SHAREHOLDER PROTECTION AVOIDING BOARDROOM DISPUTES AND UNFAIR - PowerPoint PPT Presentation

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, 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. 2

SHAREHOLDER PROTECTION & UNFAIR PREJUDICE 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. 3

SHAREHOLDER PROTECTION & UNFAIR PREJUDICE Model articles • Article 19 – Directors’ Remuneration. • Article 30 – Procedure for declaring Dividends. • Have these articles been changed/amended for the client company? 4

SHAREHOLDER PROTECTION & UNFAIR PREJUDICE A fictional client Share • 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. Mr A • Messrs A, B and C are also directors of the Mr B business, involved in the running of the Mr C 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….. 5

SHAREHOLDER PROTECTION & UNFAIR PREJUDICE 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? 6

SHAREHOLDER PROTECTION & UNFAIR PREJUDICE Someone is not amused • A widow or widower could be left as a minority shareholder with no immediate financial return. • What can they do? 7

SHAREHOLDER PROTECTION & UNFAIR PREJUDICE Section 994 companies act 2006 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”. Source: Companies Act 2006 – section 994 8

SHAREHOLDER PROTECTION & UNFAIR PREJUDICE 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”. Source: https://www.ashfords.co.uk/news-and-events/general/guide-to-unfair-prejudice-against-shareholders 9

SHAREHOLDER PROTECTION & UNFAIR PREJUDICE Examples of prejudice • Failure to pay a dividend • Diversion of business to another company • Exclusion from management decisions 10

SHAREHOLDER PROTECTION & UNFAIR PREJUDICE 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. Source: https://www.ashfords.co.uk/news-and-events/general/guide-to-unfair-prejudice-against-shareholders 11

SHAREHOLDER PROTECTION & UNFAIR PREJUDICE Business valuation 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. 12

SHAREHOLDER PROTECTION & UNFAIR PREJUDICE Legal professional privilege • 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. 13

SHAREHOLDER PROTECTION & UNFAIR PREJUDICE Real cases • Hequet v McCarthy • Metropolis Motorcycles • Irvine v Irvine • Hale v Waldock 14

SHAREHOLDER PROTECTION & UNFAIR PREJUDICE Back to Lift and Drop Ltd • 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. 15

SHAREHOLDER PROTECTION & UNFAIR PREJUDICE The life raft • 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? 16

SHAREHOLDER PROTECTION & UNFAIR PREJUDICE Shareholder Protection The insurance community also calls this: • Ownership Protection Insurance, or • Partnership Protection Insurance. 17

SHAREHOLDER PROTECTION & UNFAIR PREJUDICE An example quote Life Cover 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 18 Premiums correct as at 17/01/2019

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 19

SHAREHOLDER PROTECTION & UNFAIR PREJUDICE An example quote Life Cover 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 20 Premiums correct as at 17/01/2019

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 21

SHAREHOLDER PROTECTION & UNFAIR PREJUDICE An example quote Life or Critical Illness Cover 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 22 Premiums correct as at 17/01/2019

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 23

SHAREHOLDER PROTECTION & UNFAIR PREJUDICE An example quote Life or Critical Illness Cover 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 24 Premiums correct as at 17/01/2019

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