Use of 'management charges' to remove profit

'management charges' seem to be used to remove profit to stop dividends being paid to shareholders?

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I am one of 3 shareholders in a UK LTD business which is activly trading. My business partner and I own 20% of the business (via another UK LTD business 50% each) with two other shareholders splitting the other 80% between them and they are the company Directors. The company turns over £600k an has been trading for 6+ years. The accounts show a loss but this is only because the Directors pay themselves a £80k 'management charge' between them. This seems to be to stop the requirment of paying dividends to all shareholders which would be the normal way of working. We have no say in anything and getting accounts is hard.

What rights do we have as shareholders here as there was no share agreement drawn up at the beginning. Which on reflection was a mistake but we are where we are. What can we do here as it seems they could just remove company profits forever and therefore never pay any shareholders.

 

Replies (21)

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By David Ex
01st Feb 2024 17:15

ry4n6 wrote:

What rights do we have as shareholders ….

 

You have the right to seek legal advice on a legal question. You’ll have to pay for it, mind you.

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By Bobbo
01st Feb 2024 17:37

As pointed out by David Ex, this is very much a legal issue.

But just to clarify, is this 80k management charge the only remuneration the directors receive from the company? Or is this on top of director salaries?

If the former, then whilst the amount conveniently more or less equating to what otherwise would be profit raises an eyebrow surely you aren't expecting them to work for free? (of course I have no idea how much time running this business takes of the directors.)

If the latter, then perhaps they are being a bit cheeky so you are simply in the legal issue territory of are the directors acting not in the best interests of all shareholders.

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Replying to Bobbo:
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By ry4n6
01st Feb 2024 19:04

There are £27k worth of wages which I would assume are their 2 x PAYE allowances and some additional part time staff costs.

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RLI
By lionofludesch
01st Feb 2024 17:43

Yes - you're asking the wrong people.

You need legal advice.

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By Roland195
01st Feb 2024 17:52

And the suggested legal advice will not be free, cheap or even particularly helpful most likely.

You will need deep pockets and determination to see a conclusion.

How much have you invested?

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Replying to Roland195:
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By ry4n6
01st Feb 2024 19:06

Approx. £15k and we are looking to sell the shares back to them to just get out but they are saying the business is worth nothing (arguably because they are paying their 'Management Charges')...

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Replying to ry4n6:
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By Roland195
01st Feb 2024 19:40

If you consider the management charges are fictitious in their entirety then you might have a case worth pursuing although you'll go through more than £15k of legal fees in an eyeblink. Do they supply admin support from their other companies for instance?

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Replying to ry4n6:
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By Paul Crowley
01st Mar 2024 18:02

They are partly correct
The share you have an interest in are indeed worthless. Did you take proper advice? is so then there should have been a shareholders agreement as part of the set up.
Try the advisors insurance company. They would likely settle to get rid of the claim.

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By DKB-Sheffield
01st Feb 2024 18:37

I suppose, aside from the fact this is a legal matter...

Do you have rights?... undoubtedly

BUT

Do you have power/ influence?... possibly not.

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Replying to DKB-Sheffield:
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By ry4n6
01st Feb 2024 19:06

What should we have done differently to protect our rights here? Why doesn't this happen to other people?

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Replying to ry4n6:
RLI
By lionofludesch
01st Feb 2024 19:19

ry4n6 wrote:

What should we have done differently to protect our rights here? Why doesn't this happen to other people?

Who said it doesn't?

Did you take legal advice before entering into this?

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Replying to ry4n6:
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By David Ex
01st Feb 2024 19:36

ry4n6 wrote:

What should we have done differently to protect our rights here?

Taken paid for legal advice, basically.

If you’re planning on spending £15,000, you should be thinking “what’s the worst that can happen?” and then put in place measures to manage the risk(s). But you knew that because you mentioned a “share agreement” in your OP.

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Replying to David Ex:
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By Roland195
01st Feb 2024 19:42

To be fair, I've found shareholders agreements to make a negligible difference in the real world. No matter how expensive and therefore supposedly well written, there is always someone who will argue otherwise.

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Replying to Roland195:
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By David Ex
01st Feb 2024 19:51

Roland195 wrote:

To be fair, I've found shareholders agreements to make a negligible difference in the real world. No matter how expensive and therefore supposedly well written, there is always someone who will argue otherwise.

Maybe so but something is better than nothing.

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Replying to ry4n6:
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By FactChecker
01st Feb 2024 20:41

"What should we have done differently ..?"

Stopped to think it all through (buying a minority stake in a small company will always have these, and many other, kinds of danger - and paying 2.5% of T/O to purchase a 20% stake should've rung warning bells);
then, if still determined to proceed, taken professional advice from (i) a Financial Adviser re the best structure for the investment, and from (ii) an experienced Solicitor to make sure the terms cover (as much as possible) of your posterior.

Personally I'd have looked at a Loan (tied to unfudgeable performance factors not just interest, with the existing Directors providing personal guarantees). If they didn't bite, then I'd have walked away (who needs who is always paramount).

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Replying to ry4n6:
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By DKB-Sheffield
01st Feb 2024 22:15

ry4n6 wrote:

What should we have done differently to protect our rights here? Why doesn't this happen to other people?

It happens a lot more often than you may think! Many times daily at a guess!

From your setup (you don't own the shares, but the company you own does) I'm certain you've taken advice. It's not the usual setup for a 'green' rookie investor, and may even have put you on more of a back foot than a direct investment (certainly likely to cost more from a legal perspective, and less chance of getting a friendly face at CAB to guide you). I'd therefore start with the adviser who suggested the corporate structure!

The list of what you could have done is huge. IANAL so would not (could not) post such a list. And nonetheless, I'm afraid you are where you are, and taking guidance on a public forum (for future investments) would surely be a ridiculous thing to do - given your experience. A good starting point would be though... don't buy a minority share in an unlisted company without taking legal and financial advice (particularly regarding safeguards)!

Incidentally, you haven't said (I don't believe) whether these directors work full time for the company, nor whether you are a passive investor. If both are true, £100K for 2 full-time directors doesn't seem unreasonable. And if you are passive, why should they do the hard work and pay you 20% of their not unreasonable 'wage'. That's a staggering 133% ROI per annum?!

You clearly need specific legal advice to explore your current options, or you need to chalk this down to experience. Have you actually offered to sell your company's shareholding?

The last thing I'll say... investing, partnerships, JVs, part-ownerships... all come with risks. How far you want to go to mitigate that risk usually depends on how much you're willing to pay a legal adviser!

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paddle steamer
By DJKL
01st Feb 2024 20:47

The cheap option is demand an audit. Gets you nothing but reduces company profits, that therefore reduces their rewards and means they may have more incentive to pay something to you for your shares. Also costs you nothing. Even threat of it may prompt them to pay something for your shares, say 5-10 times the annual audit cost.

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By Justin Bryant
02nd Feb 2024 08:52

I guess Dragons' Den has a lot to answer for here.

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By ireallyshouldknowthisbut
02nd Feb 2024 09:09

From a valuation point of view you would add back the director's fees and other charges to profits, and deduct a market rate for the services those persons supply. That would give the 'true' level of profit of the business. Then apply some sort of multiple to profits depending on the sector/growth etc, and you got yourself a valuation. However minority shares carry hefty discounts to the total, typically 50%, or maybe more in your situation given the lack of control and presumably total lack of a proper shareholders agreement [which should detail what the other shareholders can do or not do] so they genuinely might not be worth much.

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Replying to ireallyshouldknowthisbut:
paddle steamer
By DJKL
02nd Feb 2024 11:19

They are likely worth as much as the annoyance that they cause is worth.

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By tom123
02nd Feb 2024 14:53

Are the directors working full time?
If so, then surely they would be expecting to draw more than £12,570, however you choose to structure it.

£40k of "fees" plus £12,570 of "salary" would be a reasonable return for full time working, in, what is presumably a very small operation.

So, if that leaves nothing for dividends, that's the breaks.

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