Routledge v Skerritt & Ors

For the purposes of an unfair-prejudice petition, a company’s dividend arrangements must be construed from its constitution and any binding shareholders’ agreement. Where preferential dividend rights depend on a board dividend policy, the policy is an essential part of the machinery governing those rights. If no such policy has been adopted, the relevant share classes rank equally for dividends unless another valid provision applies.

Directors must genuinely and regularly consider whether dividends should be paid, including the position of each share class. They must act in accordance with the company’s constitution, exercise independent judgment and have regard to fairness between members. Persistent payment of dividends to one class while entirely disregarding another may constitute unfairly prejudicial conduct.

The petitioner held 500 ordinary B shares in Skerritt Consultants Ltd. A 2005 special resolution gave ordinary A shares priority for dividends and made both classes’ rights subject to a policy adopted by the board. A shareholders’ agreement also required dividends to be declared in accordance with the board’s policy and required notification of any policy to shareholders.

The petitioner received no dividends, while substantial dividends were declared on the respondents’ A shares. He presented a petition under section 994 of the Companies Act 2006, alleging breach of his membership rights and breach of directors’ duties. The central issues were the construction and existence of the dividend policy, the resulting ranking of the shares, the directors’ conduct, and the effect of acquiescence and delay.

1. Construction of the share rights. The A shares did not carry an unqualified right to receive dividends ahead of the B shares. The words requiring payment in accordance with the board’s dividend policy made that policy an essential component of the dividend machinery. The corresponding B-share right was therefore dependent on the same policy.
2. Effect of no policy. No dividend policy had been adopted by the board after the petitioner acquired his shares. The special resolution and shareholders’ agreement had to be read together, and required at least written notification of any policy. Without a policy, there was no basis for distinguishing the A and B shares for dividends. They therefore ranked pari passu, reflecting the default position identified in Birch v Cropper (1889) 14 App Cas 525.
3. Directors’ duties. Directors owe a duty genuinely and regularly to consider whether company profits should be distributed. Where classes have different dividend rights, each class must be considered, having regard to the duty under section 172 of the Companies Act 2006 to act fairly between members. The respondents failed to adopt a valid policy, failed to comply with the constitution, failed to consider the B shareholders and failed to exercise independent judgment and reasonable care, skill and diligence.
4. Unfair prejudice. The continuing failure to pay dividends on the B shares breached rights attached to those shares and caused prejudice in the petitioner’s capacity as a member. The conduct was therefore unfairly prejudicial under section 994 of the Companies Act 2006. The court’s jurisdiction and remedial power arose under sections 994 and 996.
5. Acquiescence and delay. The petitioner acquiesced in the absence of B-share dividends until 21 February 2014, when he first complained. That acquiescence did not bar relief for the continuing unfairly prejudicial conduct, and the petition was not issued too late.
6. The claim succeeded on liability. The precise form of relief was left to be determined after further submissions.