Shareholder Dispute or Company Dispute?

It is a well-recognised principle of company law that a company's money should not be spent on disputes between the company's shareholders.

For this reason, there are many examples of the courts issuing injunctions to prevent one or more of the ’sides’ to a shareholder dispute from funding the fight using company money. But it is not always so easy to tell what a shareholder dispute is, on which company money cannot be spent, and what are legitimate claims that the company is entitled to pursue.

Often, for example, shareholder disputes involve allegations and counter allegations that certain parties have acted contrary to their director’s duties. Those kinds of allegations are claims that a company could legitimately pursue, using its own funds to do so. But if they are allegations that are only being made as part of a wider shareholder battle, the courts may well interfere to prevent an abuse of the rule that a company's money should not be spent on disputes between the company's shareholders.

In trying to sort the legitimate from the illegitimate use of company money, the courts will examine all of the circumstances. So, for example, if a company first starts to pursue allegations of wrongdoing only by way of response to a threat from a shareholder then the court will need to be persuaded that there is a legitimate company concern, rather than what are in substance arguments between shareholders being couched as complaints of the company as a rouse to legitimise the funding of those complaints by the company.

For more information on the topic please contact Paul Lunt directly.