Shareholder and Director Disputes – Blog 5

  • Shareholder Dispute

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TACTICAL CONSIDERATIONS

Introduction.

In last week’s blog we looked at “unfair prejudice”. This week we look at some of the tactical considerations which shareholders ought to bear in mind when positioning themselves in unfair prejudice litigation .

Is there a conflict of interest if the company’s solicitor acts for the majority members?

The Solicitors Code of Conduct 2011 lays down strict rules which must be complied with.

A conflict of interest is defined as including a situation where the solicitor owes separate duties to act in the best interests of two or more clients in relation to the same or related matters, and those duties conflict or there is a significant risk that those duties may conflict.

Thus often in a shareholders dispute situation where the solicitor has acted for the company and is then approached by the majority member, it is likely that the question of conflict will be raised by the minority member.

This can often be used as a tactical manoeuvre to place pressure on the majority to change solicitors. In most cases it is difficult for the minority member to force a removal of the solicitor where the solicitors maintains that he has considered the conflict point and dismissed it.

Should the company have separate representation in the litigation?

The company has to be included as a respondent in any event but there are often real, practical reasons for its inclusion. For instance because a substantive remedy is claimed against it (e.g. a purchase of shares by the company itself; or where the petitioner is seeking an order obliging the company to sell property to the petitioner as part of the relief) or simply to ensure that it is bound by the result of the litigation; or the company holds relevant documents and it has to be joined for the purposes of obtaining disclosure.

In those circumstances one should also consider whether there should be separate representation so that another solicitor can advise on particular issues.

Do you need to join all the other members as respondents?

Usually common sense dictates that a petitioner should join all the other members so that they are bound by the order made by the court.

The other respondents are not allowed to use the company’s position as co-respondent to justify using company money to fund a joint defence effort Corbett v Corbett [1998] BCC 93. Accordingly when acting for a minority shareholder it is important to ensure that the majority members do not use company funds to defend the petition.

A petitioner should be alert to the majority members (normally the directors) awarding themselves bonuses and pay increases as a disguised means of funding their defence.

Interim relief

Another matter to consider is whether the client needs to apply for any form of interim relief such as an injunction. Such applications are notoriously costly and they should only be made in the clearest of cases of unfair prejudice. For example if the majority give themselves shares without offering them to the minority or in cases of obvious fraud.

However in a case of a proposed removal of the minority member as a director it is normally not advisable to seek an injunction preventing removal as the court is not disposed to interfering with the wishes of the majority members and force a director on the company.

Written by barrister Hugo Groves of Enterprise Chambers and senior partner and solicitor Jeremy Boyle of Summit Law LLP.

DISCLAIMER

The information and any commentary on the law contained in this article is provided free of charge for information purposes only. No responsibility for its accuracy and correctness, or for any consequences of relying on it, is assumed by any member or employee of Summit Law LLP. The information and commentary does not and is not intended to amount to legal advice and is not intended to be relied upon.

You are strongly advised to obtain advice from a solicitor about your specific case or matter and not rely on the information or comments in this article.