What is the role of the company, during shareholder litigation such as unfair prejudice proceedings?

As a matter of law the company is a nominal party in a shareholders’ dispute – it should be adopting a very limited role as a neutral and uninterested participant. That role should be confined to such tasks as giving disclosure of documents when required to do so (Re a Company (No. 004502 of 1989), ex parte Johnson [1991] BCC 234).

In any unfair prejudice claim, the company is likely to be affected by some of the relief which has been sought by the claimant shareholder (which is the reason for joining the company as a respondent). That relief could include a buy-out order or an investigation into the company’s management and affairs. Notwithstanding that reality, the underlying substance of the dispute remains one between the shareholders, and as such (i) the company has no interest in it and consequently (ii) the company should not be incurring any legal costs in actively defending the claim.

That is not to say that a company in these circumstances cannot properly incur any legal expenses at all: for example, it will have to acknowledge service, it will have to explain in a pleading what it understands the factual position to be based on the corporate documents, and it will have to provide disclosure of those corporate documents. It might also wish to make submissions as to the form of any order to be made by the court following trial in the event that such an order will affect the company.

But what has been made clear by the Johnson decision is that the company’s money must not be used to run an active defence to the allegations which are levelled against shareholders. Furthermore, it would be wholly improper for the company to fund the defences of any of its shareholders.

If a company engages in either of these activities, then it is open to the other parties to the litigation to take any of the following steps to try and remedy that position:

1. to seek undertakings from the company that it is not:

a. expending company funds on substantively defending or responding to the claim; or

b. funding the legal costs of any of the shareholders (most likely it would be the majority shareholders who, or course, have control of the company).

If the requisite undertakings are not provided, it will then improve the shareholder’s prospects in applying for any injunctive relief.

2. to make an application to the court to recoup funds paid by the company in either of the scenarios above; or

3. to bring an application to strike out the relevant paragraphs of the company’s defence insofar as those paragraphs amount to it actively taking a position in the proceedings.

It should therefore be apparent that a solid understanding of the proper role of the company can be a very powerful weapon in the arsenal of a claimant shareholder in their fight against the unfairly prejudicial conduct of the majority.