A tale of yachts, luxury cars, excessive director remuneration, but no dividends. A recent case is a reminder for shareholder-directors of private companies of the rights and responsibilities attaching to their different roles, and the ability of other shareholders to enforce rights against them.
Directors are subject to duties under both common law and the Companies Act. The key areas in this case were:
- promoting the success of the company for the benefit of its members as a whole;
- exercising independent judgment; and
- exercising reasonable care, skill and diligence.
Shareholders may seek intervention by the court under the Companies Act where a company’s affairs are being, or have been, conducted in a manner that is unfairly prejudicial to the interests of members.
The claim was brought by members holding approximately 27% of the shares, against members holding approximately 65% of the shares, four of whom were also directors. The directors had adopted a policy of not paying dividends over a number of years, including when the company was profitable. Over the same period, the directors had awarded themselves increasingly substantive remuneration packages. The company had also purchased a yacht and luxury cars, which the directors argued were used by them for legitimate purposes in the course of the company’s business.
The shareholders argued that the excessive spending was in breach of the directors’ duties, and that failing to pay dividends was unfairly prejudicial to their interests in that it reduced the value of their shareholding and deprived them of an income stream which should rightfully have been paid to them.
The court found that the directors had breached their duties under the Companies Act in paying excessive remuneration to themselves, whilst at the same time unfairly prejudicing the interests of the minority shareholders in failing to declare dividends. For practical purposes, the court found that the director-shareholders had paid monies and rewards to themselves in their capacity as directors which should actually have been distributed to the members as a whole through the payment of dividends.
The case highlights that shareholder-directors need to ensure that they take into account different factors when acting in their different capacities. When making decisions as a director, an individual is obliged to comply with (amongst others) the duties set out above including acting in the best interests of the company for the benefit of its members as a whole. By contrast, when exercising rights as a shareholder (voting on written resolutions or at general meetings) the shareholders can act as they see fit without regard to the impact on the other members.