Irvine & Ors v Irvine & Anor

In an unfair-prejudice petition, excessive remuneration paid to a controlling director may justify relief where it is outside the range supported by objective commercial criteria and reduces the dividends available to other shareholders.

Where a company has historically extracted substantially all distributable profits, the court may assess proper executive remuneration and treat the balance as available for distribution according to the shareholdings. Procedural breaches, such as failures to hold meetings, do not themselves establish material prejudice unless they caused a consequential disadvantage. A breakdown in trust and confidence may justify a buy-out order.

The petitioners held just under half the shares in Campbell Irvine (Holdings) Ltd. They alleged that the controlling shareholder and director had unfairly prejudiced their interests by paying himself excessive remuneration, failing to pay adequate dividends, disregarding statutory and constitutional procedures, and negotiating a proposed sale on terms favouring himself.

The dispute concerned the period following the death of the former equal shareholder. The court considered the appropriate level of executive remuneration, the consequences for dividend distributions, the proposed Towergate sale, and the relief required under the unfair-prejudice jurisdiction.

1. Unfair prejudice. The conduct had to be both unfair and prejudicial, with real prejudice flowing from the conduct. The relevant principles were stated by reference to Saul D Harrison & Sons plc [1994] BCC 475, O’Neill v Phillips [1999] 1 WLR 1092, Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 and Re BSB Holdings Ltd (No 2) [1996] 1 BCLC 155.
2. Remuneration and dividends. The director alone had fixed the remuneration paid by the trading subsidiary. It had not been fixed through the procedures required by the company’s articles. Applying the objective commercial criteria discussed in Re A Company (No 004415 of 1996) [1997] 1 BCLC 479, the court assessed proper remuneration by reference to the responsibilities undertaken, the importance of the director to the business, his client relationships, workload and contribution to profitability.
3. The appropriate remuneration was assessed at 40% of net profits before tax, subject to a minimum of £300,000 for 2003 and appropriate adjustment for earlier years. The balance, consistently with the historic policy of extracting distributable profits, should have been distributed as dividends according to the shareholdings. The excessive remuneration therefore caused unfair prejudice to the petitioners.
4. The failures to hold board and shareholder meetings and to obtain formal approvals were wrongful and censurable. They did not, however, cause separate material prejudice because the controlling shareholder could have secured the same result through properly convened meetings.
5. In principle, a person who undertakes to negotiate the sale of another shareholder’s shares may assume fiduciary duties to seek the best price and avoid conflicts without informed consent. The Towergate negotiations did not, however, cause actionable unfair prejudice. No sale occurred, the overall price was not challenged, and the petitioners had access to independent advice and could approach Towergate directly.
6. The Towergate defence failed. The February 2000 offer provided no reliable cash or guaranteed security for the loan notes. The petitioners were justified in declining to accept unsecured, non-guaranteed consideration.
7. The relationship between the parties had irretrievably broken down. The appropriate remedy was an order requiring the first respondent to buy, or procure the purchase of, the petitioners’ shares. The valuation was to take account of the excess remuneration. The court indicated that a minority discount should probably not be applied, subject to further argument.