Re Sam Weller [1990] Ch 682

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

1. 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.
2. 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.