What is the Role of the Company (and Counsel) when Owners Go Through a Dispute?
There are times when the owners of a company, especially LLCs or closely held companies, litigate over who should control the company. When that happens, what is the company supposed to do? Does it play any role in that dispute? Does the majority owner get to use company counsel or other company resources going through this dispute?
Naming the Company as a Co-Defendant
There are times that the company is named as a nominal defendant. However, the plaintiff owner will run the risk that the defendant owner will be bolstered in believing that the company's resources can be used (if not in total, in a large part) as they are defending the company and that the defendant owner can piggyback off of that defense.
Remedies After the Fact
There are some remedies that each party may be able to get after the fact if the other side has had access to counsel at a substantially reduced cost. Courts may be able to provide some fiscal relief in the form of post litigation fees. However, this remedy is not helpful in many cases as the other side was able, during the full brunt of the litigation, to utilize counsel at a substantially reduced rate and accordingly had more funds available for other purposes.
In re Murrin - Texas Litgation
This exact scenario arose in Texas litigation, In re Murrin Brothers 1885, Ltd., 603 SW3d 53 (Tex 2019). This case arose in the Texas Supreme Court as the plaintiffs moved to disqualify defendants' counsel in the matter. The dispute, which wasn't decided at the time by the lower court, was among six controlling owners and twelve minority owners in an LLC. The controlling owners fired the president of the LLC and the president claimed that unanimous vote was required to fire him (and his supporting team). The minority sued both the company and the majority and the majority retained counsel that previously represented the company. Further, the majority utilized company resources to fund the litigation.
The court did not rule on the issue of the majority utilizing company resouces to fund the litigation. The court stated that any inequity that was brought about by one side using the company's resouces could be fixed later as adequate remedies still exist for subsequent recovery of legal fees.
Although remedies may exist after the fact for the payment of litigation costs by one party, that may not help enough to balance the existing inequity. Counsel needs to carefully determine whether adding the company as a defendant is enough to run the risk of the other party being able to use company resources and counsel during the litigation. See more at https://kcbusinesslawgroup.com/