Unfair Prejudice – Protecting the value of your practice

Have you heard of the impact Unfair Prejudice can have on a dental practice if it’s been incorporated? I hadn’t realised either until I heard about this legal case - Irvine v Irvine. Thomas Dickson explains the impact on Unfair Prejudice for dentists that have incorporated and there are two or more directors. We’re meeting a significant number of dentists that have incorporated their dental practice over the last ten years typically to be able to control the level of taxable income and hopefully as a result reduce their tax liabilities. Unfair Prejudice is where a minority shareholder can assert their rights legally to ensure they have not been disadvantaged financially in the event of the death of one of the shareholders and it’s easy to see how this might happen if the right steps are not taken. I’d like you to picture a practice with three shareholders each owning 1/3rd of the practice, earning dividends of £80,000 and a salary of £20,000 each a year. Let’s assume that one the director’s dies prematurely and leaves their shares to their spouse. Unless they had previously organised some shareholder protection to ensure the spouses shares can be purchased by the surviving directors, the spouse is then in business with the remaining directors. Let’s reasonably assume the spouse is not a dentist and not actually working in the practice. Very typically the advice for the surviving directors would then be to increase the salaries of the practicing dentists and reduce the level of dividends to reflect the fact that the spouse is not actually working. It’s easy to see how this situation could last for at least 1-2 years if not more, before a suitable buyer can be found or the surviving directors had the capital to buy the spouses’ shares. However, Section 994 of the Companies Act 2006 provides that: "A member of a company may apply to the Court by petition for an order...... on the ground (a) that the company's affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members”. This means the surviving spouse would be entitled to dividends at the level the dividends were previously paid out and a court could order them to be back dated. There is clear case law on this is in the case of Irvine v Irvine, where the judge agreed with the petitioner, who was a widow whose husband had previously owned 49.96% of the company’s shares. If you have incorporated and there are 2 or more directors (other than perhaps happily married couples who are equal shareholders) it’s worth reviewing your Shareholder Agreement, as well as your Shareholder and Dividend Protection plans. Essential Money advisers can work closely with your accountants and solicitors, to make sure that in the event of a premature death, the practice can continue successfully and the deceased’s beneficiaries receive a fair proportion of the practice value.