Shareholder disputes are known to escalate quickly, with unexpected and quick turns in events. Where minority shareholders’ stakes are involved, they may be diluted in breach of the shareholders’ agreement before mediation or litigation has even commenced. In this way, minority shareholder rights can become damaged before they begin to seek resolution for the dispute itself.
In these circumstances, a party may apply for an interim injunction to keep the current arrangements in place while the dispute is being resolved. This protection can be particularly important for a shareholder who may otherwise suffer harm before the court reaches a final decision.
What is an Interim Injunction?
Interim injunctions are court orders that can either prohibit a party from taking a particular course of action or require a party to take a positive action. In shareholder disputes, injunctions may serve the following purposes:
- Provide emergency relief
- Protect shareholder interests (majority and/or minority)
- Prevent unauthorised allotment of new shares
- Prevent unauthorised transfer of shares
- Prevent a general meeting called to approve of a resolution in breach of the shareholders’ agreement
- Freezing a director’s personal assets
As interim injunctions generally are seen as a gateway, or the first step to wider litigation matters, the court is likely to exercise its discretion in determining whether an injunction is appropriate, taking the specific facts of the case into account.
American Cyanamid – the Legal Test
In American Cyanamid Co v Ethicon Ltd [1975], the court established the principles used in England and Wales when deciding whether to grant an interim injunction. These principles involve three main considerations.
- Is there a serious question to be tried?
To apply for an injunction, the applicant must show that their rights are being breached or that a breach is likely to occur. Where the conduct has already taken place, there must be enough evidence to suggest that it is reasonably likely to happen again in the foreseeable future and that an injunction is needed to prevent it. For example, in the context of shareholder disputes; this could happen when new shares are being allotted in breach of the shareholders’ agreement.
Whether an issue is sufficiently serious to justify an injunction will often depend on its timing. The court is unlikely to grant an application that is premature or based only on a speculative future concern. An applicant should therefore apply when there is a real and immediate risk of the conduct occurring, rather than waiting until after harm has been caused.
- Is an injunction the best remedy or relief available?
If the first principle is fulfilled, the next question the courts ask is whether damages paid by the respondent would be an adequate remedy for the issue the applicant is seeking to prevent. If the issue can be resolved through payment to the injured party, an injunction will usually be deemed unnecessary.
- The balance of convenience
Finally, if it is unclear whether damages would provide a more appropriate remedy than an interim prohibitory injunction, the court will consider all the relevant facts and circumstances. It will then choose the course of action that carries the lowest risk of causing injustice to either party.
The court should consider maintaining the status quo between the parties and minimise the risks of harm arising from their decision. An injunction is more likely where the defendant has no valid defence. However, even a strong claim may be refused if granting the injunction would cause disproportionate harm.
Applications for injunctive relief are costly, intense, and require the right timing; it is also perceived by some to be the last resort where a breach has occurred. Shareholders who find themselves in situations where they feel that their rights are threatened, should seek professional legal advice as soon as possible to leave sufficient time to explore their options for remedy or alternative dispute resolution methods.
If you would like advice or assistance about interim injunctions in shareholder disputes, call Nath Solicitors and book your consultation today.