Disputes over dividends and unfair payment policies are a common source of conflict in private companies. Minority shareholders often invest in a business expecting that profits will be distributed through dividends. When those dividends are not paid, tensions can quickly arise between shareholders.
In some circumstances, the refusal to declare dividends may form part of an unfair prejudice claim under section 994 of the Companies Act 2006. However, the failure to pay dividends does not automatically amount to unfair prejudice. The court will examine the wider context of the company’s affairs before deciding whether the conduct is unfair.
Understanding how courts approach dividend disputes can help shareholders determine whether legal action may be appropriate.
When does a dispute over dividends arise between shareholders?
Dividend disputes often arise in private companies where the majority shareholders control the board of directors and therefore have influence over whether profits are distributed.
- Minority shareholders may believe that the company is profitable and capable of paying dividends, while the majority may argue that profits should be retained for reinvestment or business development.
- The tension becomes more pronounced where minority shareholders rely on dividends as their primary financial return from the company.
These disagreements can escalate where communication breaks down or where shareholders have different views about the long-term strategy of the business.
When can non-payment of dividends become unfair prejudice?
The courts recognise that directors have discretion over dividend policy. Companies are not legally required to distribute profits as dividends, even if the business is profitable.
However, the refusal to declare dividends may become unfair where it forms part of a broader pattern of conduct that disadvantages minority shareholders.
For example, unfair prejudice may arise where:
- majority shareholders extract profits through salaries, bonuses or other benefits while refusing to declare dividends
- dividend policy is manipulated to pressure minority shareholders into selling their shares
- profits are diverted away from the company in a way that prevents dividends from being paid
- the refusal to pay dividends contradicts an established understanding between shareholders.
In these situations, the court will examine whether the conduct is both prejudicial and unfair in the context of the company’s governance and shareholder relationships.
How do courts examine dividend policy in shareholder disputes?
When considering whether dividend policy amounts to unfair prejudice, courts look at several factors.
- First, they consider the company’s financial position. If the company is genuinely reinvesting profits in the business, the refusal to declare dividends may be commercially justified.
- Second, courts examine how the majority shareholders benefit from the company’s profits. If value is being extracted through remuneration or related-party arrangements instead of dividends, this may support allegations of unfair prejudice.
- Third, courts may consider the history of dividend payments. A sudden change in dividend policy, particularly following a breakdown in relations between shareholders, may raise questions about the motivation behind the decision.
Ultimately, the court assesses whether the dividend policy has been used as a tool to disadvantage minority shareholders.
What evidence is relevant in dividend-related unfair prejudice claims?
Evidence relating to dividend disputes often focuses on the financial affairs of the company and how profits have been used.
Common sources of evidence include:
- company accounts and management accounts
- records of dividend declarations and distributions
- directors’ remuneration and bonus arrangements
- board minutes discussing dividend policy
- correspondence between shareholders concerning financial decisions.
This evidence helps the court determine whether the refusal to pay dividends was a legitimate business decision or part of conduct that unfairly prejudiced minority shareholders.
What remedies may the court order where dividend policy is unfair?
If the court concludes that dividend policy forms part of unfairly prejudicial conduct, it has broad powers under section 996 of the Companies Act 2006 to grant appropriate relief.
In many cases the court may order a share purchase order, requiring the majority shareholder to buy the minority shareholder’s shares at a fair value.
The court may also regulate the future conduct of the company’s affairs, which could include governance changes affecting how financial decisions are made.
In extreme situations where the relationship between shareholders has broken down irretrievably, the court may consider other remedies such as winding up the company on just and equitable grounds.
Key takeaway
The failure to pay dividends does not automatically amount to unfair prejudice. Directors generally have discretion over dividend policy, and commercial decisions about reinvestment may be entirely legitimate.
However, where dividend policy is used as part of a broader strategy to disadvantage minority shareholders, it may support a claim under section 994 of the Companies Act 2006.
Careful analysis of the company’s financial records and governance decisions is often required to determine whether unfair prejudice has occurred.
Francis Wilks & Jones were responsive, available at all times to deal with any of my queries and very reassuring. I would definitely recommend them to deal with proceedings brought on behalf of shareholders – they understood our practical needs.
A shareholder we helped bring unfair prejudice proceedings against a fellow shareholder who had been interfering with the management of the company and damaging its value
