Need help with this corporate finance homework, argh. They keep saying things like "these covenants include provisions about passing dividends", what the heck?
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A "covenant" is a solemn promise to engage in or refrain from a specified action.
Every company must do a balancing act while declaring the dividends in terms of companies interest (can it use the surplus cash to generate more revenue) to shareholders' interests, giving back to them the profits that due.
Many countries have regulations governing as to when and how much the dividends may be given. It also lays out the policy about declaring dividends to protect everyones' interest. For example if the company has a huge suit pending against it, the company is not supposed to distribute the surplus cash as dividends and when the suit goes against it, its left when no money to pay ... or other such examples where the interests of one or the other party is compromised.
The company law board ensures that all this is adhered to in a fair manner.
So essentially "these covenants include provisions about passing dividends", means that due diligence has be exercised by the company in order to arrive at the dividends that are to be paid out.
