Personal Finance Society news update from 10th to 23rd May
Taxation and Trusts
TAXATION AND TRUSTS
Share purchase for directors - no dividend policy held
to be unfairly prejudicial to minority shareholders
It is generally well understood that, where there is no share
purchase agreement between shareholders in a private company and
following the death of a shareholder their shares pass to their
family, then, when the shareholding is a minority holding, those
who inherit the shares will be left with an asset which may have
little value if no dividends are paid and where minority
shareholders have little say on how the company is run.
There are provisions in company law, namely section 994
Companies Act 2006, whereby, if the company's affairs are being
conducted in a manner that is unfairly prejudicial to the
interests of members (i.e. shareholders) generally or, of some of
the members, such a member may bring a petition to the Court. If
the Court is satisfied that the petition is well founded it may
make such order as it thinks for giving relief. Such an order could
regulate the conduct of the company's future affairs, require the
company to refrain from doing or continuing to carry out the acts
complained of, all the way to providing for the purchase of the
shares of certain shareholders, even a reduction in the company's
share capital. Petitions can only be brought by minority
shareholders, given that majority shareholders have the power to
pass any resolution of the company by themselves.
We don't often see decisions on such cases but a recent one
provides an interesting insight into what the Court may consider as
unfairly prejudicial. The case concerned is D Booth, CR
Wilkinson and J A Compton v CKF Booth and Others (2017).
The facts of the case were as follows:
DB, CRW and JAC (the petitioners) were minority shareholders in
CF Booth Ltd (the Company). This was a family company
incorporated in 1949 and involved in the scrap metal
business. The business was established by Clarence Booth in
1920. Clarence died in 1980 which is when the conflict between two
different branches of the family started.
The petitioners held between them 27.4% of the Company. The
respondents were the majority shareholders with 65% of the shares,
5 of whom were also directors of the Company. The petitioners
and the respondents were different branches of the same
Over the years the Company diversified and grew into one of the
largest metal recycling businesses in Europe. From incorporation
until 1985 substantial dividends were paid. In 1986 the company
suffered a loss and no dividends were paid. Subsequently, despite
the Company returning to profitability, no further dividends were
paid. However, the directors' remuneration increased
considerably, between 2005 and 2006, from £275,000 to £820,000 and
from 2007 to 2015 the annual average remuneration was about
£1.6m. The directors also had other benefits including
expensive motor cars and a yacht.
Needless to say the non-dividend policy became a basis for
animosity between the two sides of the family. Some of the minority
shareholders complained about being unfairly treated back in
1991. On a couple of occasions the directors offered to buy
the shares of the minority shareholders although these offers were
rejected, understandably perhaps as in 2012 the directors offered
to buy the shares of CRW and JAC for £50,000 when a chartered
accountant instructed by them provided a valuation of between
£840,000 and £1.1m.
The petitioners brought a claim under the above-mentioned
section 994 claiming that they were unfairly prejudiced by the
directors being excessively remunerated and by the non-dividend
policy. They also claimed that the non-dividend policy was intended
to enable the directors' side of the family to acquire the minority
holdings at a favourable price, given that the lack of dividends
would have had a negative effect on the share price.
There was no share purchase agreement although there were
pre-emption rights included in the Company's Articles.
Without going into the detail of the arguments in Court, the
Court decided that the remuneration paid to the directors was
As can be imagined it is not an easy task to determine what is
an excessive remuneration for a director. However, there have been
some guidelines laid down, notably in the case of Irvine v
Irvine (2007) EWHC 1875. While clearly there can be no single
figure that can be said to be "reasonable" the guidelines provide
that what would be reasonable would be a fair remuneration for the
work the directors undertook within a certain bracket that
executives discharging similar duties would expect to receive. The
Judge in this case considered evidence provided by the accountant
instructed by the petitioners as well as a paper published by
Deloitte LLP entitled 'Directors' remuneration in small companies'.
The Judge also looked at median salaries in similar sized
companies, both listed and unlisted, before he reached his
conclusion that the remuneration paid to the directors far exceeded
what would have been fair and reasonable.
As for the non-dividend policy, it is clear that the declaration
of dividends is within the remit of the directors and not the
shareholders. The shareholders will vote on the directors'
recommendation as to a dividend but cannot by themselves insist on
a dividend being declared if the directors do not recommend it.
The directors in this case claimed that profits were needed for
the business and that the issue of whether to pay dividends was
considered by the Board more than once a year and each time the
decision was made not to pay a dividend.
The Judge accepted that the Company needed cash for investment
and that it did use some of its profits for this purpose and that
this might provide a reason for not paying dividends out of the
profits remaining after the directors' remuneration. The excessive
remuneration, which the Judge had already decided there had been,
made inevitable the finding that in profitable years there would
have been sufficient profits for investment if that excessive
remuneration had not occurred. In effect, there were
profits available for distribution but they were instead taken by
the directors for themselves.
The Court also concluded that the policy which the directors
adopted of never paying dividends under any circumstances was a
policy which they cannot have considered likely to promote the
success of the Company for the benefit of its members as a whole,
which is a duty of the directors. This, combined with the
excessive remuneration which they paid themselves, was a policy
promoting the success of the Company for their own benefit and not
for the benefit of the members.
It should be remembered that to prove their case under section
994 the minority shareholders must prove both unfairness
and prejudice. The Judge decided that the excessive
remuneration and no dividend policies were prejudicial because the
petitioners were denied a return on their investment and the
balance sheet had been diminished by the excessive
remuneration. It had also been unfair because the directors
had taken the petitioners' share of profits. Therefore the
statutory duties of the directors were breached.
The only argument that the respondents succeeded on was to show
that there was a limitation period and so the Judge restricted the
unfair prejudice to the relevant six year period before the
The Court held that the purchase of the petitioners' shares was
the only possible remedy as devising a proper dividend policy would
be impossible. For the purpose of valuing the Company, the balance
sheet would be adjusted to add back the excessive element of
remuneration taken by the directors in the six years prior to the
The petitioners argued that there should be no discount applied
to the value of the shares to reflect the misconduct of the
directors but the Court rejected this and said that the value of
the shares should be discounted to reflect a minority holding in a
private company (but not on any other basis) and the appropriate
discount for the size of the shareholding was one third. The
Court decided that it should be the directors who should be buying
the petitioners' shares at fair value. However, if the Company was
prepared to acquire the shares (under company share purchase
procedures) then that should happen.
The Judge also added that the conduct of the directors would
probably justify an order to wind up the company on the "just and
equitable" ground where it is not for the alternative and more
appropriate relief under section 994.
While each case will always be decided on its own facts, the
above decision sheds some light on the Court's approach in
determining what is unfair and prejudicial to minority
shareholders. Of course, it is much better to try and avoid any
potential argument and litigation and have in force a proper share
purchase agreement which caters for death and retirement, whether
incorporated in the shareholders' agreement or as a separate
agreement. And, clearly, as the above case illustrates, just
because a business is a family business it does not follow that
there is no need for a structured share purchase
Employees' business expenses
(AF1, AF2, JO3, RO3)
The Treasury has extended until 10 July the deadline for
submissions to the call for evidence on income tax relief for
employees' business expenses.
New UK limited partnership for private
(AF1, AF2, JO3, RO3)
From 6 April 2017 a new form of limited partnership came into
existence with the introduction of a "private fund limited
The Government first announced its intention to legislate for a
new type of partnership at Budget 2016 and, finally, the
Legislative Reform (Private Fund Limited Partnership) Order, SI
2017/514, introduced this new type of partnership structure from 6
April 2017. This modernises the Limited Partnership Act
1907 and is intended to make the limited partnership structure
more attractive for asset managers and investors.
The new structure aims to reduce various financial
administrative burdens for the managers and general partners as
well providing greater legal certainty for limited partners.
The following are the key points to note in relation to
- PFLP will be available to private investment funds established
as limited partnerships, such as private equity and venture capital
- A limited partnership (LP) must be constituted by an agreement
in writing and be a "collective investment scheme" to be designated
as a PFLP. The definition of a collective investment scheme is in
section 235 of the Financial Services and Markets Act 2000.
- An existing limited partnership may choose to apply for PFLP
status, if it fulfils the above conditions, by application to
Companies House in the UK.
- A new LP may apply to Companies House for registration as a
Benefits of becoming a PFLP
- Non-exhaustive "white list" of permitted activities. In a
traditional LP a limited partner may not take part in the
management of the LP's business without becoming liable for the
LP's debts. For PFLPs there is a list of activities a limited
partner may carry on without being considered to take part in the
management and without losing its limited liability.
- The removal of capital contributions - unlike with traditional
LPs, in a PFLP limited partners are not required to contribute any
capital. Any capital contributed may be withdrawn at any time.
- Removal of some statutory duties - certain duties applicable
under the Partnership Act 1890 have been disapplied for limited
partners of a PFLP; for example, limited partners will not need to
render accounts or other information to other partners and will not
need to account for profits made in competing businesses.
In addition to the above, PFLP has no obligation to file a
Gazette notice on a transfer of interest by a limited partner and
is not required to file notices at Companies House of changes of
the partnership business etc. In addition, the requirement
for limited partners to obtain a Court order to wind up a limited
partnership where there is no general partner does not apply to
Judging from the content of the Regulations, there does not
appear to be any disadvantages with funds registering to be
designated as a PFLP and so it is expected that many funds will
take advantage of this new structure.
The Bank of England sends out a subtle
(AF4, FA7, LP2, RO2)
The Bank of England's latest quarterly inflation report has
hinted that the future path of interest rates may not be quite what
the market expects.
"On the whole, the Committee judges that, if the economy follows
a path broadly consistent with its central projection, then
monetary policy could need to be tightened by a somewhat greater
extent over the forecast horizon than the very gently rising path
implied by the market yield curve at the time of the forecast."
So said Mark Carney, Governor of the Bank of England, at the
presentation of the Bank's latest quarterly inflation report (QIR).
In launching the May
QIR, coming just five weeks before the general election, Mr
Carney had to be more careful than normal that it did not ruffle
any political feathers. Hence his careful words, which translated
from central banker speak suggest interest rates might be higher in
three years' time than the 0.5% implied by money market swap rates.
This latest QIR also offers a slightly different view from that of
its February predecessor in other areas:
- For 2017, GDP growth is now forecast to be 1.9%, down 0.1% from
the earlier forecast in response to the disappointing 0.3% first
estimate for Q1. The Bank sees a small improvement in 2018 and
2019, but the overall result is "broadly as the Committee had
expected in February".
- As was widely expected, the Bank has nudged up its inflation
forecasts: CPI is already 0.3% above target. The Bank now expects
inflation to peak at close to 3% in the final quarter of the year
and fall very gently thereafter. For the Bank's three-year forecast
period it will remain above 2%.
- The overshoot of inflation "is entirely due to the effects of
sterling's depreciation," which the Bank will not try to counter.
At the press conference Mr Carney explained that "For most of the
forecast period, the economy is expected to operate with a degree
of spare capacity [ie slack], justifying that some degree of
above-target inflation could be tolerated."
- One factor preventing inflation from subsiding rapidly, once
the Brexit depreciation effects have fallen out of the annual
figures, is the Bank's forecast that "wages will rise significantly
as the output gap narrows throughout the forecast period and closes
by the end".
- In presenting the report Mr Carney said that the Bank's
forecast relied on, amongst other things:
- "a significant pick-up in wage growth;
- no further slowing in aggregate demand;
- the lower level of sterling continuing to boost consumer
prices, broadly as projected, without adverse consequences for
inflation expectations further ahead; and
- the adjustment to the UK's new relationship with the EU being
Pessimists might feel that there is plenty of scope for at least
one of the conditions not to be met.
The remarks on future interest rates were unexpected, but Mr
Carney's track record on the subject suggests that the market may
not place too much credence upon them.
Retail prices index - April inflation
(AF4, FA7, LP2, RO2)
The CPI for April rose to 2.6% and showed prices rising by 0.4%
over the month, the same as the rise between March 2016 and April
2016. The consensus had been for a 2.3% annual rate, so there was
no reaction in the markets. The CPI/RPI gap narrowed by 0.1% over
the month, with the RPI down 0.1% on an annual basis to 3.1%. Over
the month alone, the RPI was up 0.3%.
The Office for National Statistics (ONS) newly favoured CPIH
index was also flat at 2.3% for the year. The unchanged number was
due to a balance between upward and downward factors:
Food and non-alcoholic beverages: Overall prices rose
by 0.4% between March 2017 and April 2017, compared with a 0.7%
fall a year earlier. The ONS notes that it was the first time in
seven years that food prices (up 0.6%) have risen between March and
April. The rises were wide-ranging across all food categories.
On an annual basis, food price inflation jumped to 1.3% in April
2017, reinforcing the idea that March marked the end of a long
period of falling food prices.
Alcohol and tobacco: Overall prices rose by 1.7%
between March 2017 and April 2017, compared with a 0.3% fall a year
earlier. The ONS says the year-on-year difference is attributable
to the timing of the introduction of Budget duty changes, which
last year were picked up in the April inflation figures.
Clothing and footwear: Overall prices rose by 2.0%
between March and April this year compared with 1.0% a year ago.
The effects are spread across a wide range of items, principally in
Miscellaneous goods and services: This category
experienced an overall price rise of 0.6% between March and April
2017, the largest price rise between March and April since the CPIH
first started to be measured in 2005. The greatest individual
effect came from jewellery, clocks and watches though there were
small upward contributions from a variety of groups.
Transport: Overall prices fell by 0.5% between March
2017 and April 2017, compared with a 1.6% rise a year earlier. The
timing of Easter in April 2016 contributed to air fares rising by
22.9% on the month whereas, this year, Easter was in April and
instead fares fell by 3.9% between March and April. Prices of motor
fuels also fell between March and April this year reflecting falls
in global oil prices whereas prices rose a year ago. Petrol fell by
1.0 pence per litre this year but rose by 0.9 pence per litre a
year ago. Similarly, diesel fell by 1.1 pence per litre this year
but rose by 2.0 pence a year ago.
Core CPI inflation (CPI excluding energy, food, alcohol and
tobacco) was down 0.2% at an annual 1.8%. All twelve Index
components were in positive annual territory, underlining how
broadly the inflation picture has changed. Goods inflation rose by
0.6%, moving from 1.9% to 2.5%, while services inflation decreased
by 0.7% to 2.1%.
Producer price inflation (PPI) continued to
signal problems down the road. The input PPI figure dipped from
19.1% in the year to March 2017 to 17.9% in the year to April 2017.
Output price (aka factory gate price) inflation fell marginally
from 3.7% to 3.6%. The large gap between the two is explained by a
combination of hedging, time lags and the probable absorption of
some cost increases. Input prices are generally much more volatile
than the output numbers.
The annual CPI figure was unchanged, as expected, but the
likelihood remains of further increases throughout the rest of
2017. April will probably see a jump as Easter air fare rises
return to the annual calculation. At 2.3%, inflation now matches
the latest regular pay growth rate reported by the ONS (for January 2017). It is
little wonder the British Retail Consortium is recording sales
growth in the last quarter of just 0.1%: the squeeze is
TPR issues DB annual funding statement
(AF3, FA2, JO5, RO4, RO8)
The Pensions regulator has published its annual funding
statement (AFS) aimed at trustees and employers of DB schemes. The
AFS is primarily aimed at schemes undertaking valuations with
effective dates in the period 22 September 2016 to 21 September
2017 (2017 valuations), but is relevant to all trustees and
sponsoring employers of DB schemes.
The AFS highlights some of the key issues we have identified
facing schemes with 2017 valuations. Schemes will have been
affected differently by market conditions and the TPR's analysis
has identified groups of schemes which have been impacted in
particular ways. The TPR has identified actions that trustees and
employers falling into those groups should take in light of that
impact. Trustees and employers should use the statement to identify
whether their scheme falls into those groups and take appropriate
TPR AE: naming and shaming
(AF3, FA2, JO5, RO4, RO8)
The Regulator's quarterly bulletin confirms that automatic
enrolment has now passed a significant milestone, with over 500,000
employers having met their duties and nearly eight million of their
staff now saving for their retirement
The bulletin also shows the extent of the use of the fixed
penalty notices (FPNs) and escalating penalty notices (EPNs) has
again increased in line with the staging profile, rising to 14,502
FPNs and 2,517 EPNs.
The Regulator has the power under s89 of the Pensions Act 2004
to name and shame those employers who fail to comply. Given the FPN
fine of £400 and persistent non-compliance can result in a daily
rate, depending on the number of employees for an EPN of up to
£10,000, it's surprising how many employers find themselves on the
Consultation response and the contracting-out (transfer
and transfer payment) (amendment) regulations 2017
(AF3, FA2, JO5, RO4, RO8)
The DWP had identified that for some pension schemes facing
financial difficulties a solution that both protects the interests
of members and ensures the sustainability of the scheme is to
transfer members' rights, with their consent, to a new scheme.
Whilst the current legislative regime permits transfers of active
and deferred contracted-out pensions rights, with members' consent,
to new schemes, it prevents the transfer of contracted-out pensions
that are in payment to new schemes that have never had
contracted-out provisions. The current legislation was implemented
to protect contracted-out pensioners from being transferred into
new schemes which may not protect their contracted-out rights.
However, with the ending of State Earning Related Pension (SERP)
and 'contracting-out' in April 2016, it is no longer legislatively
possible to create a new scheme with contracted-out provisions in
the scheme rules. That means it is currently impossible to transfer
contracted-out pensioners into a new scheme even where it would be
beneficial to them (i.e. potentially resulting in higher pension
than if the scheme's financial difficulties would lead to their
transfer into the PPF). Pensions received may therefore be lower as
As a consequence and after consultation, The
Contracting-out (Transfer and Transfer Payment) (Amendment)
Regulations 2017 which were laid on 26th April 2017 and will come
into force on 3rd July 2017 enable schemes that were contracted-out
to make transfers in respect of pensioner members into occupational
pension schemes which have not previously been contracted-out.
The new regulations cover transfers of liability for, and
transfer payments in respect of, guaranteed minimum pensions and in
relation to transfers of liability for, and transfer payments in
respect of, section 9(2B) rights.
The new regulations provide that such a transfer can be made
from an occupational pension scheme where either the scheme is
going through a Pension Protection Fund assessment period or where
a regulated apportionment arrangement has been entered into in
relation to the scheme. The transfer can only be made where the
pensioner member consents in writing. In addition the member must
acknowledge in writing receipt of a statement showing the benefits
to be awarded in respect of the transfer. The member must also
acknowledge in writing the member's acceptance that the benefits to
be provided by the receiving scheme may be in a different form and
of a different amount to those which would have been payable by the
transferring scheme; and that the receiving scheme is not required
by statute to provide for survivor's benefits in relation to the