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Shareholders win dispute with directors over excessive payments

Posted: 11th April 2017   In: Corporate Commercial

A company’s minority shareholders have won a legal dispute with directors who refused to pay dividends yet awarded excessive payments to themselves.

The shareholders were descended from the company's founder. They owned 27% of the company. The directors, who were also the majority shareholders, owned 65%.

From 1987, the directors maintained a policy of paying no dividends, despite the company making profits until 2013. They sought to purchase the minority group’s shares, but no price was agreed. The company made losses after 2013.

The minority group issued proceedings in July 2015, alleging unfair prejudice from excessive directors' remuneration combined with the no-dividend policy.

The court found in their favour. It held that the no-dividend policy was unfair and the remuneration the directors awarded themselves far exceeded what would be reasonable if they were acting as they should in the company’s best interests.

The only possible remedy was for the directors to buy the group’s shares at a fairly assessed price. The court ruled that the shares should be valued after the six years of excessive remuneration up to July 2015 was added back to the company's balance sheet.

The court then considered whether the shares should be sold at a discount because the group were minority shareholders.

The directors had a majority of the shares and in a negotiated sale would be in a strong position to require a discount. The group’s submission that there should be no price reduction, to reflect the misconduct, was rejected.

The failure to pay dividends would be reflected in the excess remuneration being added back to the balance sheet. On the evidence, the appropriate discount was one third.

Please contact Sing Li if you would like more information about the issues raised in this article or any aspect of company law.




Posted by: Sing Li
Corporate Commercial
Luton Office