were ¥14 per share. The committee estimated that, if the company had prepared financial statements using Sept. 30 as an interim accounting date and obtained the required audit and approval, it could have paid the 2024 dividend with about ¥8.1 billion in headroom and the 2025 dividend with about ¥6.2 billion. The excess arose because the company did not complete the procedures needed to include profits earned during the fiscal year as a source of dividend funding.

The committee cited the lack of an assigned person to check the distributable amount as a key cause, noting that no one had actually verified it. It also pointed to a gap in dividend controls and shortcomings in board deliberations and audits.

• Review framework: Neither the responsible party nor the procedure for calculating and checking the distributable amount was clearly defined, and the drafting and review steps specified in the authority matrix were not followed.
• Knowledge gap: Many officers and employees did not fully understand that interim financial statements must be prepared and approved to include profits earned during the fiscal year in the dividend funding base.
• Board materials: The interim dividend was not presented as a separate proposal, but was decided through approval of the earnings release. The materials did not show figures from the holding company's standalone balance sheet.
• Audit shortcomings: The Audit and Supervisory Committee and internal audit did not treat the funding or procedures for interim dividends as specific audit items.

Since becoming a holding company, most of its standalone revenue has come from dividends from subsidiaries and management fees. But dividends received from subsidiaries in June cannot immediately be counted as funding for that year's interim dividend. The committee said the belief that consolidated net assets were ample was one reason the company did not check the holding company's standalone distributable amount.

The committee found no evidence that directors knowingly approved dividends in excess of the available amount and concluded they did not face criminal liability. However, it said civil liability could not be ruled out because the directors had failed to check the distributable amount.

• Decision on liability: Given the limited severity of the conduct and its practical impact on stakeholders, steps to prevent a recurrence and current directors' offers to return part of their compensation, the committee said a decision not to sue could not be considered unreasonable.
• Company response: After considering the committee's findings and other factors, the Audit and Supervisory Committee decided not to file a suit seeking to hold directors liable.
• Shareholder response: The company will not seek repayment of dividends already paid and will not ask shareholders to take any procedural steps.
• Voluntary pay returns: Current directors offered to return 10%-30% of their monthly compensation for 1-3 months, depending on their responsibilities. The board accepted the offer.

The committee noted that the chair and a full-time member of the Audit and Supervisory Committee, which decides whether to pursue liability, had also been in office when the dividends were approved. It called on the company to explain the decision-making process and reasons carefully to shareholders. With the company opting against litigation, attention will turn to how it explains that decision and whether its safeguards work in practice.

The company has introduced a process to review dividends as a separate proposal and check the standalone distributable amount. For the interim dividend in the fiscal year ending March 2027, the board confirmed the dividend was within the available amount and voted on it separately from its approval of the earnings release.

• Board materials: Show the standalone distributable amount and how it was calculated, and put dividends forward for separate deliberation and approval.
• Calculation and review: Add steps to the checklist and separate the preparer from the reviewer. The drafting and review process set out in the authority matrix will also be followed.
• Audit and training: Before the board votes, the Audit and Supervisory Committee will check for violations. The company will provide regular training for directors and employees involved in dividends.
• External experts: Seek review by outside experts when needed in deciding dividends.

The fiscal year ending March 2027 interim dividend was ¥14 per share, for a total of about ¥4.49 billion. The company said the matter would have only a minor impact on consolidated earnings. While it will not seek repayment of past dividends, revising dividend procedures and ensuring effective board oversight and audits remain important to restoring trust.