Company resources may not be used to fund strictly intershareholder dispute

BVWire–UKIssue #26-2
May 18, 2021

In a new case, Koza Ltd v Koza Altin Işletmeleri AS [2021] EWHC 786 (Ch), the High Court held that the finances of a company could not be used to fund what was effectively litigation by one shareholder against another.

Koza UK’s share capital consisted of 60 million ordinary shares Koza Altin, a listed Turkish company, held and two “A” shares a Mr Ipek and his brother held.

Eventually, a dispute arose between Koza Altin and Mr Ipek. Koza Altin tried to convene a general meeting to remove Koza UK’s board, of which Mr Ipek was the sole director, but Ipek refused (and sought an injunction to prevent the meeting). The central question was whether Ipek was entitled to finance the proceedings with Koza UK’s cash and resources.

What did the decision conclude? The court agreed with Koza Altin and emphasised that the key question was whether a claim is brought in good faith in the interests of a company, or rather is advanced as a response to a shareholders’ dispute. In this case, the company was not the “genuine protagonist” but instead was “merely an object” of the dispute between the “A” shareholders.

This conclusion is of interest to business valuers for the following potential reasons that affect noncontrolling discounts:

  • How powerful are “veto rights” compared to other shareholders?
  • May a controlling shareholder simply treat a company as its own and use that company’s resources to fund its own litigation?
  • May directors commit company resources to ongoing litigation unless they can prove that a successful result will improve the performance of the company?
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