Using Company Finances to Fund Shareholder Disputes

Year Published: 2021

The recent High Court case of Koza Ltd v Koza Altin Isletmeleri AS [2021] EWHC 786 (Ch) involved a company incorporated in England (Koza Ltd) as well as a listed Turkish company (Koza Altin). In this case, the High Court has held that a company’s finances cannot be used to fund shareholder disputes.

What Happened in the Case?

The High Court case involved a dispute between an individual shareholder and a corporate shareholder around whether or not the corporate shareholder could require the directors of the company to convene a general meeting to remove the board of directors. The individual shareholder opposed the convening of the general meeting and sought an injunction to prevent the corporate shareholder from convening such a meeting. This was on the basis that the individual shareholder was the sole director of the company and therefore the person whom the corporate shareholder was seeking to remove.

One of the key matters the court was asked to decide was whether the company’s finances could be used to finance the proceedings without the individual shareholder making any contribution of his own.

How Did the Court Reach Its Decision?

The court drew a crucial distinction between circumstances where a claim is brought in good faith in the independent interests of a company, and circumstances where a claim is brought as part of a shareholders’ dispute.

The key question was held to be whether the company was a “genuine protagonist in proceedings against one of its members” or whether the true nature of the dispute is one in which the company is in fact the “object” over which its shareholders are themselves in dispute. The court held that only in the case of the former will it be right and proper for the company’s finances to be used to fund a claim.

It should be noted that this does not mean that the company shall incur no legal expenditure during the course of a shareholder disputes proceedings. However, it will be limited in scope and will only relate to elements of the proceedings which require the company to protect its own independent interests. This could include, by way of example, the legal costs incurred in respect of the company’s obligation to give disclosure as a party.

Funding Shareholder Disputes – Key Takeaways from the Case

It is unsurprising that the court came to the conclusion that it did. The case raised the, not uncommon, issue of a dispute between shareholders relating to the control over the company and how its affairs are to be conducted. Whilst the court appreciated that such a dispute does not contribute to the smooth and efficient running of a business, this does not in itself justify steps being taken by the company to support one of the shareholders, and certainly not to use its funds to enable a shareholder to finance its case.

This case serves as a useful reminder that the company’s finances are not the directors’ to be freely used at their discretion, and it also reinforces the significant distinction between a person’s duties to be carried out in their capacity as director and their duties to be carried out in their distinct capacity as a shareholder.

If a director seeks to use company finances to fund the latter type of dispute, this will amount to a breach of a director’s fiduciary duties owed to the company which could result in a claim for misfeasance being made against them.

Before commencing any proceedings and committing the company’s resources to fund such proceedings, it is essential that the directors understand what is at the heart of the dispute and to what extent the outcome of the proceedings would benefit the company’s independent interests. If a director fails to take these considerations into account, a court may be inclined to grant an injunction to prevent such a course of action.

If you would like more information or guidance, please contact Sophie Adshead, Solicitor in our Corporate Law team, on 0161 475 1235 or email [email protected].

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