Introduction

Routledge v. Skerritt & Ors ([2019] EWHC 573 (Ch)) is a landmark judgment delivered by the England and Wales High Court (Chancery Division) on March 13, 2019. The case involves a dispute between Mr. Michael Routledge and the directors of Skerritt Consultants Limited, primarily Mr. Richard Skerritt and his ex-wife Mrs. Catherine Skerritt. Mr. Routledge, holding 500 ordinary B shares in the Company, alleged that his rights as a shareholder were unfairly prejudiced due to the non-payment of dividends on his B shares, despite dividends being regularly paid to A shareholders.

The central issues revolve around the interpretation of the Company's Special Resolution concerning dividend distribution, the existence (or lack thereof) of a formal dividend policy, and the directors' duties under the Companies Act 2006. Mr. Routledge sought relief under section 994 of the Companies Act 2006, alleging that the Company's affairs were conducted in a manner unfairly prejudicial to his interests as a member.

Summary of the Judgment

The High Court examined the terms of the Special Resolution and the Shareholders Agreement, focusing on dividend rights attached to A and B shares. The court found that the Special Resolution allowed for dividends to be paid to A shareholders before B shareholders, contingent upon a dividend policy set by the Company's board of directors.

Critically, the court determined that no formal dividend policy had been adopted by the board, as required by the Special Resolution and the Shareholders Agreement. In the absence of such a policy, the default legal position is that all ordinary shares should rank equally (pari passu) concerning dividend entitlements. Consequently, the non-payment of dividends on B shares was deemed a breach of shareholders' rights and constituted unfairly prejudicial conduct.

The court concluded that Mr. Routledge was entitled to relief, recognizing that his rights as a B shareholder had been unjustly disregarded, and identified breaches of directors' duties in failing to establish and adhere to a valid dividend policy.

Analysis

Precedents Cited

The judgment extensively referenced key cases and legal principles to support its reasoning:

• O&Neill v Phillips [1999] 1 WLR 1092: Established that unfair prejudice claims hinge on breaches of agreements among company members concerning the company's affairs.
• Re Saul D Harrison & Sons plc [1995] 1 BCLC 14: Defined the scope of un fairly prejudicial conduct under section 994 of the Companies Act 2006.
• Re McCarthy Surfacing Ltd [2008] EWHC 2279 (Ch) and Re J&S Insurance & Financial Consultants Ltd [2014] EWHC 2206 (Ch): Highlighted the importance of directors' duties in considering dividend distributions.
• Birch v Cropper (1889) 14 App Cas 525: Affirmed the pari passu principle, where absent any specific provisions, shares rank equally concerning dividends.

Legal Reasoning

The court's legal reasoning focused on interpreting the Special Resolution in conjunction with the Shareholders Agreement. It emphasized that the right of A shareholders to receive dividends before B shareholders was not absolute but rather subject to a dividend policy formulated by the board of directors.

The absence of such a policy effectively nullified the preferential dividend rights of A shares, mandating that dividends be distributed equally among all ordinary shares. This interpretation aligns with the pari passu principle, ensuring fairness among shareholders. Additionally, the court scrutinized the directors' actions, finding that their failure to establish and communicate a dividend policy breached their fiduciary duties under sections 171(a), 172, and others of the Companies Act 2006.

Impact

This judgment has significant implications for corporate governance and shareholder rights. It underscores the necessity for clear, formalized dividend policies, especially when share classes have differing rights attached to them. Companies must ensure that their internal agreements and resolutions are adhered to meticulously to prevent unfair treatment of shareholders.

Furthermore, the case highlights the importance of directors' duties in managing company affairs transparently and equitably. Failure to establish and follow a dividend policy can lead to severe legal consequences, including claims of unfair prejudice and breaches of fiduciary responsibilities.

Complex Concepts Simplified

Section 994 of the Companies Act 2006

Section 994 provides a mechanism for shareholders to seek relief if they believe that the company's affairs are being conducted in a manner that is unfairly prejudicial to their interests. Unfair prejudice can encompass actions that disregard the agreements among shareholders or the company's constitution, leading to significant detriment to affected shareholders.

Special Resolution and Shareholders Agreement

A Special Resolution is a decision made by a supermajority (typically 75%) of shareholders during a general meeting. It often addresses fundamental aspects of company governance and operations, such as altering the company's memorandum of association or amending important financial policies.

The Shareholders Agreement is a contractual arrangement between shareholders detailing how the company should be managed and the rights and obligations of the shareholders. It serves as an internal governance document that supplements the company's articles of association.

Pari Passu Principle

The pari passu principle dictates that in the absence of any specific provisions, all ordinary shares in a company hold equal rights concerning dividends and liquidation proceeds. This ensures that no class of shares is unduly favored over another unless explicitly stated.

Director's Duties under the Companies Act 2006

Directors are fiduciaries who must act in the best interests of the company and its shareholders. Key duties include:

• Duty to Promote Success (Section 172): Directors must act in good faith to promote the success of the company for the benefit of its members as a whole.
• Duty to Exercise Independent Judgment (Section 173): Directors must make decisions independently, free from external influences.
• Duty to Exercise Reasonable Care, Skill, and Diligence (Section 174): Directors must carry out their roles with the care and skill that is expected of someone in their position.

Conclusion

The Routledge v. Skerritt [2019] judgment serves as a pivotal reference in corporate law, delineating the boundaries of shareholder rights and directors' fiduciary duties concerning dividend distributions. It reinforces the necessity for companies to establish clear, formalized dividend policies, especially when different classes of shares are involved.

By affirming the pari passu principle in the absence of a dividend policy, the court ensures equitable treatment of all ordinary shareholders, preventing preferential treatment unless explicitly authorized by company resolutions and agreements. Moreover, the judgment underscores the critical role of directors in maintaining transparency and adhering to agreed-upon governance structures.

For both corporations and shareholders, this case underscores the importance of meticulous adherence to internal agreements and the establishment of clear policies to prevent disputes and potential legal challenges. It also highlights the judiciary's role in interpreting corporate constitutions in favor of fairness and equity among shareholders.