Minority Shareholder Gains £400,000 Payoff

It is rare to see a petition under the Companies Act regarding the payment of excessive remuneration to a director, but the Scottish Outer House of the Court of Session had to deal with just such a case earlier this year.

It involved the sole director of a company, who also owned the majority of the shares. A minority shareholder claimed that the director conducted the company’s affairs in a manner which was unfairly prejudicial to the interests of the company’s members and made a claim to that effect in court (under what is now Section 994 of the Companies Act 2006).

The minority shareholder specifically alleged that no dividends had been paid to shareholders and that:

1. he had been wholly excluded from the management of the company;
2. the director had unlawfully borrowed money from the company, in part to buy shares to give himself control over it;
3. the director spent the company’s money defending a case brought against him personally;
4. the director arranged for the company to buy an expensive car for the director’s sole use; and
5. over a period of approximately three years, the company paid the director in the region of £900,000 in income and pension contributions and this was severely understated in the company accounts.

The Court examined all the evidence, which covered the entire commercial history of the company, before deciding that the director’s conduct was prejudicial to the other shareholders. It ordered that the director be required to buy the petitioner’s shares. The equity value of the company was put at £2,740,642 and a discount of 40 per cent applied because of the petitioner’s minority shareholding. This resulted in his 28.57 per cent shareholding being valued at £469,800.