SHAREHOLDER PROTECTION AVOIDING BOARDROOM DISPUTES AND UNFAIR - - PowerPoint PPT Presentation

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SHAREHOLDER PROTECTION AVOIDING BOARDROOM DISPUTES AND UNFAIR - - PowerPoint PPT Presentation

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SHAREHOLDER PROTECTION AVOIDING BOARDROOM DISPUTES AND UNFAIR PREJUDICE SHAREHOLDER PROTECTION & UNFAIR PREJUDICE Learning objectives The differences between directors and shareholders in relation to owning and running a business,

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SHAREHOLDER PROTECTION AVOIDING BOARDROOM DISPUTES AND ‘UNFAIR PREJUDICE’

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SHAREHOLDER PROTECTION & Learning objectives

  • The differences between directors and shareholders in relation

to owning and running a business, and the concept of a quasi partnership.

  • How to identify the dangers faced by directors who engage in

unfairly prejudicial behaviour.

  • The financial opportunities presented by promoting Dividend

Insurance Policies (DIPs) and associated protection products. UNFAIR PREJUDICE

2

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Setting the scene

  • Q. Who owns a private limited company?
  • A. The shareholders.
  • Q. Who runs a private limited company?
  • A. The directors.
  • Q. Who sets the remuneration rules for the

company?

  • A. The directors.
  • Q. Who decides dividend levels?
  • A. The directors.
  • Q. Where do we go for the details/rules on all

this?

  • A. The Articles of Association.

SHAREHOLDER PROTECTION & UNFAIR PREJUDICE

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Model articles

  • Article 19 – Directors’

Remuneration.

  • Article 30 – Procedure

for declaring Dividends.

  • Have these articles been

changed/amended for the client company? UNFAIR PREJUDICE SHAREHOLDER PROTECTION &

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A fictional client

  • Lift and Drop Ltd is a specialist furniture

removal business.

  • Owned by Mr A 33.3%, Mr B 33.3% and

Mr C 33.3%. Estimated value £1.5m.

  • Messrs A, B and C are also directors of the

business, involved in the running of the business.

  • They pay themselves salaries of £8,000 a

year and declare annual dividends of £60,000 each.

  • They all have wills leaving everything

(including their shares) to their spouses.

  • Let’s ask ourselves some questions…..

SHAREHOLDER PROTECTION & UNFAIR PREJUDICE

Share

Mr A Mr B Mr C

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Keeping an open mind

  • Q. Who would advise them on their

remuneration strategy?

  • A. The accountant.
  • Q. Who would advise them on legal

matters, perhaps including their wills?

  • A. The lawyer.
  • Q. If A died, where do his shares go?
  • Q. If A died, would B and C declare

dividends?

  • Q. Who might B and C go to for advice?

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UNFAIR PREJUDICE SHAREHOLDER PROTECTION &

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SHAREHOLDER PROTECTION &

Someone is not amused

  • A widow or widower could be left as

a minority shareholder with no immediate financial return.

  • What can they do?

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UNFAIR PREJUDICE

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What is Unfair Prejudice?

  • Section 994 provides that

“a member of a company may apply to the Court by petition for an order on the grounds that the company’s affairs are being/have been conducted in a manner that is unfairly prejudicial to their interests”. SHAREHOLDER PROTECTION & UNFAIR PREJUDICE

Source: Companies Act 2006 – section 994

Section 994 companies act 2006

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What conduct must be

  • Prejudicial
  • and
  • Unfair
  • “the courts will regard the

prejudice as unfair if a hypothetical reasonable bystander would believe it to be unfair”. SHAREHOLDER PROTECTION & UNFAIR PREJUDICE

Source: https://www.ashfords.co.uk/news-and-events/general/guide-to-unfair-prejudice-against-shareholders

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Examples of prejudice

  • Failure to pay a dividend
  • Diversion of business to another

company

  • Exclusion from management decisions

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UNFAIR PREJUDICE SHAREHOLDER PROTECTION &

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There are 5 specific powers listed:

  • 1. Regulate the Company’s affairs.
  • 2. Require the Company to refrain from certain acts – or

to start to do certain acts.

  • 3. Authorise civil proceedings.
  • 4. Require the Company not to alter their Articles of

Association without Court permission.

  • 5. Provide for the purchase of the shares of any member

by either the other members or the Company itself.

In practice, the most common remedy awarded to a successful petitioner is an order that their shares be purchased.

SHAREHOLDER PROTECTION & UNFAIR PREJUDICE

Source: https://www.ashfords.co.uk/news-and-events/general/guide-to-unfair-prejudice-against-shareholders

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The Courts have in general held that the shares should be valued at such date as is fair to the Petitioner, usually the date when the prejudice to the Petitioner began.

SHAREHOLDER PROTECTION & UNFAIR PREJUDICE Business valuation

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  • Normally communications between a

client and their lawyers are privileged.

  • In Unfair Prejudice cases there is an

exception and these communications may NOT be privileged.

  • Care needs to be taken in that anything

said to or by the Company’s lawyers may need to be revealed.

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UNFAIR PREJUDICE SHAREHOLDER PROTECTION & Legal professional privilege

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  • Hequet v McCarthy
  • Metropolis Motorcycles
  • Irvine v Irvine
  • Hale v Waldock

SHAREHOLDER PROTECTION & UNFAIR PREJUDICE Real cases

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  • Things can’t be that bad, what’s the worst

that could happen?

  • B and C would have to pay their legal fees

and perhaps those of A’s widow.

  • B and C would have to buy A’s widow’s

shares in the business.

  • B and C would have to pay for the

accountancy work involved in valuing the business, including any historic financial awards they made to themselves to the exclusion of A’s widow.

  • B and C risk being disqualified from being

directors of any company in the future.

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UNFAIR PREJUDICE SHAREHOLDER PROTECTION & Back to Lift and Drop Ltd

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  • Messrs A, B and C could invest in a

Dividend Insurance Policy.

  • When A dies, the widow receives a

cheque for £500k.

  • B and C continue to declare £60k

dividends each, reducing the annual dividend pay-out by a third.

  • When Lift and Drop is sold the

proceeds are shared 50/50 by B and C. NO UNFAIR PREJUDICE What is this wonderful Dividend Insurance Policy?

SHAREHOLDER PROTECTION & UNFAIR PREJUDICE The life raft

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The insurance community also calls this:

  • Ownership Protection Insurance, or
  • Partnership Protection Insurance.

SHAREHOLDER PROTECTION & UNFAIR PREJUDICE Shareholder Protection

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Male aged 40 next birthday, non-smoker £500,000 RPI indexed for 25 year term.

  • Premium £37.25. Commission £819.82

Male aged 45 next birthday, non-smoker £500,000 RPI indexed for 20 year term.

  • Premium £48.41 Commission £1,067.01

Male aged 48 next birthday, smoker £500,000 RPI indexed for 17 year term.

  • Premium £156.41 Commission £3,459.13

Total Monthly Premium £242.07 Total Commission £5,345.96

Premiums correct as at 17/01/2019

SHAREHOLDER PROTECTION & UNFAIR PREJUDICE An example quote Life Cover

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SHAREHOLDER PROTECTION & UNFAIR PREJUDICE EQUALISED PREMIUMS

Lift and Drop Ltd Name Age Position Share Payment Equalised Payment Mr A 40 Director 33% £37.25 £102.41 Mr B 45 Director 33% £48.41 £96.83 Mr C 48 Director 33% £156.41 £42.83 Totals 100% £242.07 £242.07

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Male aged 40 next birthday, non-smoker £500,000 RPI indexed for 25 year term.

  • Premium £37.25. Commission £819.82

Male aged 45 next birthday, non-smoker £500,000 RPI indexed for 20 year term.

  • Premium £48.41 Commission £1,067.01

Male aged 48 next birthday, non-smoker £500,000 RPI indexed for 17 year term.

  • Premium £56.96 Commission £1,256.38

Total Monthly Premium £142.62 Total Commission £3,143.21

Premiums correct as at 17/01/2019

SHAREHOLDER PROTECTION & UNFAIR PREJUDICE An example quote Life Cover

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SHAREHOLDER PROTECTION & UNFAIR PREJUDICE EQUALISED PREMIUMS

Lift and Drop Ltd Name Age Position Share Payment Equalised Payment Mr A 40 Director 33% £37.25 £52.69 Mr B 45 Director 33% £48.41 £47.11 Mr C 48 Director 33% £56.96 £42.82 Totals 100% £142.62 £142.62

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Male aged 40 next birthday, non-smoker £500,000 RPI indexed for 25 year term.

  • Premium £242.02 Commission £5,355.33

Male aged 45 next birthday, non-smoker £500,000 RPI indexed for 20 year term.

  • Premium £311.25 Commission £6,888.72

Male aged 48 next birthday, smoker £500,000 RPI indexed for 17 year term.

  • Premium £749.57 Commission £16,597.18

Total Monthly Premium £1,302.84 Total Commission £28,841.23

Premiums correct as at 17/01/2019

SHAREHOLDER PROTECTION & UNFAIR PREJUDICE An example quote Life or Critical Illness Cover

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SHAREHOLDER PROTECTION & UNFAIR PREJUDICE EQUALISED PREMIUMS

Lift and Drop Ltd Name Age Position Share Payment Equalised Payment Mr A 40 Director 33% £242.02 £530.41 Mr B 45 Director 33% £311.25 £495.80 Mr C 48 Director 33% £749.57 £276.63 Totals 100% £1,302.84 £1,302.84

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Male aged 40 next birthday, non-smoker £500,000 RPI indexed for 25 year term.

  • Premium £242.02 Commission £5,355.33

Male aged 45 next birthday, non-smoker £500,000 RPI indexed for 20 year term.

  • Premium £311.25 Commission £6,888.72

Male aged 48 next birthday, non-smoker £500,000 RPI indexed for 17 year term.

  • Premium £383.03 Commission £8,478.59

Total Monthly Premium £936.30 Total Commission £20,722.64

Premiums correct as at 17/01/2019

SHAREHOLDER PROTECTION & UNFAIR PREJUDICE An example quote Life or Critical Illness Cover

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SHAREHOLDER PROTECTION & UNFAIR PREJUDICE EQUALISED PREMIUMS

Lift and Drop Ltd Name Age Position Share Payment Equalised Payment Mr A 40 Director 33% £242.02 £347.15 Mr B 45 Director 33% £311.25 £312.52 Mr C 48 Director 33% £383.03 £276.63 Totals 100% £936.30 £936.30

25

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SHAREHOLDER PROTECTION &

  • The differences between directors and shareholders in relation to
  • wning and running a business, and the concept of a quasi

partnership.

  • How to identify the dangers faced by directors who engage in

unfairly prejudicial behaviour.

  • The financial opportunities presented by promoting Dividend

Insurance Policies (DIPs) and associated protection products. UNFAIR PREJUDICE Learning objectives

26

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  • https://www.ashfords.co.uk/news-and-

events/general/guide-to-unfair-prejudice-against- shareholders

  • www.financialdirector.co.uk/financial-

director/feature/1742347/company-law-court- minority-report

  • www.gov.uk/government/uploads/system/uploads/att

achment_data/file/376832/model_articles_private_lt d_by_shares_after28April2013.doc

ADDITIONAL READING

SHAREHOLDER PROTECTION & UNFAIR PREJUDICE

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The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions and is a member of the Association of British Insurers. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London EC3V 0RL.

PRP8PN0082 January 2019

adviser.royallondon.com/protection