In a recent High Court (England and Wales) decision handed down on 21st October 2024, HHJ Keyser KC resolved a bitter family dispute over shares in a construction company, AGM Brickwork & Stonework Ltd, highlighting the risks of informal arrangements in family-owned businesses. The case, Mark Lane & Anor v Pamela Lane [2024] EWHC 2616 (Ch), underscores the importance of formal shareholder agreements and careful management of company remuneration structures to avoid costly litigation.
Case Background
AGM was incorporated in 2003 as a vehicle for father-son bricklayers Alan and Mark Lane to expand their business. Shares were allocated 40% each to Alan and Mark, with 10% each to their wives, Pamela and Suzanne, for tax efficiency. Alan died in 2009, leaving his estate to Pamela under his will. However, Mark claimed entitlement to Alan’s 40 shares (“Disputed Shares”) based on an oral agreement made at a 2003 family meeting, where it was allegedly agreed that the surviving partner (Alan or Mark) would inherit the deceased’s shares to ensure business continuity.
Pamela denied any such agreement and asserted her right to the shares under AGM’s articles and Alan’s will. Mark sought declarations of entitlement via contract, proprietary estoppel, or trust. Pamela countered with an unfair prejudice petition under s.994 of the Companies Act 2006, alleging that Mark and Suzanne (as directors) had deprived her of dividends by funneling profits into a Remuneration Trust—a tax mitigation scheme involving offshore loans—instead of declaring dividends.
Key Findings on the Share Dispute
The court preferred Mark’s evidence, supported by AGM’s accountant, finding that the oral “Share Agreement” was made in 2003. Despite no contemporaneous documents, the judge relied on witness credibility, family dynamics at the time, and Pamela’s failure to claim the shares until 2021 investigations. The agreement was enforceable as a binding contract among the shareholders, obligating Pamela (as executrix) to transfer the Disputed Shares to Mark. Alternatively, proprietary estoppel applied: Mark relied on the promise by continuing to build the business post-Alan’s death, and it would be unconscionable for Pamela to renege.
This reinforces that oral agreements can bind family businesses if seriously intended and relied upon, but the lack of writing created evidential challenges and acrimony.
Unfair Prejudice Petition Dismissed
Pamela’s petition failed. The Remuneration Trust, established in 2008 with unanimous shareholder consent (including Pamela’s), substituted tax-free loans for dividends. The court found Pamela knew the payments were loans, not dividends, and had signed loan applications until 2012. Post-2012 payments via Mark and Suzanne were also acknowledged as trust-sourced.
No unfair prejudice was established: Pamela benefited (£188,500 in loans plus dividends), exceeding her 10% entitlement under expert valuations. Allegations of director breaches (e.g., conflicts from loans to AGM or tax risks) were rejected, as decisions were made in good faith on professional advice. The 12-year limitation period under s.8 Limitation Act 1980 barred claims on the Trust’s setup, and no causal link to share value diminution was shown.
The judge noted directors must on an ongoing basis consider dividend policies and Trust viability, but historical consent precluded unfairness claims.
Implications for Clients
This judgment serves as a cautionary tale for family businesses:
- Formalise Agreements: Oral understandings, even in trusting families, risk disputes upon death or fallout. Shareholder agreements or cross-option policies tied to life insurance are essential to clarify succession and avoid proprietary estoppel claims.
- Remuneration Structures: Tax schemes like Remuneration Trusts require informed consent and regular review. Directors must document decisions under ss.171-175 Companies Act 2006 to promote company success and avoid conflicts.
- Unfair Prejudice Risks: Petitions demand proof of causal prejudice to shareholder interests, not just dissatisfaction. Limitation periods (12 years for non-monetary relief like buyouts) apply, per THG Plc v Zedra Trust (appeal pending).
- Family Dynamics: Early breakdowns (here, a 2017 fallout) can escalate latent issues. Proactive governance, including independent advice, mitigates this.
