Shareholder Disputes Circular

Director remunerationOne

Director remunerationOne complaint made frequently by minority shareholders is that directors are taking excessiveremuneration at the expense of paying dividends. Majority shareholders with a seat on theBoard sometimes extract available cash in this way, as opposed to by means of a dividend,thereby avoiding the need to distribute to other shareholders. However, this is not a validrationale or proper exercise of a director’s fiduciary duties and in two cases in 2018 thisapproach was held to be unfairly prejudicial to a minority shareholder.CF BoothIn CF Booth, the Petitioners argued that excessive director remuneration and a no-dividendpolicy were unfairly prejudicial. The directors (the majority shareholders and Respondents)maintained that any spare cash was needed for the business, hence the no-dividend policy, andthey disputed that their salaries were excessive. The Court disagreed with the directors. Theirremuneration was excessive in the context of the work they undertook when compared toindustry norms. But for this excessive remuneration, money would have been available to paydividends. The Directors had also used company monies to purchase expensive cars and a yachtfor personal use. They had breached their directors’ duties by failing to promote the company’ssuccess for the benefit of all its shareholders and were essentially making important financialdecisions in their own personal interests.Re Edwardian Group LtdRe Edwardian Group Ltd, was essentially an unfair prejudice dispute between two brothersinvolved in a large hotels business. One of the issues in dispute was a complaint that the elderof the two brothers, who held the position of CEO, was receiving excessive remunerationincluding by means of benefits in kind and bonuses. He argued that this was in fact reasonableand appropriate to his role and that he had been involved in successfully developing specificaspects of the company’s business. However, the Court again disagreed. The payments werenot justifiable objectively: the company’s Remuneration Committee was not functioningproperly (it met only on an ad hoc basis and there was no evidence of meeting minutes orregular recommendations being made to the Board), and in reality the CEO was receivingsignificant additional money simply for the purposes of covering personal expenditure (forexample, family weddings) from an overly compliant Board. Along with the CEO’s inflated fixedsalary, the benefits in kind and bonuses amounted to an improper/disguised distribution ofcompany profits and were unfairly prejudicial because the available money should have beendistributed to all shareholders by means of dividends on a pro-rated basis.10

CommentThese two cases highlight the tension that can often arise between a shareholder’spersonal interests (e.g. the extraction of the maximum amount of money) and his or herdirectors’ duties (which include a duty to discharge his/her powers for a proper purposeand in the best interests of the company and its members generally). In these excessiveremuneration cases, the directors had clearly strayed too far. However, there will besituations which are less clear cut. For example, while industry norms may dictate a certainrange of salary, a specific director may bring some kind of special skill which justifies ahigher salary. In addition, higher than average remuneration may be justified if linkedto specific (particularly forward looking) performance objectives or in an industry widelyrecognised as ‘overpaying’ senior managers.11