Routledge v Skerritt & Ors

The court applied the principles of unfair prejudice under section 994 and the relief under section 996 of the Companies Act 2006. The judge held that the dividend regime created by the Special Resolution depended on a board "policy in relation to dividends" and that, in the absence of any such policy adopted and notified in accordance with the Shareholders Agreement (clause 5.4), the A and B ordinary shares could not be treated differently and therefore rank pari passu for dividends. The court found that no board dividend policy had been adopted or notified in writing and that the respondents, as controlling directors, had failed to give proper consideration to declaring dividends on the B shares, breaching their duties as directors. The non-payment of dividends on the B shares was therefore unfairly prejudicial to the petitioner. The petitioner had acquiesced in the position until 21 February 2014, but that acquiescence did not bar relief from that date onwards.

Background and procedural posture: The petitioner, Michael Routledge, brought a petition under section 994 Companies Act 2006 alleging unfairly prejudicial conduct by the controlling shareholders and directors (Mr and Mrs Skerritt) of Skerritt Consultants Limited. The Chancery Division heard a liability trial, with issues of quantum to be dealt with subsequently.

Key facts:

• In 2005 the company re-designated its shares into 9,500 ordinary A shares and 500 ordinary B shares by Special Resolution, specifying dividend rights for A and B shares that were to operate "in accordance with the policy in relation to dividends as made and as amended by the Company’s Board of Directors from time to time."
• The parties also had a Shareholders Agreement containing clause 5.4 requiring dividends to be declared in accordance with the board policy and that shareholders be promptly notified in writing of any such policy or amendment. The Shareholders Agreement was unsigned but treated by the parties as binding.
• The petitioner acquired B shares in three tranches (2005–2007) but was never paid B dividends; large dividends were repeatedly paid on A shares to the respondents over many years.

Issues before the court:

1. Whether the Special Resolution and related documents permitted the directors to adopt a dividend policy under which B shares would never receive dividends, or whether, absent a board dividend policy, A and B shares rank pari passu;
2. Whether a board dividend policy had in fact been adopted and, if so, whether it had been notified to the petitioner per clause 5.4;
3. Whether the respondents breached directors' duties by failing properly to consider dividends for the B shares;
4. Whether the petitioner had acquiesced or delayed so as to preclude relief.

Court's reasoning and findings:

• Construction: The Special Resolution made dividend priority dependent on a board policy; the policy was a necessary element of the dividend machinery because it identifies the factors and the amount of any A dividend and thus whether profits remain for B dividends.
• Interaction with the Shareholders Agreement: Clause 5.4 required the board policy to be set and shareholders to be notified, which in practice required written notification of any adopted policy.
• Findings of fact: On credibility and contemporaneous documents the court found no evidence of any board policy having been adopted or notified in accordance with clause 5.4. Documentary minutes and emails did not show a properly adopted policy; the accountant and director evidence established that dividends were determined informally to meet the controlling director's remuneration needs and to clear his director’s loan account.
• Directors' duties: The respondents failed to adopt or apply a valid dividend policy, failed to give genuine consideration to paying B dividends and failed to act fairly between members, breaching duties derived from the constitution and statutory duties in the Companies Act.
• Acquiescence and delay: The petitioner had information and did not complain until February 2014 and therefore had acquiesced to the practice until that date; nevertheless the acquiescence did not bar relief for conduct after the complaint.

Outcome and next steps: The court held that the non-payment of dividends on the B shares was unfairly prejudicial and liability was established. The form and extent of relief were to be dealt with at a subsequent hearing.

First instance: The petition under section 994 Companies Act 2006 is upheld on liability. The court held that the Special Resolution required a dividend policy adopted by the board for the preferential A dividend to operate; no such policy had been adopted or notified in writing and therefore the A and B shares rank pari passu for dividends. The respondents breached their duties by failing to adopt or apply a valid dividend policy and by failing to consider B dividends. The non-payment of B dividends was unfairly prejudicial to the petitioner. The form and extent of relief were reserved for later determination.