Balancing act: Corporate neutrality in shareholder disputes explored in Yen v Ghahramani
Mujir A. Muneeruddin, assisted by articling student Pulkit Sahi
by Mujir A. Muneeruddin, assisted by articling student Pulkit Sahi
Overview
When shareholders of corporation find themselves embroiled in a dispute, can the corporation align itself with one side? The principle of corporate neutrality holds that a corporation should remain neutral in such conflicts. However, with corporations often reflecting the will of majority/controlling stakeholders, neutrality can be an evasive concept. In Yen v Ghahramani, 2023 BCCA 403, the British Columbia Court of Appeal confirmed and emphasized the importance of corporate neutrality in shareholder disputes.
Procedural history
The dispute involved airG Inc. (the “Company”), a private mobile gaming company. Yen (the “Minority Shareholder”) sued Ghahramani (the “Majority Shareholder”) and the Company, alleging oppression, and seeking liquidation.
In an unusual move, the Company, represented separately, defended against the Minority Shareholder’s claim and filed a counterclaim resembling the Majority Shareholder’s case against the Minority Shareholder. The Minority Shareholder sought to amend his Notice of Civil Claim, arguing the Company’s actions were oppressive and breached fiduciary duties. The chamber’s judge dismissed the Minority Shareholder’s application, ruling that it failed to raise an actionable oppression claim.
Court of Appeal decision
The Court of Appeal overturned this decision, noting a conflict of interest since the Company’s counsel received instructions from the Majority Shareholder. The court emphasized that legal representation for the corporation should be independent of the majority shareholders. The court found that the facts supported an actionable oppression claim and that the Company’s actions, influenced by the Majority Shareholder, could be seen as oppressive to the minority.
In coming to its decision, the court relied on recent authorities and found that, where such a conflict of interest arises, the proper course is to require legal representation for the corporation that is separate and distinct from the legal representation of the majority shareholders (and nominee directors) and, ideally, such representation should be chosen independent of the litigating individuals.[1]
Key takeaways
In considering the corporate neutrality principle and conflicts of interest in shareholder disputes, the court emphasized the following key points:
There is no rule preventing a company from actively participating in a shareholders' dispute.[2]
A company’s participation and expenditure are proper when necessary or expedient in the interests of the company as a whole.[3]
In disputes primarily between shareholders, the company should avoid expending its funds on the legal costs of the dispute.[4]
This decision is crucial to all companies (both public and private) navigating shareholder disputes.
[1] Rice v. Smith, 2013 ONSC 1200.
[2] Halsbury’s Laws of England (4th ed., 2016 Reissue), vol. 7(2).
[3] Ibid.
[4] Ross River Ltd v Waveley Commercial Ltd [2014] 1 BCLC 454.
Mujir Muneeruddin has extensive experience in corporate finance and securities law, providing strategic advice on complex transactional, commercial, and regulatory matters. He combines his business background with his legal expertise, offering clients agile and effective business solutions.Contact Mujir.
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