Unfair prejudice: Supercars, yachts, and other excesses

This article was first published by Solicitors Journal, Monday 8 May 2017

Unsurprisingly, complaints by minority shareholders about excessive directors’ remuneration and inadequate dividends often go hand in hand. The recent case of (1) Donald Booth (2) Charles Wilkinson (3) Jane Compton v Clarence Booth & 9 Others [2017] EWHC 457 (Ch) is a reminder that despite the high hurdles, the court is prepared to intervene if necessary.

This case concerned CF Booth Limited – one of the largest metal recycling businesses in Europe. The business was successful with substantial dividends being paid each year. However, in 1986, the company made a loss. Despite returning to healthy profitability from 1987, no dividends were ever again declared. In 1987, the chairman confirmed his intention never to pay a dividend.

By 2015, directors’ pay had increased from around £275,000 (in 2005) to over £2.4 million. The directors (and their wives) also had the use of a yacht and a series of luxury cars, at the company’s expense.

A petition was presented in July 2015, by the minority shareholders, claiming unfair prejudice due to the directors’ excessive remuneration together with the no-dividend policy driven by the directors’ desire to acquire the shares at a reduced value. However, the respondents (five of whom were directors who owned 65 per cent of the shares) denied any unfairness and argued an abuse of process.

Whether the remuneration is excessive is to be assessed by applying ‘objective commercial criteria’. The court found that the directors’ remuneration ‘far exceeded the amount that reasonable directors acting in the best interests of the company could have thought fair remuneration for the work they undertook’ and was outside the bracket that directors, carrying out their duties, would expect to receive.

The directors’ decision not to declare a dividend, even where there are profits to do so, can only be successfully challenged where the decision is taken in breach of their duties. While the respondents sought to justify their policy on the basis that ‘cash is key’ to their business, the court noted that there was sufficient cash for the directors to be excessively remunerated.

The court found that the decision never to pay a dividend, ‘combined with the related feature of accepting excessive remuneration, was a policy promoting the success of the company for their own benefit’ and not for the members as a whole.

The judge, Mark Anderson QC, noted that ‘although the level of remuneration was fixed in general meetings, the directors were nevertheless under a duty to consider whether part of their own ‘remuneration’ was in reality a distribution of profit discriminating against non-director shareholders. They did not discharge that duty. They closed their minds to the concept of sharing profits with, and ignored the interests of, the non-director members’.

Further, the directors must have known that the no-dividend policy made it less attractive for the petitioners to hold onto the shares which reduced their value.

Although there was a pre-emption mechanism under the articles to sell the shares at a value fixed by the company’s auditors, the court recognised that if that irreversible and unchallengeable mechanism was invoked, the auditors might well have valued the shares taking account of the no-dividend and remuneration policies. Similarly, it would likely be difficult to persuade the auditors to revise the balance sheet which they had certified.

Given the negative impact the unfair prejudice would have on the value of the shares, it cannot be an abuse of process for the petitioners not to invoke the pre-emption provisions as otherwise the petitioners would be denied relief.

The respondents claimed the petition was an abuse for ‘recycling complaints’ made in 1991 but not pursued. While there is no limitation period for unfair prejudice claims, the court will not allow ‘stale’ claims. Had the company pursued a claim against the directors for excessive remuneration, the six-year limitation period would apply.

The judge agreed that any remedy should be limited by analogy with the limitation period. He held that there had not been any acquiescence by the petitioners in the no-dividend policy and accordingly, there had been no waiver. For these reasons, he did not think it inequitable for the petitioners to complain about the failure to pay dividends in the six years leading up to the issue of the petition.

The court held that there was significant unfair prejudice because the effect of the policies (1) was to deny the petitioners a return on their investment, (2) meant the directors took the petitioners’ share of the profits, and (3) had a negative impact on the balance sheet.

The court ordered that the directors should buy-out the petitioners’ shares, noting that the directors’ conduct would probably justify an order for the company to be wound up on the just and equitable ground were it not for the alternative and more appropriate relief under section 994.