Background

This principle has been illustrated in the recent case of Re CF Booth Limited which concerned one of Europe's largest metal recycling businesses. The origins of CF Booth Limited date back to 1920 and it has since been an owner/operated family business, although the minority shareholder members of the family did not have an active role in the Company.

The Basis of the Petition

Broadly, the minority shareholders' complaint was that the majority shareholder Directors took excessive remuneration from the Company whilst causing the Company to pursue a policy of not paying dividends. The prejudice argued was the non-receipt of dividend income and the negative impact on the capital value of their shares resulting from the unfair remuneration and "no dividend" policy. It was alleged that the policy was pursued, in part, to devalue the shares to allow the majority shareholders to acquire the minority shareholding cheaply.

Evidence of Excessive Remuneration

Excessive remuneration taken by the majority shareholder Directors was evidenced by salaries increasing from £275,000 a year in 2005 to an average of £1.5M in 2015; on top of which the majority shareholder Directors also had the benefit of a fleet of Company owned luxury cars and a yacht. All the while, the Company remained profitable (other than three years in which it had made a loss since 1986) but no dividends were declared. The majority shareholders argued that the "no dividend" policy was necessary to retain profits for reinvestment. The Court was not persuaded that such a decision was made in good faith to promote the interests of the Company for the benefit of all of its shareholders as a whole.

Delay by the Petitioners - Limitation

The complaints, whilst ongoing, were historic and dated back some thirty years. The Court noted that there is no limitation period for unfair prejudice petitions but the courts will not allow stale claims. The Judge pointed out that if the Company had brought proceedings against the directors to reclaim excessive remuneration the claim would not have been allowed to go back more than six years before proceedings were brought. However, the Judge decided that the minority shareholders had not accepted their fate or provided their implicit agreement to the policy (which may have acted as a barrier to their bringing the claim). In short, the fact that the petitioners chose to do nothing for several years did not mean that it was inequitable for them to complain about the failure to declare dividends in the six years leading to the issue of this petition.

The Outcome

The Judge was persuaded that there had been unfairly prejudicial conduct and ordered the majority shareholders to purchase the minority shareholders' shares at fair value. To decide fair value the Court required the Company's balance sheets to be amended to take account of the excessive remuneration, so as to value the shares as if the remuneration had not been excessive. However the Court limited the re-balancing exercise to the period of the six years before legal proceedings were issued because it considered that that any right to a remedy beyond that period was stale.

Comment

Two main points arise from the case are:

  • The payment of excessive Directors' remuneration may well be unfairly prejudicial to the minority shareholder(s).
  • Although there is no specific limitation period for bringing an unfair prejudice petition, and the threshold to establish that a petition is stale (therefore preventing it being brought) is high, the Courts may prefer to limit the remedy by analogy to a six year limitation period. Therefore, an unfair prejudice petition should be pursued promptly because, even if it is decided that delay in bringing the petition is not fatal to the right to bring the petition, delay may significantly decrease the value of any remedy available to the minority shareholder(s).