Minority shareholder wins £400,000 payoff
It is rare to see a petition under the Companies Act seeking to prevent the payment of excessive remuneration to a director, but a Scottish Court had to deal with just such a case earlier this year.
It involved the sole director of a company, who also owned the majority of the shares. A minority shareholder claimed that the director conducted the company’s affairs in a manner which was “unfairly prejudicial” to the interests of the company’s members, and made a claim to that effect in court.
The minority shareholder specifically alleged that no dividends had been paid to shareholders and that:
he had been wholly excluded from the management of the company
the director had unlawfully borrowed money from the company, in part to buy shares to give himself control over it
the director spent the company’s money defending a case brought against him personally
the director arranged for the company to buy an expensive car for the director’s sole use and
over a period of approximately three years, the company paid the director in the region of £900,000 in income and pension contributions and this was severely understated in the company accounts.
The court examined all the evidence, which covered the entire commercial history of the company, before deciding that the director’s conduct was prejudicial to the other shareholders. It ordered that the director be required to buy the petitioner’s shares. The value of the company was put at £2.7m and a discount of 40 per cent was applied because of the petitioner’s minority shareholding. This resulted in his 28 per cent shareholding being valued at £469,800.
Says Clare Towers, Partner in DFA Law’s Corporate & Commercial team, “Minority shareholders often think that there is nothing they can do when their company is run in a way they do not like. However, when this behaviour is prejudicial to the minority shareholders, and at the same time is unfair, then the Companies Act does offer a remedy.”
If you are a shareholder in a company and are concerned about how it is being run, we can advise you.