Minority shareholders may not have much control over companies that they partially own, but they are not without rights and have to be treated fairly. In a striking case on point, the High Court came to the aid of an investor who received not a penny in dividends whilst majority shareholders were paid millions.
The case concerned a company that provided independent financial advice and had thrived mightily, to the point to where it had £960 million of funds under management. The investor worked for the company as a self-employed IFA and, after striking up a friendship with its managing director, agreed to purchase 500 shares, for which he paid a total of £50,000.
He was allocated ‘B’ shares, which had been created by special resolution. ‘A’ shares in the company were allocated to the managing director and his ex-wife (the directors). After leaving the company, the investor complained that he had not received any dividends and launched proceedings against the company and the directors on the basis that his interests as a minority shareholder had been unfairly prejudiced, within the meaning of Section 994 of the Companies Act 2006.
In upholding his claim, the Court found that on a true interpretation of the special resolution, and in the absence of a properly formulated board policy to the contrary, the ‘B’ shares should have attracted the same dividends as the ‘A’ shares. In paying dividends solely in respect of ‘A’ shares, the directors had treated the investor unreasonably and unfairly and had shown a complete disregard for his rights.
The directors had breached their duties in failing to adopt or adhere to a valid board policy in respect of dividends and had violated the company’s constitution in paying dividends only in respect of ‘A’ shares. They had failed to exercise reasonable care, skill and diligence or to act even-handedly between members of the company.
The Court found that, for several years after purchasing the shares, the investor had acquiesced in the non-payment of dividends in respect of his ‘B’ shares. However, that acquiescence ceased when he complained – since when over £11 million had been declared in dividends on ‘A’ shares. The Court’s decision opened the way for the investor to seek an order requiring the directors, or the company, to purchase his shares at a fair value, and/or compensation for non-payment of dividends.