Factual and Procedural Background
The case involves a dispute concerning a financial services company ("the Company") founded in 2000, which provides independent financial advice and wealth management services. The Company’s shares were re-designated in 2005 into two classes: ordinary 'A' shares and ordinary 'B' shares, with different rights attached, particularly regarding dividends. The Plaintiff purchased 500 'B' shares between 2005 and 2007 but has never received dividends on these shares, while substantial dividends were paid to the Respondents, who hold the 'A' shares.
The Plaintiff initiated proceedings by presenting an unfair prejudice petition under section 994 of the Companies Act 2006 in November 2017, alleging unfair treatment by the Respondents in relation to the non-payment of dividends on the 'B' shares. The trial on liability was heard in January 2019, with issues concerning the interpretation of the special resolution on share rights, the existence and effect of a dividend policy, and breaches of directors’ duties.
Legal Issues Presented
- Whether the Plaintiff was informed before purchasing the 'B' shares that no dividends would be paid on those shares and whether he agreed to purchase them on that basis.
- The proper construction of the Special Resolution regarding dividend payments and the rights attached to 'A' and 'B' shares.
- Whether the board of directors adopted a dividend policy within the meaning of the Special Resolution that excluded dividends on 'B' shares, and if so, whether such policy was properly notified to the Plaintiff.
- Whether there was a common understanding or convention among shareholders that no dividends would be paid on 'B' shares and whether the Plaintiff is estopped from denying such a policy.
- Whether the Respondents breached their duties as directors by failing to pay dividends on the 'B' shares or by adopting a policy excluding such dividends.
- Whether the Plaintiff accepted or acquiesced in the conduct complained of or delayed in bringing proceedings such that relief should be barred.
Arguments of the Parties
Respondents' Arguments
- The Special Resolution expressly prioritises dividends to 'A' shareholders before 'B' shareholders, and the directors have discretion to adopt any dividend policy, including one excluding dividends on 'B' shares.
- There is no requirement that the dividend policy be in writing or that it be notified in writing to shareholders.
- The Respondents contend that the Plaintiff knew and agreed to a dividend policy excluding dividends on 'B' shares from the outset.
- The Respondents rely on delay and acquiescence, arguing the Plaintiff made no complaint for over eight years and delayed further after first complaining.
Plaintiff's Arguments
- The Special Resolution requires dividends to be declared according to a board policy, which must be adopted and notified to shareholders; absent such a policy, 'A' and 'B' shares rank pari passu for dividends.
- The Plaintiff was never informed that no dividends would be paid on 'B' shares and relied on the existence of a dividend policy to protect his rights.
- The Respondents breached their duties by failing to adopt a valid dividend policy and by paying dividends solely to 'A' shareholders.
- The Plaintiff denies acquiescence or delay that would bar relief, asserting the first complaint was timely and justified.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| O'Neill v Phillips [1999] 1 WLR 1092 |
Defines unfairness in section 994 claims as breach of agreement between members. |
Used to establish that unfair prejudice jurisdiction requires breach of members’ agreement, including articles and shareholders’ agreements. |
| Re Saul D Harrison & Sons plc [1995] 1 BCLC 14 |
Unfairly prejudicial conduct includes breaches of directors’ duties inconsistent with members’ agreement. |
Applied to show directors’ breaches of duty can constitute unfair prejudice. |
| Re a Company (No. 00370 of 1987) ex p Glossop [1988] 1 WLR 1068 |
Directors have duty to genuinely consider distributions of profits to shareholders. |
Referenced to affirm directors’ duty under section 172 CA 2006 to consider dividend payments fairly. |
| Rock Nominees v RCO (Holdings) Plc [2004] BCC 466 |
Prejudice must be suffered by petitioner as a member; usually financial harm. |
Used to assess whether prejudice was suffered by Plaintiff as shareholder due to dividend policy. |
| Birch v Cropper (1889) 14 App Cas 525 |
Absent express provisions, shares rank equally in dividends. |
Applied to hold that without a dividend policy, 'A' and 'B' shares rank pari passu for dividends. |
| Secretary of State for Trade and Industry v Baker [1999] 1 BCLC 433 |
Directors must acquire and maintain sufficient knowledge to discharge duties and supervise delegation. |
Used to assess directors’ duty of care and diligence in relation to dividend decisions. |
| Re McCarthy Surfacing Ltd [2008] EWHC 2279 (Ch) |
Failure to properly address dividend payments can be unfairly prejudicial. |
Supports finding of unfair prejudice due to non-payment of dividends on 'B' shares. |
| Re J&S Insurance & Financial Consultants Ltd [2014] EWHC 2206 (Ch) |
Similar principle on directors’ failure to consider dividend payments. |
Supports conclusion on breach of directors’ duties in dividend distribution. |
| Re Grandactual Ltd [2006] BCC 73 |
Conduct over time must be considered in assessing unfair prejudice; acquiescence may bar relief. |
Referenced to assess Respondents’ argument on delay and acquiescence. |
| Re Edwardian Group Ltd [2018] EWHC 1715 (Ch) |
Delay affects court’s discretion under section 996; unjustified delay with prejudice may bar relief. |
Applied in considering whether Plaintiff’s delay barred relief. |
| Re Crossmore Electrical and Civil Engineering Ltd [1989] 5 BCC 37 |
Expenditure of company funds on shareholder disputes is misappropriation and breach of duty. |
Applied to criticism of Respondents’ use of company funds to pay legal fees. |
| Re a Company (No. 001126 of 1992) [1993] BCC 325 |
Same principle as above regarding misuse of company funds. |
Supports findings on breach of duty regarding company funds. |
| EPI Environmental Technologies Inc v Symphony Plastic Technologies plc (Practice Note) [2005] 1 WLR 3456 |
Guidance on assessing witness credibility and reliability after long periods. |
Applied in assessing witness evidence reliability in the case. |
Court's Reasoning and Analysis
The Court analysed the rights attached to the 'A' and 'B' shares as set out in the Special Resolution, which conditioned dividend rights on a board policy to be made and amended by the directors. The Court found that no such dividend policy was ever formally adopted or notified in writing to shareholders, as required by the Shareholders Agreement. Without a valid board dividend policy, the preferential dividend rights of the 'A' shares could not properly operate, and thus the 'A' and 'B' shares rank pari passu for dividends by default, consistent with established legal principles.
The Court examined extensive witness evidence, including contemporaneous documents and emails, and found the Plaintiff to be a credible witness, while the Respondents’ main director was found to be unreliable in crucial respects. The Court rejected the Respondents’ assertion that the Plaintiff was informed he would never receive dividends on the 'B' shares, finding no such agreement or understanding existed prior to the share purchase.
The Court further found that the Respondents, as directors, breached their duties under the Companies Act 2006 by failing to adopt and adhere to a dividend policy, failing to act fairly between shareholders, and by paying dividends exclusively on 'A' shares without proper consideration of the 'B' shares’ rights. The Court also considered and rejected the Respondents’ arguments on acquiescence and delay, holding that the Plaintiff’s complaint was timely and that the conduct was continuing unfairly prejudicial conduct.
The Court noted procedural irregularities in company meetings, including failure to notify the Plaintiff of general meetings and inaccuracies in meeting minutes, further undermining the Respondents’ position.
Holding and Implications
The Court held that the Respondents’ conduct in failing to pay dividends on the 'B' shares constituted unfairly prejudicial conduct under section 994 of the Companies Act 2006. The non-payment of dividends on the 'B' shares breached the rights attached to those shares and was prejudicial to the Plaintiff as a member of the Company.
The Court found that no valid dividend policy had ever been adopted or notified, and thus the 'A' and 'B' shares rank pari passu in respect of dividends. The Respondents breached their duties as directors in multiple respects, including failure to act fairly and failure to exercise reasonable care, skill, and diligence in relation to dividend decisions.
The Plaintiff’s acquiescence in the non-payment of dividends ceased in February 2014 when he formally complained, and relief is therefore not barred by delay or acquiescence. The Court reserved the precise form of relief to be determined subsequently, as this trial concerned liability only.
No new precedent was established beyond the application of established principles of unfair prejudice and directors’ duties to the facts of this case. The decision directly affects the parties by recognizing the Plaintiff’s entitlement to relief for unfair prejudice due to the non-payment of dividends on the 'B' shares.