Capital Structure and Dividend Policy Template (Board Paper)

Capital Structure and Dividend Policy: [Company name]

Board policy and supporting paper on how the company funds itself and returns cash to shareholders: objectives, current capital structure, cost of capital, target leverage range, capital allocation priorities, dividend policy, share buybacks, the legal and contractual tests that every distribution must pass, upstreaming from subsidiaries, governance, stress tests and monitoring. Written as original practice guidance. Distribution tests are based on public law, referenced by section number: UK Companies Act 2006 Part 23 (distributions) and Part 18 (own shares), Delaware General Corporation Law sections 160, 170, 173 and 174, German Limited Liability Companies Act (GmbHG) section 30, and the Vietnam Law on Enterprises No. 59/2020/QH14 as amended. Obtain the law for the normative text and check the consolidated version. Replace every [bracketed] value and every row marked Example. This is a document format, not financial, investment, tax, legal or accounting advice.

Document control

Approvals

Revision history

Contents

1. Purpose, scope and status
2. Objectives and principles
3. Current capital structure
4. Cost of capital
5. Target capital structure and leverage range
6. Capital allocation framework
7. Dividend policy
8. Share buybacks and special distributions
9. Legal and contractual distribution tests
10. Upstreaming cash from subsidiaries
11. Governance, approval and disclosure
12. Stress tests and review triggers
13. Monitoring and reporting
14. Glossary and references

1. Purpose, scope and status

This policy sets how [Company name] decides the mix of equity and debt that funds the group, the order in which it uses cash, and the basis on which it pays dividends and buys back shares. It applies to the parent company and, for upstream dividends and intra-group funding, to every subsidiary.

The policy guides the board; it does not create an obligation to pay any dividend. Each distribution is a separate decision taken when it is proposed, on the facts at that time, after the legal and contractual tests in section 9 and the liquidity tests in section 12. The board may depart from the policy when circumstances require it and will explain any departure to shareholders.

Out of scope: day-to-day cash management and investment of surplus cash (Treasury Policy, finance/treasury-policy), the funding plan and maturity profile (Liquidity and Funding Plan, finance/liquidity-funding-plan) and the appraisal of individual investments (Investment Appraisal, finance/investment-appraisal).

2. Objectives and principles

Principles:

1. Liquidity and solvency come first. No distribution may reduce liquidity below the treasury minimum or leave covenant headroom below the policy limit in the base case or the downside case.
2. Investment in the business ranks ahead of surplus returns, provided each project earns more than the hurdle rate set in section 4.
3. The ordinary dividend is set so that it can be maintained in a reasonable downside; the board prefers to grow it steadily rather than to cut it.
4. Surplus capital is returned rather than held, because idle cash raises the cost of capital and invites value-destroying uses.
5. Decisions are documented with the figures and tests that support them, so that directors can show they acted with care.

3. Current capital structure

Example: Corvid Commerce Group is lightly geared: net debt is about 0.6 times one year's EBITDA and about 5% of enterprise value. The management accounts show net debt excluding leases of EUR 2,000k; the covenant basis adds leases of EUR 8,000k and EUR 1,000k of restricted cash in Vietnam, giving EUR 11,000k. Check: 30,000 + 8,000 - 27,000 = 11,000; 11,000 / 17,800 = 0.62x.

3.1 Maturity and pricing profile

Both facilities were originated on 2025-06-30 with a three-year tenor. They fall within 12 months of maturity on 2027-07-01, after which the revolving facility no longer counts towards the treasury liquidity minimum. The refinancing (a new five-year term loan and revolving facility, to be signed by 2027-06-30) is set out in the Liquidity and Funding Plan (finance/liquidity-funding-plan); the capital structure decisions in this paper assume it is signed on those terms.

4. Cost of capital

Debt here is gross debt including leases at carrying amount; use the same definition in Valuation Report (finance/valuation-report). The hurdle rate for projects is WACC plus a risk premium by project type, set in Investment Appraisal (finance/investment-appraisal). Example: core projects 10%, new markets 13%.

4.1 Effect of higher leverage on WACC

To test whether more debt would lower the cost of capital, unlever the beta at the current debt to equity ratio and relever it at the target. With D/E = 38,000 / 200,000 = 0.190:

At an illustrative target of D/(D+E) = 25% (D/E = 0.333), with the cost of debt rising to 4.5%:

Example conclusion: moving to 25% debt lowers WACC by about 0.02 percentage points, well within the estimation error. For Corvid, the case for more debt rests on funding growth or acquisitions efficiently, not on a lower cost of capital. Many boards reach the same conclusion: the trade-off curve is flat over a wide range, and the cost of financial distress rises quickly beyond it.

5. Target capital structure and leverage range

5.1 Debt capacity

Check: 1.5 x 17,800 = 26,700; 2.0 x 17,800 = 35,600; 2.5 x 17,800 = 44,500; less 11,000 in each case. At 0.62x the group is below its target range. The board's view in the example is that the capacity is held for bolt-on acquisitions in the next two years (section 6), and that a surplus return will be considered if no acquisition is approved by [date].

6. Capital allocation framework

Check: 16,200 - 1,200 - 1,600 = 13,400; 13,400 - 12,000 - 3,000 = -1,600.

Example: The FY2027 plan uses all cash generated plus EUR 1,600k of opening cash. Budget closing liquidity is EUR 46,400k on the management basis (cash 26,400 plus the undrawn RCF 20,000), or EUR 45,400k excluding the EUR 1,000k of restricted cash. That figure assumes committed facilities are in place at year end: the existing RCF matures on 2028-06-30 and stops counting towards the treasury minimum from 2027-06-30, when less than 12 months remain, so without the refinancing the policy headroom at 2027-12-31 would be 26,400 - 1,000 = EUR 25,400k, below the EUR 35,000k minimum. The dividend recommendation therefore passes the liquidity test only on condition that the refinancing is signed before payment, or that headroom stays above EUR 40,000k at the payment date (Liquidity and Funding Plan, decision DEC-002). The FY2026 final dividend is paid in May 2027, while the existing RCF still counts. No buyback is proposed because discretionary cash after investment and the ordinary dividend is negative.

6.1 Investment criteria

Every organic project and acquisition must meet the return criteria in Investment Appraisal (finance/investment-appraisal), be approved under Delegation of Authority Matrix (finance/delegation-of-authority-matrix) and, above [EUR 1,000k], follow Capex Request (finance/capex-request). Acquisitions must also show the effect on leverage and on the dividend for the next three years.

7. Dividend policy

7.1 Application to this year

7.2 Dividend history

The payout has stayed inside the range for three years while the dividend per share grew in line with earnings. The board should explain in the annual report how this year's recommendation applies the policy and, if it departs from the range, why.

7.3 Points for the board when setting the dividend

Look at cash, not only profit. A business with high working capital growth or heavy investment can report rising profits while consuming cash; check the dividend against free cash flow after investment as well as against underlying profit, and explain any gap.

Think about the shareholder base. Long-term holders who rely on income value a steady dividend, while growth investors may prefer reinvestment or buybacks. Tax treatment of dividends and capital gains differs by country and by type of investor, so the board should ask its brokers or investor relations team which form of return the main holders prefer, without favouring one holder over another.

Treat the dividend as a signal. Markets read a cut as a sign of weakness and an unusually large increase as a sign of confidence. Avoid increases that the downside case cannot sustain, and when a cut is unavoidable, explain the reasons and the path back to the policy range at the same time.

Keep the decision separate from management incentives. Where executive pay depends on earnings per share or total shareholder return, the remuneration committee should check that buybacks and dividend choices are not being driven by the effect on those measures.

8. Share buybacks and special distributions

Conditions for a surplus return (all must hold):

1. Covenant leverage below 1.0x at the last two test dates and expected to stay inside the range after the return.
2. No approved or near-final acquisition that would use the capacity within 12 months.
3. Liquidity after the return at least EUR 35,000k in the base case and above the covenant minimum in the downside case.
4. Distributable reserves of the paying company sufficient after the ordinary dividend (section 9).
5. For buybacks, the share price is below the board's estimate of intrinsic value on the methods in Valuation Report (finance/valuation-report).

In the UK, a company may purchase its own shares only within Part 18 of the Companies Act 2006. A market purchase needs shareholder authority by ordinary resolution that sets the maximum number of shares and the maximum and minimum prices (s.701). Purchases must be funded out of distributable profits or the proceeds of a fresh issue made for the purpose (s.692); only private companies may also purchase out of capital (ss.709 to 723). A buyback is not a "distribution" for Part 23 (s.829(2)), so the s.831 net asset test does not apply to it as such, but the distributable profits used reduce what remains for dividends; test them together. For the American Depositary Shares, also check the US rules that apply to issuer repurchases (for example the safe harbour in Exchange Act Rule 10b-18) with US counsel. In the EU and the UK, buyback programmes can benefit from the safe harbour in Article 5 of the Market Abuse Regulation when its conditions on purpose, disclosure, price and volume are met; check the current conditions before launching a programme. In Delaware, section 160 of the General Corporation Law permits a corporation to purchase its own shares unless its capital is impaired or would become impaired.

9. Legal and contractual distribution tests

9.1 Distributable reserves test (paying company)

Under UK law a distribution made in breach of Part 23 is unlawful; a shareholder who knew or had reasonable grounds to believe it was unlawful must repay it (s.847), and directors who authorised it may be liable to the company. Directors also have general duties, including the duty to promote the success of the company and, where the company is or is likely to become insolvent, to consider the interests of creditors. Record the tests and the evidence in the board minutes.

9.2 Jurisdiction summary (as of 2026-10; check local law)

9.3 Preparing the distribution paper

Prepare a short paper for each distribution decision, separate from the annual policy review. Start with the amount proposed and the policy basis, then present the reserves test on the paying company's individual accounts, the covenant and basket checks, and the liquidity forecast for at least twelve months after payment, with the downside case from section 12. Attach the evidence: the accounts relied on, the latest covenant certificate, the cash flow forecast and confirmation from legal that no default is continuing.

Ask the auditors early if the reserves position is tight, if interim accounts are needed, or if the paying company has had a reorganisation, an intra-group asset transfer or an impairment of an investment in a subsidiary in the year. Each of these can change what counts as realised and distributable, and the analysis takes time.

When the dividend is paid in a currency other than the one in which reserves are measured, test the reserves at a prudent rate and hedge the exposure between declaration and payment in line with the hedging policy. Finally, minute the directors' consideration of each test in specific terms; a minute that only records approval gives little protection if the distribution is later challenged.

10. Upstreaming cash from subsidiaries

Tax on upstream dividends depends on domestic law and the relevant treaty; Head of Tax confirms the rate and any documentation (residence certificates, beneficial ownership) before each payment. Where cash cannot be upstreamed efficiently, consider intra-group loans at arm's length terms (see Transfer Pricing Local File, finance/transfer-pricing-local-file) and record the reason in section 13.

11. Governance, approval and disclosure

The board approves this policy and every distribution. Limits for intra-group dividends and capital injections are in Delegation of Authority Matrix (finance/delegation-of-authority-matrix). Inside information about a dividend change is handled under the group's disclosure procedure until announced.

12. Stress tests and review triggers

A dividend is affordable in a scenario only if it passes all three gates: leverage below the 2.00x dividend basket in the facility agreement (Covenant Compliance Certificate, section 7.3), liquidity at or above the EUR 35,000k treasury minimum after payment, and leverage inside the 2.5x policy ceiling.

Check: 17,800 x 0.70 = 12,460; the shortfall 17,800 - 12,460 = 5,340 is assumed lost in cash within the year, so net debt is 11,000 + 5,340 = 16,340 and 16,340 / 12,460 = 1.31x; after the 3,000 dividend net debt is 19,340 and 19,340 / 12,460 = 1.55x; liquidity is 47,000 - 5,340 = 41,660 before the dividend and 38,660 after it, still above 35,000. The last two rows test the policy range itself: 26,700 / 12,460 = 2.14x; 35,600 / 12,460 = 2.86x.

Example conclusion: even mid-range leverage leaves no dividend capacity after a 30% EBITDA fall, because the facility basket closes at 2.00x long before the 3.00x covenant is reached. The board therefore aims for the lower half of the 1.0x to 2.0x range in normal conditions, moves above 1.5x only for an acquisition with a credible deleveraging plan, and treats the basket, not the covenant, as the binding constraint on the progressive dividend. If a future facility moves the basket level, rerun this table.

Review triggers: leverage outside the range for two consecutive tests; liquidity below the minimum; a covenant headroom alert from the compliance certificate; a proposed acquisition above [EUR 20,000k]; a change in the debt markets that changes pricing by more than [100 basis points]; or a change in tax or company law affecting distributions.

13. Monitoring and reporting

Exceptions are logged with the reason, the approver and the remediation date, and reported to the audit committee.

14. Glossary and references

14.1 Glossary

14.2 References

Standard and licence note

Based on public law referenced by section number: the UK Companies Act 2006 (Parts 18 and 23), the Delaware General Corporation Law (sections 160, 170, 173 and 174), the German GmbHG (section 30), the Vietnam Law on Enterprises No. 59/2020/QH14 and the Market Abuse Regulation (Article 5). The cost of capital and capital allocation sections follow widely taught corporate finance methods described in original words. No statutory text is quoted; obtain the law for the normative text and check the current consolidated version. Corvid Commerce Group and every figure are fictional. This template is original text written for this collection. Template licence: MIT.