FAILURE TO PAY DIVIDENDS HELD TO BE UNFAIRLY PREJUDICIAL: ROUTLEDGE V SKERRITT  EWHC 573 (CH)
This was an unfair prejudice claim brought by a minority shareholder under section 994 of the Companies Act 2006. The principal complaint concerned non-payment of dividends.
The company had two classes of shares, ‘A’ and ‘B’ shares. The rights attached to the shares allowed for dividends to be paid on the ‘A’ shares in priority to the ‘B’ shares, but this depended upon the board of directors having adopted a “policy in relation to dividends”.
Over a period of many years the company paid substantial dividends on the ‘A’ shares, but no dividends at all on the ‘B’ shares.
The Court found that, in fact, the board had never adopted any dividend policy and that, as a consequence, the default position was that the ‘A’ and ‘B’ shares ranked pari passu in respect of dividends.
Accordingly, it was held that the rights attached to the ‘B’ shares in respect of dividends had been breached, and that the majority shareholders (who were the holders of the ‘A’ shares and the directors of the company) had thereby conducted the company’s affairs in a manner unfairly prejudicial to the interests of the holder of the ‘B’ shares.
Where rights in respect of dividends depend upon the board of directors adopting a dividend policy, the Court will seek to ascertain whether any such policy has actually been adopted by the directors; it will not simply infer the existence and terms of a policy from the company’s practice in respect of dividends.
The case illustrates the basic principle that absent any applicable basis under a company’s constitution for treating shares differently, shares rank equally: Birch v Cropper (1889) 14 App Cas 525, per Lord MacNaughton at 543.
The primary basis upon which unfair prejudice was established was breach of the rights in respect of dividends attached to the ‘B’ shares; i.e. breach of the personal rights of the petitioner as a holder of ‘B’ shares. Such a breach readily supports a case of unfair prejudice, because it comprises a breach of the shareholder’s constitutional rights, i.e. is ‘unfair’, and is also prima facie prejudicial, because it directly gives rise to a financial loss in the amount of the dividends that should have been paid.
As such, the case may be contrasted with the position that more normally pertains in unfair prejudice cases featuring complaints about under-payment of dividends. Usually, the petitioner is not able to point to a breach of the express terms governing rights in respect of dividends, but must instead rely upon alleged breach of directors’ duties. In that context, it is necessary to show not only that the directors breached their duty by failing to give genuine consideration to the question of whether dividends should be paid (Re a Company (No. 00370 of 1987) ex p Glossop  1 WLR 1068), but also that the petitioner has been prejudiced by such failure. In principle, the latter requirement entails an examination of the counterfactual question of what, if any, dividends would have been paid if the directors had properly considered the question. Thus, for unfair prejudice purposes, the analysis based on breach of directors’ duties is potentially much more complex than in a case where it can be established that there has been a breach of the express rights attached to the shares.
Skerritt Consultants Limited is a financial services company based in Brighton. Its founder and controller is Mr Richard Skerritt. At the relevant time, Mr Skerritt and his former wife between them held 95% of the shares in the company, and were both directors. The case concerned their treatment of the holder of the remaining 5% of the shares in the company, Mr Michael Routledge, and, particularly, their failure ever to pay him a dividend.
Mr Routledge agreed to become a shareholder in 2005. At that time, the established practice was that Mr Skerritt received a very small salary, and a much larger dividend; i.e. he was effectively remunerated by the company through the payment of dividends. Against that backdrop, Mr Skerritt claimed that Mr Routledge had understood and agreed that if he became a shareholder it would be on the basis that he would never be paid a dividend. That was denied by Mr Routledge, who, whilst accepting that there was a practice whereby Mr Skerritt would expect to receive preferential dividends, indicated that he did hope to receive dividends if and when the company became more profitable in the future.
In order to facilitate Mr Routledge’s acquisition of shares, whilst at the same time preserving Mr Skerritt’s ability to take most of his remuneration in the form of dividends, the company’s share capital was restructured. Specifically, the existing ordinary share capital was split into ‘A’ shares and ‘B’ shares, on terms that the ‘A’ shares had the right, “to receive dividends declared by the company before all other ordinary shareholders of the company and in accordance with the policy in relation to dividends as made and as amended by the company’s board of directors from time to time”. The ‘B’ shares, comprising 5% of the company’s share capital, were transferred to Mr Routledge.
In the years immediately following Mr Routledge’s acquisition of shares in the company, dividends were paid on the ‘A’ shares held by Mr and Mrs Skerritt, and no dividends were paid on Mr Routledge’s ‘B’ shares. Mr Routledge made no complaint about this; he considered that the amount received by Mr Skerritt did not exceed what would be a reasonable level of remuneration.
Mr Routledge left the company in 2012. He and Mr Skerritt engaged in some negotiations with a view to agreeing a price at which Mr Routledge’s shares could be bought, but no agreement was reached. Relations between the parties deteriorated and in 2014 Mr Routledge for the first time raised a concern about the level of dividends being paid to Mr Skerritt.
Despite the fact that the company was no very profitable, and that the amounts being paid to Mr Skerritt in dividends were increasing year on year, the position remained that no dividends were paid on the ‘B’ shares. From the beginning of 2014 until trial, dividends in the total sum of £11,018,522 were declared on the ‘A’ shares (of which over £6.8 million was paid to Mr Skerritt, £281,250 was paid to Mrs Skerritt and the balance was waived by Mrs Skerritt).
The Judge, Amanda Tipples QC, found, as a matter of construction of the special resolution that created the ‘A’ and ‘B’ shares, that the ‘A’ shares’ preferential right to dividends could only operate if the board had adopted a board policy in respect of dividends. If no such policy had been adopted, then there was no basis for treated the ‘A’ shares any differently from the ‘B’ shares when it came to dividends. This was the “default position as a matter of law”, following Birch v Cropper (supra).
No such policy had actually been adopted. In practice, decisions in respect of dividends were taken simply on the basis of Mr Skerritt’s personal needs. Each year, a large end-of-year dividend would be paid to discharge the substantial debit balance that he had accumulated on his director’s loan account as a result of expenditure for his personal benefit over the year. There was never any genuine consideration of what amount would reflect a reasonable level of his remuneration for his services to the company; nor was any consideration given to the ‘B’ shares.
In the result, the ‘B’ shares carried the right to participate in dividends on a pari passu basis, and that right had been breached. Mr and Mrs Skerritt, as directors of the company, had also breached their duties, in that they had failed to adopt and adhere to a board policy on dividends, they had caused dividends to be paid in breach of the rights attached to the ‘B’ shares, and they had failed to act fairly between shareholders, and to exercise reasonable care, skill and diligence.
That said, it was found that Mr Routledge had acquiesced in the situation in which dividends were not paid on his shares, but only until February 2014. Accordingly, whilst such acquiescence might operate to limit the relief that could be obtained in respect of the non-payment of dividends, it was not a bar to the claim.
In the circumstances, the Court was satisfied that there had been unfairly prejudicial conduct for which Mr Routledge was entitled to relief.
Edward Davies QC – Counsel for the Petitioner