May 29, 2023
If you end up in a dispute with your fellow shareholders in a closely held private corporation, it pays to be well behaved.
But what about an injunction to compel your fellow shareholder to behave better?
Panahiannigjeh v. Vosoughian illustrates this point nicely. The two parties we’re each a 50% shareholders of a social media corporation. The corporation did not have a shareholder agreement governing its operations or the rights of each shareholder.
Over time, their personal relationship deteriorated to the extent that they could no longer work together. They accused each other of bad behavior. Each sought an injunction against the other with the objective of gaining control of the corporation, and presumably keeping the profits.
The Superior Court judge hearing the motions made an order requiring them to share the passwords and other key information equally with each other, but otherwise refused to grant an injunction or mandatory order which would result in one of them exclusively operating the business of the corporation.
The evidence suggested that the corporation has never operated with the formalities of a corporation. It has functioned like a partnership or as two sole proprietors co-owning email, telephone, and social media accounts.
As the judge described it, the corporation “never existed as more than a vehicle for limited liability for its shareholders who have carried on more as selfish sole proprietors”.
An award of damages, or an order winding up the corporation, was a more appropriate remedy than an injunction.
The evidence showed that they had a totally dysfunctional business relationship. Their efforts in reviving the corporation was simply for their own individual self-interest. The judge had determined that both parties had acted wrongfully, for example by diverting business to other sites that they personally operated, thereby depriving the corporation and their fellow shareholder of income. They both acted aggressively towards the other and by March 2022 the corporate website was not being used. The motion was heard in September.
The judge ruled that neither party was entitled to a mandatory injunction (an order of the court compelling somebody to positively act in a certain way, or to accomplish a defined goal) because:
- Neither party could meet the threshold to show that they had what appears to be a strong case against the other party over their conduct and control of the corporation. That is the basic requirement for a mandatory injunction.
- There was no irreparable harm, which is the secondary requirement to obtain an injunction. The judge ruled that damages could be an adequate remedy if, at a trial, either of them was able to prove that it was the fault of the other that the corporation or the claiming shareholder suffered a loss.
- The balance of convenience did not favour either party.
An injunction is an equitable remedy, and one of those principles of equity is the maxim that “one who comes to equity must come with clean hands”.
The judge said that:
the unclean hands of both parties is reason enough to deny them both injunctive relief…. Equitable relief may be denied when the appropriateness of the remedy being sought is tainted by the claimant’s own wrongdoing associated with the transaction. The case at bar is an example where neither party is entitled to equitable relief.
Other than a consent order to share information, neither partner came out ahead in this costly motion. Only the lawyers won.
- Your corporation should have a shareholder agreement, even if it is a simple “incorporated partnership”. This will save on costs when the time comes to wind things up, or any bitterness arises.
- Without a written agreement disputes often end up in front of a judge. This is costly and the result may please nobody.
- Injunctions are not necessarily suitable remedies for shareholder disputes.
- Injunctions, being equitable remedies, require the party seeking it to have “clean hands”.
- Having the “cleaner hands” will not necessarily be enough to come out “on top”.
- Sometimes, a little common sense goes a long way. But your emotions may overrule your common sense.
- Having a lawyer who “plays cheerleader” and pursues a remedy because you want to is not the best use of your money.
- Having a lawyer who can talk common sense may be your best investment.
HOW WEILERS LLP CAN HELP YOU
Part of our “progressive approach” is to talk common sense with our clients. We strongly encourage shareholders to accept that investing in a shareholder agreement when things are new and shiny is better than a free for all if things turn sour.
If, despite the best efforts of our corporate team, you end up at odds with a fellow shareholder, our litigation team is experienced in shareholder disputes. We take a common sense view of the best remedies to seek, and the most cost-effective means to seek a suitable result – a win for you.
If you want common sense advice and representation for your corporate needs, give Weilers LLP a try. We may be the right lawyers for you.