SHAREHOLDER PROTECTION - Royal London Group · The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial

SHAREHOLDER PROTECTION

AVOIDING BOARDROOM

DISPUTES AND ‘UNFAIR

PREJUDICE’

SHAREHOLDER PROTECTION &

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.

UNFAIR PREJUDICE

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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?


• Q. Who decides dividend levels?


• Q. Where do we go for the details/rules on all this?

• A. The Articles of Association.

SHAREHOLDER PROTECTION & UNFAIR PREJUDICE

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Model articles

• Article 19 – Directors’ Remuneration.

• Article 30 – Procedure for declaring Dividends.

• Have these articles been changed/amended for the client company?

UNFAIR PREJUDICE


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A fictional client

• 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.

• Messrs A, B and C are also directors of the business, involved in the running of the 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…..


Share

Mr A

Mr B

Mr C

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?

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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?

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UNFAIR PREJUDICE

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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

Section 994 companies act 2006

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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

Examples of prejudice

• Failure to pay a dividend

• Diversion of business to another company

• Exclusion from management decisions

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UNFAIR PREJUDICE


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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

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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.


Business valuation

• 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.

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UNFAIR PREJUDICE


Legal professional privilege

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• Hequet v McCarthy

• Metropolis Motorcycles

• Irvine v Irvine

• Hale v Waldock


Real cases

• 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.

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UNFAIR PREJUDICE


Back to Lift and Drop Ltd

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• 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?


The life raft

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The insurance community also calls this:

• Ownership Protection Insurance, or

• Partnership Protection Insurance.


Shareholder Protection

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Male aged 40 next birthday, non-smoker £500,000 RPI indexed for 25 year term.

• Premium £37.25. Commission £819.82


• Premium £48.41 Commission £1,067.01

Male aged 48 next birthday, smoker £500,000 RPI indexed for 17 year term.


Total Monthly Premium £242.07 Total Commission £5,345.96

Premiums correct as at 17/01/2019


An example quote Life Cover


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

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• Premium £37.25. Commission £819.82








An example quote Life Cover


EQUALISED PREMIUMS

Lift and Drop Ltd


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

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Male aged 48 next birthday, smoker £500,000 RPI indexed for 17 year term.


Total Monthly Premium £1,302.84 Total Commission £28,841.23



An example quote Life or Critical Illness Cover


EQUALISED PREMIUMS

Lift and Drop Ltd


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

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An example quote Life or Critical Illness Cover


EQUALISED PREMIUMS

Lift and Drop Ltd


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

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• 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.

UNFAIR PREJUDICE

Learning objectives

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• https://www.ashfords.co.uk/news-and-events/general/guide-to-unfair-prejudice-against-shareholders

• www.financialdirector.co.uk/financial-director/feature/1742347/company-law-court-minority-report

• www.gov.uk/government/uploads/system/uploads/attachment_data/file/376832/model_articles_private_ltd_by_shares_after28April2013.doc

ADDITIONAL READING


https://www.ashfords.co.uk/news-and-events/general/guide-to-unfair-prejudice-against-shareholders
















http://www.financialdirector.co.uk/financial-director/feature/1742347/company-law-court-minority-report











http://www.gov.uk/government/uploads/system/uploads/attachment_data/file/376832/model_articles_private_ltd_by_shares_after28April2013.doc



The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions and is a member of the Association of British Insurers. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London EC3V 0RL.

PRP8PN0082 January 2019

adviser.royallondon.com/protection

Documents

SHAREHOLDER PROTECTION - Royal London Group · The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial