Litigation can sometimes be an expensive and time-consuming process, particularly in the context of shareholders disputes where inevitably emotions can run high and the parties may, initially at-least, want their day in Court.
However, with, some well timed legal advice and expert correspondence an early resolution to a dispute can be achieved.
Our client was a minority shareholder of what had been her father’s company, who had left his shares in the business to both her and her brother. The brother continued to run the company and held 80% of the shares whilst our client held the remaining 20%.
Historically, our client had received a dividend from the company, however in the previous year, her brother had advised her that she would not be receiving a dividend either in that year, or in the future and he wrote to her confirming that this was the case. At the same time, he offered our client £300,000 for her shares.
Our client obtained an independent valuation prepared by an accountant which indicated that the true value of her shareholding was nearer £900,000. Regardless of this valuation, her brother was not prepared to increase his original offer.
Whilst there is no absolute right to a shareholder to receive a dividend from a company, in circumstances such as these where there is a small group of shareholders and historically the minority shareholder has received a dividend, the majority cannot arbitrarily decide to stop the dividend. Only if the payment of the dividend can be justified on commercial grounds would it be safe for the majority to cease the existing arrangement. If, for example, the company did not have sufficient distributable reserves (spare cash available without eating into the company’s capital) then this would provide a commercial justification for not paying.
In this instance there was no such commercial justification. The company had over £500,000 in the bank and our client’s brother had paid himself a generous salary. In all the circumstances, it was extremely difficult for the company to justify not paying a dividend.
In any event, our client’s brother had made it perfectly clear that he did not intend to pay our client a dividend either now or in the future – irrespective of the company’s financial fortunes.
To assist our client we wrote two letters to her brother pointing out the error of his ways. The offer he was prepared to make rose subsequently from £300,000 to over £700,000 in the course of those two letters.
Arguably our client may have been entitled to a higher sum for her shares if she had proceeded to litigation, however she was content with the offer made by her brother and it was accepted.
Our fees for the two letters amounted to a tiny fraction of the increased offer made by our client’s brother for the shares. Which just goes to show that legal advice and assistance at an early stage of a dispute can pay dividends.