The Continuing Evolution of Case Law

In 1997 a Law Commission Report was published, authored by the redoubtable Lady Arden. This report made the point that the vast majority of section 994 actions involved companies with five or fewer shareholders; it also found that the most common grounds by far were exclusion of a shareholder from management of the business.

There has been developing a sub-set of such actions: claims that a company has paid the directors excess remuneration and given them the enjoyment of extensive benefits in kind, such as eye-wateringly expensive cars. These cases then also petition on the basis that the company has failed to pay dividends to shareholders.

An earlier article dealt with the case of McCallum-Toppin and McCallum-Toppin, involving AMT Coffee Limited. In that case the judge found that the directors had failed properly to consider the payment of dividends. They had not made a positive bona fide decision that dividends should not be paid.

Clarence Booth and His Heirs

Clarence Booth had set up a scrap metal business in Doncaster and Sheffield in 1926. Over the years the business had blossomed and had developed into one of Europe’s largest companies engaged in demolition, metal recycling and allied trades.

Inevitably there were several branches of the family which became increasingly distant with the passing years. Only one branch of the family were engaged in the management of the business but several other branches had shareholdings. Members of one family, the Wilkinsons, had interests of 8.4%. The Booth family had shown a desire to buy the shares from the Wilkinsons, but they had been offered only £50,000.

In February 2014 the Wilkinsons instructed an accountant to value the shares. He derived a value for the entire equity of £40m to £52m.

They were joined by a member of the Booth family with a holding of 19%. The petitioners therefore held a combined 27% of the equity.

Unfairly Prejudicial Conduct?

The petitioners maintained that the directors had paid themselves excessive remuneration and had also had the use of some relatively exotic and costly motor cars. The suggestion that such cars were bought in order to convey customers in an impressive manner did not produce much traction in the court room.

Due to the rules of procedure and evidence, only the expert for the Wilkinsons had addressed the issue of reasonable remuneration. He relied on a paper published by Deloitte LLP in March 2016 entitled "Directors' remuneration in smaller companies". That paper reported a median salary of £317,800, and an annual bonus of 50 per cent of salary, for chief executives of companies of similar size to the Company but which (unlike the Company) are FTSE listed. The expert applied a discount of 10 per cent to that median for the fact that the Company is not listed. The resultant £429,030 (£317,800 less 10 per cent plus 50 per cent bonus) was the benchmark remuneration considered appropriate for the two senior directors.

The Decision on Remuneration and Dividends

The judge concluded:

'In my judgment the Booth 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.'

The judge found that there were profits available for distribution, but they were taken for the Booth directors in the form of excess remuneration.

He stated that the valuation of the company should be determined at July 2015. He then addressed the means whereby there could be fairness in respect of excess remuneration:

'In my judgment it would be just and equitable between these parties, when valuing the petitioners' shares, that the balance sheet be adjusted to add back the excessive remuneration taken by the Booth directors in the six years to 31st July 2015. I limit the remedy to those six years because I think that any right to a remedy beyond that period is stale.'

Impacts on Value

The judge stated that there should be a minority discount of one third applied to the shares held by the Wilkinsons. However, as he found that the excess remuneration could have been paid out as dividends, which should not be subject to discount, he proposed an uplift by 1.5 to that part of the valuation in order to address that factor.

The business had been loss making in later years. The judge considered whether the shares should be valued under the cost approach using a going concern premise or a liquidation premise. He chose the average of these two premises.

In some other cases, judges had recognised that a discounted valuation gave an unjustified windfall to the party engaged in unfairly prejudicial conduct. The judge expressed his view on the status of the shareholdings:

'The Company is not a quasi-partnership. It is a family company in which all the shareholders inherited most of their shares.'

He was concerned not to give the petitioners’ shares a quality which they lacked. He was also mindful that his award should not be less than that which would derive in a winding up. He considered that the discount of one third was not likely to upset that principle.

Andrew Strickland