Jun 24
As a minority shareholder in a business, you may be frustrated with how the directors are running the company and, in particular, with how much they are taking from the business as salary as this has a direct effect on your dividends.
If other shareholders agree with you, then you may be able to address these issues with their cooperation. However, even if they do not support your position, you are not completely powerless.
Excessive remuneration by directors is a common cause for complaint among shareholders particularly in small companies. We frequently come across cases in which a company has been set up by a number of individuals who are both directors and shareholders at the outset. However, there may be a fall out in due course and one or more individuals step back as directors only to find that profits are distributed more as salary than dividends in order to gain an advantage by those directors still at the helm.
It is easy to make assumptions, for example from the lifestyle of a director, but this does not necessarily equate to excessive remuneration, so it is important to obtain accurate information.
If you are also a director, you may be able to see from the accounts and the PAYE records what your fellow directors are paid.
Shareholders are not usually privy to the same financial information as directors and, unless you are a director or have day-to-day involvement in the business, or someone in the business informs you of the remuneration levels, it is unlikely that you will know the details of the directors’ remuneration.
Certain companies have to provide a directors’ remuneration report and file the report at Companies House. However, this is limited to quoted and regulated companies, and so does not cover all limited companies. There are no rights for a person to make a data subject request of an individual director, as this is likely to breach Data Protection issues, so it can prove difficult to determine the level of remuneration as a shareholder.
If you are not sure, you should start by checking the key company documents, namely the company’s Articles of Association, the Memorandum of Association, and the shareholders agreement, if there is one (these are not compulsory).
Voting rights may exist which allow shareholders to vote on the level of remuneration by directors, such as:
Naturally, minority shareholders will have less power when voting than majority shareholders.
But while a vote may require a 50% or even a 75% shareholder majority vote before it can be passed, a minority shareholder (or a few minority shareholders) have the means to block a majority vote if 25% or more agree. This is often a very good option for minority shareholders who hold similar concerns about the way a company is being run.
Once you have established the level of remuneration, and if you genuinely believe it is not justified in the market place and it is damaging the business overall, then you should speak to your fellow shareholders to see if they support you.
There are then a number of options.
If you are a minority shareholder with at least 5% of paid-up shares with a right to vote, or you have joined with others to reach 25%, then you can either call a general meeting of the shareholders to propose a resolution to address excessive remuneration, or you can circulate a written resolution and put this to a vote.
If you cannot cause a vote and you believe that the conduct of the directors is unfairly prejudicial to your shareholding, you can bring an ‘unfair prejudice’ petition to court.
This is an option if you feel seriously aggrieved about the way the business is being run, and how it is affecting your shareholding. If the court agrees with you, they might order the company to purchase your shares, so you are released from your shareholding and are paid a fair value for your shares. Or the court can make any other order that it sees fit, including ordering you to be paid damages by the company.
You will need to prove to the court that you have been prejudiced and have been unable to affect the remuneration via your existing voting rights. This may be the case if you have been directly affected in your dividends by the excessive remuneration of the director(s).
What is considered excessive will be looked at by the court taking into account the type of business, the turnover and profits, and the general financial position of the company.
A derivative claim is an application to the court brought by a shareholder on behalf of the company. To be successful, you would need to prove to the court that the actions of the director(s) have been contrary to the company’s interests under the Companies Act 2006. This may be by taking excessive remuneration and therefore is a breach of the directors’ duty to act in the best interests of the company.
If a court finds in your favour, then it has very wide powers to make any order it sees fit. This can include awarding compensation to the company for excessive remuneration drawn.
Note that this action is brought on behalf of the company, not on your own behalf, and so any award is for the company, not you as a minority shareholder personally. However, this can be a good option to bring the directors back into line and to ensure they stop acting in breach of their general duties. Ultimately, if the directors’ remuneration is reduced, this may have the effect of increasing dividends for shareholders.
For further information, please contact Jonathan Mortimer in the dispute resolution team at Raworths on 01423 566666 or email jonathan.mortimer@raworths.co.uk.
Raworths is based in Harrogate, North Yorkshire.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.
Published on 18 June 2024
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