Balancing Act: Corporate Neutrality in Shareholder Disputes Explored in Yen v Ghahramani

Published on: April 2024 | What's Trending

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When shareholders within a 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 but, 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 delved into this principle and emphasized the importance of corporate neutrality in shareholder disputes.

Procedural History

The dispute centered around airG Inc. (the “Company”), a private mobile gaming company, where a shareholder dispute between major stakeholders led to a notice of civil claim (“Notice of Civil Claim”). The shareholders initiated legal actions against each other. Yen (the “Minority Shareholder”) sued Ghahramani (the “Majority Shareholder”), and the Company, alleging oppression and seeking liquidation and dissolution of the Company.

In an unusual move, the Company, represented separately, not only defended the Minority Shareholder’s claim, but went further by filing a counterclaim that closely resembled the Majority Shareholder’s own case against the Minority Shareholder. In response, the Minority Shareholder applied for leave to file a new amended Notice of Civil Claim alleging that, by ‘taking sides’ in the litigation, the Company’s conduct was oppressive and that they had misappropriated various assets of the Company for their own purposes, contrary to the fiduciary duty owed to the Company by the defendant director.

The chambers judge dismissed the Minority Shareholder’s application to amend on the basis that it failed to raise an actionable oppression claim as against the Company and was unsupported by the necessary material facts.

Court of Appeal Decision

The British Columbia Court of Appeal disagreed with the chamber judge’s ruling and overturned the decision not to permit the amendments to the Notice of Civil Claim. The court noted that, although it may be appropriate for a corporation to retain counsel to represent its best interests in an oppression action, in this case, there was a conflict of interest, as the Company’s counsel received instructions from the Majority Shareholder, who was a defendant and therefore not at all independent from both sides of the dispute.

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 directors and shareholders and, ideally, such representation should be chosen independent of the litigating individuals.[1]

While the court was not required to rule on the propriety of the Company’s litigation conduct at this stage, it did rule that a claim of oppression had been adequately pleaded and that the facts gave rise to an actionable oppression claim. Also of note was the court finding that it was quite possible that where the person instructing counsel was also a defendant in the main action, a claim for oppression would arise even where the corporation is defending itself from dissolution. This is because the minority may have a reasonable expectation that the corporation would adopt a neutral position or that its resources would, at the very least, not be used in support of the majority’s position. Here, not only was the corporation defending against a claim for dissolution, it was also commencing a counterclaim in a manner that supported the majority shareholder’s position.

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 raises concerns for any closely-held corporation instructing legal counsel in an oppression proceeding among shareholders, even when the company is a named defendant. If you or your Board has any questions about how to navigate tense boardroom or shareholder dispute scenarios, someone from our business law group would be happy to discuss.

[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.

The author would like to thank our Student-at-Law, Pulkit Sahi, for his assistance in writing this blog.