High Court decision examines ‘Unfair Prejudice’ of minority shareholder rights

VWV partner Ben Holt

Minority shareholders can seek to uphold their rights for ‘unfairly prejudicial’ conduct through court proceedings (known as unfair prejudice petitions).

The High Court recently upheld those rights in Re CF Booth Limited, finding there had been a pattern of excessive spending and not paying dividends.

CF Booth Ltd is a family business and one of the largest metal recycling businesses in Europe.  A majority of the shareholders were represented on the board.  The minority were not.

The business had paid substantial dividends prior to 1986, when the company made a loss.

Despite returning to profit in 1987, the shareholder directors refused to pay any further dividends.  This became a source of animosity between the two sides of the Booth family.

During the same period, the shareholder directors’ average salaries increased from £275,000 in 2005 to £1.5m by 2015.  The shareholder directors and their wives also had use of a £1.73 million yacht and a fleet of luxury cars at the company’s expense.

The minority shareholders argued that their rights had been unfairly prejudiced by the excessive spending and the no-dividend policy.

The majority denied this, claiming that it was necessary to withhold dividends in order to retain profits for re-investment and to service the company’s large overdraft facility, while the yacht was needed to research and develop the company’s marine products and the cars for transporting customers.

The High Court found that the level of shareholder directors’ remuneration and benefits “far exceeded the amount that reasonable directors…could have thought fair ” and was difficult to reconcile with the claim that no money was available to pay dividends.

The no-dividend policy breached directors’ statutory duties to “promote the success of the company for the benefit of its members as a whole” and “exercise independent judgment.

Accordingly, the majority shareholders conduct was prejudicial and unfair because it: denied the minority shareholders a return on their investment; led to the majority taking the minority’s share of the profits through director pay; and diminished the balance sheet of the company.

To remedy this, the majority shareholders were ordered to purchase the minority’s shares at a price reflecting the excessive spending.

Resolving Unfair Conduct

While the facts of this case are fairly extreme in terms of the pay and yachts, similar issues are regularly faced by minority shareholders.  This judgment is a helpful reminder that there are options to resolve unfair conduct where a minority shareholder otherwise feels powerless.

Ben Holt is a partner at award-winning regional law firm, VWV.  Ben can be contacted on 0117 314 5478 or at bholt@vwv.co.uk.