Naomi is a minority-shareholder in Run For Your Life (RFYL) Ltd.

Dividends

Unfair Prejudicial Conduct

The first issue that will be looked at in this scenario is whether Mehmet and Lucy’s failure to pay dividend amounts to unfair prejudicial conduct. Under the Companies Act 2006 s.994[1](CA 2006) Naomi’s petition should relate to how the company’s conduct unfairly prejudiced her interests as a member. A member’s interests are not limited to the strict legal rights granted to them by agreements but also cover the legitimate expectations, such as expectations of profit and management, arising from the conduct of the company and any understandings between the parties (O’Neill v Phillips)[2]. In order for such expectations to occur, the company has to be a ‘quasi-partnership company’, which arises from the basis of personal relationship involving mutual confidence and an agreement that all of the shareholders/members would be involved in management to some degree (Ebrahimi v Westbourne Galleries Ltd)[3]. Applying Ebrahimi‘s test to RFYL Ltd, it can be said that it is a ‘quasi-relationship’ company as Naomi was initially a partner even before the company incorporated and was brought on as a director during the incorporation. Share restrictions can also be considered to exist, (though we are never really told) since RFYL Ltd is a private company that cannot trade its shares in public markets. It should be noted, that Naomi has expressly stated her dis-interest in RFYL Ltd which means that it may make it difficult to prove the ‘quasi-relationship’ between the members and that in Irvine v Irvine[4], the judges found that in a quasi-relationship company, the failure to pay dividends does not always amount to a legitimate expectation. However, this shouldn’t deter Naomi from arguing that a ‘quasi-relationship’ exists as there may a be chance to “reconsider and revoke his resignation if it was effected hastily and in a manner and circumstances which did not strike too deeply at mutual trust and confidence, and that a failure to permit this might amount to unfair prejudice” (Re Flex Associates Ltd)[5] and that though the Judges may not find a legitimate expectation, it can still be argued that the non-payment of dividends amounts to an unfair prejudicial conduct.

Regardless of whether she is a director or not, Naomi as a member has a vested interest in receiving dividends from RFYL Ltd, (Re Coroin Ltd[6]). For Naomi’s petition to succeed, she should objectively and individually prove that her interests have been prejudiced and that conduct was unfair[7]. In Re Sam Weller & Sons Ltd[8]thoughGibson J states that he does not ‘intend to suggest that a shareholder who does not receive an income from the company except by way of dividend is always entitled to complain whenever the company is controlled by persons who do derive an income from the company and when profits are not fully distributed by way of dividend’ he does go to indicate that it will depend on the facts of the case which means that it will remain in the judge’s discretion to decide on whether the facts of the case amount to unfair prejudicial conduct. Lucy and Mehmet decide to stop Naomi’s salary and fail to pay dividends, leaving her with no form of financial return for her investment and accordingly a lack of financial return can be considered prejudicial (Re Coroin Ltd)[9]. Moreover, Naomi needs to also prove that the conduct was unfair. The House of Lords in O’Neill v Phillips[10]effectively limited the definition of unfairness to breaches of the terms of legally enforceable agreements and to where equitable considerations make it unfair for those conducting the company’s affairs to rely on the strict legal rights offered to them. In relation to the non-payment of dividends to Naomi, it can be considered unfair especially when both Mehmet and Lucy are still receiving substantial salaries[11] all while Naomi receives no form of remuneration.

Naomi seems to have a good chance at succeeding with a petition under s.994[12]. If the judges find in favour of Naomi, she can claim for remedies under s.996[13]. The most common remedy is an order to purchase shares of the minority member. It in the case that order to purchase the shares is made, the valuation date will be on the same day as that of the order, unless a ‘quasi relationship’ is found, in which case the valuation will be pro-rata and without a minority discount.

Just and Equitable Winding-up

Naomi also can also bring a petition through the Insolvency Act 1986 s. 122(1)(g)[14], though its chances of success are comparatively much lower. Harman J in Re a Company (No 00370 of 1987)[15] found that a failure to pay dividends may amount to sufficient reasoning for winding up of a company. Nonetheless, in accordance with IA 1986 s. 125(2)[16] the courts have been less inclined[17] to grant an order for winding up if there are less severe remedies available (i.e. offer to purchase or unfair prejudicial conduct). Winding up under s.122(1)(g)[18] is usually reserved for more difficult situations where no clear member holds a majority (Re Yenidje Tobacco Ltd)[19].Therefore, it would not be viable for Naomi to bring a petition for winding up as it would most certainly be struck out by the court.

Offer to Purchase

If the offer to purchase made by Mehmet and Lucy is found to be fair, then it will most probably change Naomi’s course of action. As it stands, if a fair offer is made regarding the purchase of the petitioner’s shares, an unfair prejudicial conduct petition would also be struck out. Similarly, if a petition for winding up is made the courts will also be inclined to strike it out in favour of a fair offer. An offer to purchase is sometimes seen as the ideal remedy in such cases as it limits the possibility of future complications and allows to petitioner to step away from the company[20]  The real issue with the offer to purchase, is determining whether the offer is reasonable and fair. Lord Hoffman in the case of O’Neill[21] stated that a reasonable offer must be to purchase the shares at a fair value on a pro rata basis without a minority discount determined by a competent expert. It should also include submissions by both parties to an expert. In our scenario, it is not very clear whether the offer is considered to be reasonable since the integrity of the auditor is in question. Having the company auditor value the shares would probably be considered unfair since he is not considered adequately independent[22]. Although a court will usually consider offers to purchase as the best form of remedy it will still allow a petition to proceed depending on the merits of the case.

Directors’ Duties

Though this question deals more with minority shareholder remedies, a look at Naomi’s possible breaches as a director and whether Mehmet’s and Lucy’s claim that Naomi’s negligence is a cause for the fall in profits should be made. The general directors’ duties that are owed to RFYL Ltd. are found in CA 2006 ss.171-77[23].

The issue to consider in relation to Naomi’s possible breach of directors’ duties is Naomi’s failure to attend board meetings. The relevant sections of the CA 2006[24] that pertain to our argument are ss. 172 &174. Under s.172 a director has a duty to promote the success of the company and act in good faith for the benefit of the company. In order to prove that the director’s actions were in good faith subjective test must

[1] Companies Act 2006 s.994

[2] O’Neill v Phillips [1999] 1 WLR 1092

[3] Ebrahimi v Westbourne Galleries Ltd [1973] AC 360

[4] Irvine v Irvine (No 1) [2006] EWHC 406 (Ch); [2007] 1 BCLC 349

[5] Re Flex Associates Ltd [2009] EWHC 3690

[6] Re Coroin Ltd [2013] EWCA Civ 781

[7] Hawks v Cuddy [2007] EWHC 2999

[8] Re Sam Weller & Sons Ltd [1990]

[9] Re Coroin Ltd [2013] EWCA Civ 781

[10] O’Neill v Phillips [1999] 1 WLR 1092

[11] Re Sam Weller & Sons Ltd [1989] 5

[12]

[13]

[14] Insolvency Act 1986, s. 122(1)(g)

[15] Re a Company (No 00370 of 1987) [1988] 1 WLR 1068 (Ch).

[16] Insolvency Act 1986, s. 125(2)

[17] Re Sam Weller & Sons Ltd [1990]

[18] Insolvency Act 1986, s. 122(1)(g)

[19] Re Yenidje Tobacco Ltd [1916]

[20] Grace v Biagoli [2006] 2 BCLC

[21] O’Neill v Phillips [1999] 1 WLR 1092

[22] North Holding Ltd v Southern Tropics Ltd [1999]

[23]

[24]