Facts
- The case concerns the rights of minority shareholders when a company’s board decides not to distribute dividends.
- Directors' authority to declare dividends at the relevant time was governed by the Companies Act 1985 and the company’s articles of association.
- The board retained profits without distributing dividends, raising concerns for minority shareholders.
- The minority shareholders claimed that the board’s decision to withhold dividends unfairly harmed their interests.
Issues
- Whether the board’s retention of profits and refusal to declare dividends constituted unfair prejudice to minority shareholders under section 459 of the Companies Act 1985.
- To what extent directors, acting with discretion conferred by the articles of association, must justify withholding dividends for legitimate business reasons.
Decision
- The court assessed the company’s financial position, the board’s justification for retaining profits, and the resultant effect on minority shareholders.
- It reaffirmed that directors’ discretion over dividends, though broad, is not absolute and must be exercised for legitimate business purposes.
- The court found that the board’s actions in favoring majority shareholders and withholding dividends without adequate reason caused unfair harm to minority shareholders.
- The court held that refusing dividends without valid business justification, even within the directors’ authority, could constitute unfair prejudice under section 459.
Legal Principles
- Directors’ discretion regarding dividend decisions must be exercised in good faith and for the overall benefit of the company, as set out in the company’s articles.
- Minority shareholders are protected from unfair conduct by sections such as section 459 of the Companies Act 1985 (now contained in sections 994-996 of the Companies Act 2006).
- The refusal to declare dividends for improper or unjustified reasons may support a finding of unfair prejudice.
- Subsequent cases, including Irvine v Irvine (No.1) [2007] 1 BCLC 349, have applied and developed these principles.
Conclusion
Re Sam Weller [1990] Ch 682 remains a foundational authority affirming that directors’ discretion over dividends is limited by the need to avoid unfair prejudice to minority shareholders; unjustified refusals to declare dividends can be remedied under the statutory unfair prejudice provisions.