The right for a shareholder of a company to bring an action for unfair prejudice has been the subject of many cases over the years. This right allows a shareholder to bring an action on the ground that:

- the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of the members generally or some part of its members (including at least himself); or

- an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.

A member of a limited liability partnership (LLP) is also entitled to bring an action for unfair prejudice but, as the LLP is a relatively new form of legal entity, there is limited case law on unfair prejudice actions in respect of LLPs.

Case

A recent case has considered a number of preliminary issues in an action alleging unfair prejudice in a LLP. The judge answered the preliminary issues in favour of the member bringing the action. The judge’s comments included:

- as there was no written LLP agreement, there was no express power to expel a member;

- despite one of the members considering himself as the “boss”, in the absence of a written LLP agreement, he was not entitled to a higher return; and

- the exclusion of a member from the management of the LLP was one of the clearest examples of unfairly prejudicial conduct.

Comment

This case is interesting because it shows the application of an unfair prejudice action in the context of a LLP.

The case also highlights the importance for the members of a LLP to put a written members’ agreement in place. Without a written agreement, default statutory provisions will apply to the LLP which means, for example, that all members are entitled to an equal share of profits and to be involved in the management of the LLP. It is unlikely that such default provisions will be appropriate for all LLPs. It is also possible for a members’ agreement to disapply the statutory right for a member to bring an unfair prejudice action.

Eaton v Caulfield [2011] B.C.C. 386

Barclays disputed that it owed Nylon any money for expenses, and issued legal proceedings to obtain a declaration from the High Court that Barclays was under no obligation to pay Nylon those expenses. The High Court agreed with Barclays and ruled that it was under no obligation to pay the expenses that Nylon had claimed.

Barclays also asked the High Court to confirm that Barclays did not have to pay Nylon its profits on its original capital investment, which Nylon rejected, again arguing that Barclays was obliged to do so under the terms of the LLP agreement. Nylon applied for a stay to bring an end to the proceedings brought by Barclays, which was initially rejected but appealed to the Court of Appeal.

The Court of Appeal has now rejected that application for a stay, saying that a satisfactory outcome could only be obtained by a full trial with evidence, entitling Barclays to continue with proceedings. However, in giving its ruling, the Court of Appeal noted that the parties had reached a settlement and had asked the Court of Appeal not to actually give its judgment on Nylon’s appeal. The Court of Appeal decided, however, that there was no reason why the judgment should not be given, despite the settlement that had been agreed.

The main implication from this ruling is that, whilst the parties had reached a settlement, the Court of Appeal still issued the judgment. However, the case is also a useful reminder of the need for clarity and certainty in drafting commercial agreements, including those that define investment relationships.

PwC’s annual non-executive director report, which covers the majority of FTSE 350 companies, found that non-executive directors at FTSE 100 companies spent 24 days on company board work in 2010 (compared with just 20 in 2009), with more than half of those surveyed expecting this figure to increase again in 2011.

The increased time demands have been put down to a number of reasons: tougher regulatory requirements for companies, the recession, and even the need to attend occasional board meetings overseas. There is a real risk that if this time burden continues, the role may become less viable in the future, particularly as 45 per cent of non-executive respondents believe that the fees they charge are too low for the work they do (and the time spent doing it.) That said, 63 per cent of respondents also said that the role has actually become more attractive due to its challenging and rewarding nature.

The question that comes out of this report is: can the role of non-executive director be successfully combined with the demands of a full-time job?

The study also found that:

1. For companies, a candidate’s experience and personality are the most important selection criterion when appointing non-executive directors;

2. For candidates who are considering a non-executive position, the quality of a company’s executive directors is the most important factor. This is followed by the quality of the company’s existing non-executive directors, the financial strength of the company, the company’s business strategy, the time commitment required, and the firm’s reputation. Interestingly, fees are the least important consideration (even though 45 per cent of non-executive directors feel they are significantly underpaid);

3. The average pay for a non-executive director in the FTSE 100 is £57,000;

4. Across all non-executive roles, female representation is only 5 per cent in FTSE 100 companies and 8 per cent in FTSE 250 companies; and

5. Only 21 per cent of FTSE 100 companies and 6 per cent of FTSE 250 companies evaluate the performance of their non-executive directors. Also, only one third of FTSE 350 companies have externally facilitated board evaluations every three years, as laid out in Provision B.6.2 of the UK Corporate Governance Code.

The justification of this is that the programme will raise awareness among small businesses that they need to keep good records. The show will aim to help Britain’s small businesses improve their all round business knowledge and direction, cash flow, marketing strategy and in some cases even their enthusiasm.

The show will start in March, but if you can’t wait until then the good news is that here at MAB we have a business health check product which might prove even more useful than a TV show….Click here for info on our Business Healthcheck

I will be celebrating the Year of the Tax Hike, which is due to start on 6 April.

Anyone with a better name, please share your wit and wisdom by emailing me or commenting on this post with suggestions. There is no prize (times are tight, you know) but you will benefit from the kudos that attaches to such things…

The year of the Tiger signifies bravery. The year of the Tax Hike signifies increases in tax for individuals with income over £150,000 and for trustees (whatever the trust’s income); and the gradual reduction in personal allowances for those with income over £100,000. And the year after, NICs will be increased by 1%.

What to do?

There are several ideas which can be utilised to reduce the impact of these changes. These can be summarised as follows:

Accelerate

Income (e.g. bonuses or dividends) which would otherwise have been paid in 2010 / 2011 might be brought forward to this year (i.e. before 6th April). You will still suffer tax but this simple step will give rise to tax of 40% rather than 50%. The employer will need to agree to this, since it will also need to pay PAYE and employers NICs earlier than possibly anticiapted. If your employment status is tenuous, don’t expect your employer to agree….

Defer

You may want to defer allowable expenditure and reliefs until next year. Alternatively defer might mean hold off on making payments out of companies until tax rates reduce. This is only suitable for owner managed businesses and will need to be kept under review.

Restructure

There are tax efficient structures which can be utilised to reduce overall rates of tax. These should only be undertaken with proper professional advice. Some of these are quite strightforward such as careful use of tax approved employee share incentives, e.g. EMI options. Another well trodden path is to address the balance between spouses, when one spouse or civil partner will be a 50% taxpayer and the other will pay tax at a lower rate. Income producing assets can generally be transferred between spouses with no capital gains tax or inheritance tax implications but often the income tax benefits are surpising.

Invest

The EIS and VCT schemes (possibly combined with pensions planning) can be used to reduce your effective rate of tax. This is only of use if you have cash to invest. Further, you will need to take proper investment advice to ensure that a particular investment is suitable for you. Note, some providers offer “protected” EIS and VCT investments with a lower risk profile.

Watch this site for some more ideas on how to beat the tax man and steps which should be considered before we usher in the new year.