Excessive Remuneration Packages

Over many years of acting for minority shareholders, a consistent challenge has been how to satisfy a court that controlling shareholders are overpaying themselves.

It’s a real challenge because of the level of subjectivity involved in deciding what is a fair salary package for any given job. Pretty much every job is different and has different demands or responsibilities. So deciding what represents an appropriate payment package is not an exact science. Often, a wide range of reasonable salary figures are at least arguable.

Directors are experienced in their own business area. They can be expected to know their business intimately. Conversely, judges may have little or no experience of running any business outside of practicing law.

Courts (and judges) start with a reluctance to displace the views of a board of directors which is presumed to be much better positioned to assess suitable remuneration packages. But the recent case of McCallum-Toppin is a rare example of the court finding that remuneration taken by the controlling shareholders was excessive. It was also an unusual case in that the Judge decided that issue relying on his own assessment of the range of reasonable remuneration packages, rather than relying upon evidence given by expert recruitment consultants.

Despite accumulating millions of pounds in retained profits over many financial years, the company in question stopped declaring dividends for over ten years. The controlling shareholder claimed that the “preferred policy was to reinvest profits to allow the Company to grow” for future years. The judge had no difficulty in rejecting that as nothing more than “window dressing” to cover what were in fact ad hoc decisions by the controlling shareholders about how best to reward themselves, without regard to the interests of the minority shareholder and without properly considering whether to declare dividends.

For more information please contact Paul Lunt directly.