Directors Pay

S

sim

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Myself and one other are minority shareholders in a company with three equal majority shareholders. They were on v large salaries rather than paying themselves large dividdends. When buying in, the auditor showed their salary being reduced significantly to show the real value of profits. Whilst the salary reduced,it is still quite a bit from the figures tabled. Obviously this affects profitability and my payback. They are arguing they deserve more because of experience etc. This arguement doesnt stack up as the other miniroty shareholder is the same age!
My question is : should all salaries be equitable or can they justify paying themselves more? Do we have any say if the majority shareholders band together as is happening. By the way there is no major difference in workload etc and the only difference is that the large % of new work comes thru two of the majority shareholders.
Regards
 
This demonstrates some of the serious hazards with minority shareholdings. There are provisions in company law to prevent minority shareholders being 'oppressed' by majority shareholders, but this is a horrendously complex legal area - you'd really need to take (expensive) legal advice to get a view on this. Can you clarify one point;

When buying in, the auditor showed their salary being reduced significantly to show the real value of profits.
Are you saying that the auditor lied (which would be a very serious matter - legal/regulatory implications) or that they reduced their salaries for the year being audited?
 
This all goes back to the share purchase agreement and the advice you were given when you bought into the company. In any owner managed company, the key determinant of profit is the salary taken by the directors. This should have been agreed by the sellers and buyers before you bought in.

There is no requirement for equal salaries for directors, but if the sellers showed you accounts which showed equal salaries, then you would have a strong case for expecting this to be the case, if it was not covered in the share purchase agreement.

I would think it fair that the two directors who bring in the business get paid more, if all other things are equal.

But as Rainyday pointed out, minority shareholders are in a very weak position.

Brendan
 
no, the previous salaries were shown but their very high salaries were apparently the main way they retrieved their share of profits. In valueing the company the auditors added back in these high salaries and subtracted a more realistic salary charge for the three directors. The resulting sum of money was used to value the company and its real profitability. Unfortunately whilst they have reduced their salarys they are still 60% more than they indicated in the auditors proposal. There is other issues regarding the rental of our premises which the 3 majority shareholders own, and the proposed dividend payout however I wont bore you!!
 
Hi sim

Don't worry, you won't bore us. This is an interesting issue. Did you get independent professional advice before investing? From an accountant or from a solicitor? And I don't mean the company's auditor.

Brendan
 
The other minority shareholder did and his accountant was satisfied with the accounts he saw. I also had an accountant look at it and his initial reaction was to recommend negotiating a lower purchase price.(although this was just an initial no fee consultation) We did this and secured approx 30-40% reduction and also the deferred payment. I was happy as I was well aware the company was profitable for the majority shareholders.
By the way is there an industry standard for valueing a consultancy business?
 
Hi sim

The first thing which I would look at in a consultancy business is how the directors remunerate themselves. If I was buying into a consultancy business I would write the formula for calculating directors' salaries into the purchase contract.

It seems from what you say that you were very casual in your approach to this. It sounds as if you don't have a purchase agreement with such a formula? It sounds as if your accountants advised you badly. Had they experience of buying and selling companies?

If you cannot reach agreement with the majority shareholders, then you may have to take legal advice. My guess: the salaries shown by the vendors' auditors could well be considered to be an implied term of the contract of sale. This would be the case if there was no written contract. Alternatively, they would have to pay market rates which would require a separate court case each year to determine.

Brendan
 
The offer to purchase the shares had a valuation model attached (from the auditors)which indicated the way the directors retrieved their profits. It was largely through salary.To show the "real" value of the company the auditor showed the actual salaries added back in and showed a adjusted reduced salary chage for the majority shareholders. We felt this implied the salaries going forward would be give or take at this new reduced rate and that the majority shareholders would be compensated by taking the lion share of dividend as would be normal.
Was this wrong to presume?
As mentioned above they did reduce their salaries but not to the figures mentioned and at no stage were they agreed upon.
I agree we were naive in accepting the offer without terms and remuneration being agreed and unfortunately it is now history. Even if all the maths were done and the books balanced at the end (ie everything put into the pot and shared out fairly) my concern with the current arrangement is that the majority shareholders effectively have first call ie they are guaranteed a large element of the pot prior to a dividend being allocated. Our inside knowledge of the companies workings should at worst allow an exit route and at the buy-in rates however this would be last resort.
At our shareholdings % the salary overcharge if it were profit and distributed pro rata is not a huge figure annually. I do think they will acknowledge this and adjust our salares to account for our "potential loss of dividend".
Also I believe they know we are technically correct as the document is black and white regarding the adjusted salary charge but not sure how legally binding it is? I actually think they dont have a copy of the purchase proposal but not sure if this of any use.
Dont think it will need to go legal but I am keen to ensure the arguement is won before the end of the tax year as not to set a precedent!
Thanks for the advice
PS once bitten and all that.....
 
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