The power of a letter before action in a business dispute
As a minority shareholder in a business, you may feel frustrated with how the directors are running the company. This frustration may stem from their salaries, which directly affect your dividends.
If the majority shareholders agree with you, then you may be able to address these issues with their cooperation. However, even if they do not support your position, you are not completely powerless.
Excessive remuneration by directors is a common cause for complaint among shareholders. Minority shareholders may think they are in an impossible situation. However, George Masefield, a partner in the dispute resolution team, says there are certain routes available for addressing excessive remuneration by directors.
Obtaining information on the remuneration levels of directors
It is easy to make assumptions, for example from the lifestyle of a director, but this does not necessarily equate to excessive remuneration, so it is important to obtain accurate information.
If you are also a director, you may be able to see what your fellow directors are paid from the accounts and the PAYE records.
Shareholders are not usually privy to the same financial information as directors and, unless you are a director or have day-to-day involvement in the business, or someone in the business informs you of the remuneration levels, it is unlikely that you will know the details of the directors’ remuneration.
Certain companies must provide a directors’ remuneration report and file it at Companies House. However, quoted and regulated companies must meet this requirement, but it does not apply to all limited companies. There are no rights for a person to make a data subject request of an individual director, as this is likely to breach Data Protection issues, so it can prove difficult to determine the level of remuneration as a shareholder.
Check what powers you have over the day-to-day running of the company
If you are not sure, you should start by checking the key company documents, namely the company’s Articles of Association, the Memorandum of Association, and the shareholders agreement, if there is one (these are not compulsory).
Voting rights may exist which allow shareholders to vote on the level of remuneration by directors, such as:
- a general right, such as the power to vote on matters important to the company, which must go before the shareholders before directors are allowed take certain action; or
- a specific requirement, for example for a vote before directors’ remuneration goes over a certain level.
Check powers over the directors
Naturally, minority shareholders will have less power when voting than majority shareholders.
But while a vote may require a 50% or even a 75% shareholder majority to pass, a minority shareholder (or a few minority shareholders) can block a majority vote if 25% or more agree. This option is often very good for minority shareholders who share similar concerns about how a company is being run.
What are the options for minority shareholders who do not agree with director remuneration?
Once you have established the level of remuneration, and if you genuinely believe it is not justified and it is damaging the business overall, then you should speak to your fellow shareholders to see if they support you.
Cause a minority shareholder vote on the level of director remuneration
If you hold at least 5% of paid-up shares with voting rights, you can call a general meeting. If you and others reach 25%, you can circulate a written resolution and put it to a vote.
Unfair prejudice petition
If you can’t cause a vote and believe the directors’ conduct harms your shareholding, then file an ‘unfair prejudice’ petition.
You can pursue this option if you’re unhappy with how the business affects your shareholding. If the court agrees, it might order the company to buy your shares at a fair value. Alternatively, the court can make any other order it sees fit, including ordering the company to pay you damages.
You need to prove to the court that the company has prejudiced you and that you have been unable to affect the remuneration with your existing voting rights. This may be the case if the director(s)’ excessive remuneration has directly affected your dividends.
The court will consider the business type, turnover, profits, and financial position to determine what is excessive.
Derivative action
A derivative claim is an application to the court brought by a shareholder on behalf of the company. To be successful, you would need to prove to the court that the actions of the director(s) have been contrary to the company’s interests under the Companies Act 2006. This may be by taking excessive remuneration and therefore is a breach of the directors’ duty to act in the best interests of the company.
If a court finds in your favour, then it has very wide powers to make any order it sees fit. This can include awarding compensation to the company for excessive remuneration drawn.
You bring this action on behalf of the company, so any award goes to the company, not to you personally. This option can realign the directors and stop them from breaching their duties. Ultimately, reducing the directors’ remuneration may increase dividends for shareholders.
How our solicitors can help
As a minority shareholder you may feel powerless to affect the actions of the directors, but you are not. We can bring a court claim to stop excessive director pay and protect the business.
For further information and assistance, please contact George Masefield on 0207 404 9400 or at George.masefield@bracherrawlins.co.uk.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since we published this article.
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