The High Court has recently considered whether the payment of excessive remuneration to directors amounted to unfairly prejudicial conduct where the directors chose not to pay dividends to shareholders - Donald Booth, Charles Wilkinson and Jane Compton -v- Clarence Booth and others  WHC 547 (Ch) (Re CF Booth Ltd).
Unfair prejudice petitions
A shareholder in a company may petition the court for relief where the affairs of the company are being conducted in a manner that is unfairly prejudicial to the shareholder’s interests or where an actual or proposed act or omission of the company is or would be so prejudicial (s.994 Companies Act 2006 (Act)).
The unfairly prejudicial conduct must relate to the shareholder’s interest as a shareholder. This may include, amongst other things, exclusion from management, sufficiently serious mismanagement by the directors, failure to pay dividends as a result of excessive remuneration of the directors, diluting the minority’s shareholding or a failure to abide by the articles of association of the company.
The petitioner must show prejudice and unfairness for relief to be granted by the court. Prejudice typically arises if the economic value of the shareholder’s shares has significantly decreased or is put in jeopardy by the conduct of which the complaint is made. Unfairness is assessed objectively looking at the basis upon which the petitioner agreed to become a shareholder in the company.
If the court finds in favour of the petitioner, it has a wide discretion to make any order it considers appropriate to remedy the unfair prejudice. The most usual order requires other members of the company (or the company itself) to purchase the shares of the petitioning shareholder.
Re CF Booth Ltd
CF Booth Ltd (the company) was incorporated in 1949 to carry on the family scrap metal business. Over the years, the company diversified its offering and became one of the largest metal recycling businesses in Europe. The shareholders received substantial dividends until 1985. In 1986, the company suffered a loss and no dividends were declared. Following this bad year, the company returned to profitability but no further dividends were paid and, in 1987, the chairman confirmed his intention never to pay a dividend again (the nodividend policy).
Until 2005, the directors of the company were paid £275,000. This increased to £400,000 in 2015 and to £820,000 in 2016. Between 2007 and 2015, the annual average salary was £1,579,000 and the directors (and their wives) received other perks, such as use of a fleet of luxury motor cars and a yacht.
Donald Booth, Charles Wilkinson and Jane Compton (petitioners) held 27.4% of the company’s shares between them. Clarence Booth and nine others held 65% of the shares and five of them were also directors (directors). The petitioners and respondents were all family members.
The petitioners had been unhappy with the directors’ decision not to pay dividends for many years and, individually, had raised complaints of unfair prejudice previously. In or around 1991, Donald Booth had rejected an offer by the directors to purchase his shareholding. In May 2012, the directors offered to purchase the shares of Charles Wilkinson and Jane Compton for £50,000. However, an accountant instructed by them had valued their shareholders between £843,359 and £1,125,142.
The petitioners claimed that they were being unfairly prejudiced by the directors’ excessive remuneration and the nodividend policy (the Policy). They argued the policy was intended to enable the respondents’ side of the family to acquire their shares at a favourable price, the lack of dividends having a negative effect on value and encouraging them to sell at a lower price.
The respondents argued, amongst other things, that:
(a) there was no money available for distribution because the directors were required to re-invest the profits in the company due to the working capital requirements of the business and the company’s £20 million overdraft
(b) the petition was an abuse of process because the petitioners had failed to follow the transfer provisions set out in the articles of association of the company and had delayed in issuing proceedings. The policy had existed for twenty five years and so the claims were ‘stale’ there being no limitation period under the Act
Was the remuneration paid to the directors excessive?
In assessing remuneration paid to directors, the court will consider ‘whether, applying objective commercial criteria, the remuneration which [the respondent] took was within the bracket that executives carrying the responsibility and discharging the sort of duties that [the respondent] was, would expect to receive’ (Irvine -v- Irvine ). ‘Reasonable remuneration’ will fall within a bracket; there is no single correct figure. In Re CF Booth Ltd, the judge considered evidence provided by the accountant instructed by the petitioners and a paper published by Deloitte LLP on directors’ remuneration. He concluded that the remuneration paid to the directors far exceeded the amount that reasonable directors could have thought fair remuneration for the work they undertook.
Was the policy fair?
Dividend payments are controlled by the board of a company. It is for the directors to decide what part of the profits of the company shall be made available for distribution. Even where there are profits available for distribution, the directors may decide not to recommend a dividend providing their decision is compliant with their duties pursuant to the Act. The respondents argued that:
(a) the board considered dividends more than once a year
(b) the profits were needed for the business (as referenced above)
(c) the purchase of the yacht and luxury cars was for business purposes
The judge found all the above arguments difficult to reconcile with the excessive remuneration paid to the directors. There were profits available for distribution, but they were taken by the directors for themselves. Whilst the directors may have discussed dividends annually, there was only ever going to be one conclusion and that was not to declare a dividend. They had closed their minds to the concept of sharing profits with non-director members. As a consequence and overall, the policy was held to be unfair.
Was there an abuse of process?
Pursuant to the articles, the petitioners were required to sell their shareholding at whatever price the auditors deemed fair. Such price may have reflected the policy. The judge considered that if the petitioners established unfair prejudice in respect of the Policy, the petition could not be an abuse of process.
In respect of the respondents’ arguments that the Policy had existed for 25 years and were thus ‘stale’, the judge accepted that any remedy should be limited to a six year limitation period.
Was there unfair prejudice?
As stated above, in order for an unfair prejudice petition to succeed, there must be both unfairness and prejudice. The judge considered that the directors had not acted in accordance with their statutory duties to:
(a) exercise the power to recommend or not recommend a dividend for the purposes for which the power was conferred (s.171(b) Act)
(b) reach a conclusion regarding the declaration of dividends that they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole (s.172 Act)
(c) to exercise independent judgment (s.173 Act)
As a result of the directors’ actions, the petitioners were denied a return on their investments, the excessive remuneration had impacted negatively on the company’s balance sheet and the directors had taken the petitioners’ share of the profits.
Accordingly, the court upheld the petition and ordered a purchase of the petitioners’ shares. The balance sheet was adjusted to reflect the element of the directors’ remuneration considered to be excessive. Despite the finding of unfair prejudice, a minority discount of one third of the value of the shares was applied to reflect a minority holding in a private company.
It is clear from the judgment that payment of excessive remuneration to directors may be unfairly prejudicial to minority shareholders. Directors of companies need to ensure that remuneration is fair and justified, especially if a company decides not to declare a dividend.
Another interesting point arising from this case is the limitation issue. Whilst delay may not bar an unfair prejudice petition in itself, it may decrease the value of any remedy available and, as such, an unfair prejudice petition should be pursued promptly.