Can shareholder oppression proceedings be heard in private?

Proceedings under section 212 of the Companies Act 2014

The High Court (Cregan J) recently delivered judgment in the case of Re Glenman Corporation Limited 2024 [IEHC] 304, an application that proceedings under section 212 of the Companies Act 2014 (oppression of a minority shareholder) should be heard otherwise than in public.

When one considers that the nature of section 212 applications is to air a company's "dirty laundry" in full public view, it is perhaps surprising that more applications for private hearings do not come before the courts. Having said that, the converse is also true – and indeed it is the reason that this particular application was refused – that if public disclosure of private disputes between company directors was the only criteria for making "in camera" orders then almost all proceedings under section 212 would be heard behind closed doors. That would naturally run contrary to the interests of justice, specifically the Constitutional principle that justice should be administered in public as enshrined in Article 34.1 of the Irish Constitution. The Court in Glenman held that, in order to succeed in such an application, it is necessary for an applicant to show much more than the commercial damage naturally arising from the disclosure of in-house company disputes.

The Facts

The company was established in 1993 to work on construction projects, small at first (renovating churches etc) and growing to large-scale projects such as the construction of schools and social housing for local authorities. It operates in both Ireland and the UK. It reported a turnover of €30 million at the year ending 30th June 2021 with a gross profit of €1.6 million. The company has only two shareholders, the applicant who owns 40% and the respondent who owns 60%. They are brothers and both are directors of the company.

Relations between the two brothers were good until around 2013 when differences emerged in their respective visions for the company. That situation appears to have deteriorated to the point where it became necessary for one of them, the applicant who owns 40% of the shares, to issue legal proceedings under section 212 of the Companies Act 2014 claiming that he had been treated by his brother in an oppressive manner or that there had been a disregard of his interest as a shareholder of the company. In response, the respondent brought a motion to have the proceedings heard "in camera", otherwise than in public, since they would disclose sensitive information which could potentially ruin the company irrespective of the outcome of the proceedings.

The Law

The legislature, in drafting section 212 and its predecessor (section 205 of the Companies Act 1963), clearly envisaged that proceedings under the section would naturally result in the public disclosure of sensitive and confidential information. That is why a specific provision was added to allow for proceedings under the section to be heard in camera. Thus, section 212(9) provides:

"If, in the opinion of the court, the hearing of proceedings under this section would involve the disclosure of information the publication of which would be seriously prejudicial to the legitimate interests of the company, the court may order that the hearing of the proceedings or any part of them shall be in camera."

In applying this provision, Cregan J referred to a number of authorities from the Supreme Court. Among these was the leading decision in Re R. Ltd [1989] IR 126. The petitioner in that case was a substantial minority shareholder of a company which, he alleged, had unfairly dismissed him from his role as chief executive. His application was made under section 205 of the Companies Act 1963 and the company responded with an application for the proceedings to be heard in camera. The Supreme Court, in refusing that application and directing that the proceedings should be heard in public, emphasised the Constitutional importance of court proceedings being heard in public save in exceptional circumstances. As to when such exceptional circumstances could be held to arise, the Court applied the following two-step test:

1. Whether the disclosure of information would be seriously prejudicial to the interests of the company and, if so,
2. Whether a public hearing of the whole or part of the proceedings would prevent justice being done.

The question was raised before the Supreme Court again in the subsequent case of Irish Press Plc v. Ingersoll Irish Publications Ltd [1994] 1 IR 176. There, the respondents requested a private hearing on the basis that a public hearing would prejudice the company as it would reveal sensitive information relating to the company's precarious financial position, the animosity between its directors and its future plans. The petitioner, resisting that application, pointed to the fact that much of this information was already in the public domain from extensive media coverage. That argument was accepted by the Supreme Court which, overturning the High Court's decision, directed the proceedings to be heard in public. In coming to that conclusion, the Supreme Court applied the test in Re R Limited. Finlay J noted that, unless that test is satisfied, an order that proceedings should be heard in private cannot be made - even if all the parties consent to it.

Cregan J observed that company law applications are normally made in public even though they have the potential to do very serious damage to the company's reputation. He gave the example of proceedings for the compulsory winding up of a company. Such proceedings are always heard in public despite the clear prejudice this would cause to a company. He continued:

"Section 212(9) is a striking exception and must be strictly construed."

The onus of proof is on the person requesting the private hearing and he "would have to provide specific evidence as to the information which might be disclosed which could cause serious prejudice to the company." In other words, bald assertions of prejudice arising by reason of the mere existence of confidential information is not sufficient – the affidavit must actually state and exhibit the information itself.

The Court's decision

After citing the authorities, Cregan J went on to consider the arguments put forward by the respondent to support his application under section 212(9) that the underling proceedings should be heard in private. Those arguments, each of which the judge rejected, were the following:

1. The respondent argued that the release of confidential information in the public domain would be prejudicial to the company because it may have the effect of causing lenders to extend credit credit to the company. The Court found that this was not a credible reason for seeking a private hearing since the information which would be protected by such an order would be of a kind which credit institutions have a legitimate interest in knowing. Cregan J observed: "Thus, just as in Re R. Ltd, where the detailed accounts, the five year business plan and the terms of a commercial transaction were not sufficient in themselves to justify an in camera hearing, here also the fact that certain financial information might come into evidence in a public hearing is not sufficient to justify an in camera hearing.".

2. The applicant submitted that the disclosure of confidential information would prevent the company from securing bonding (insurance) contracts required by it to continue working in the construction industry. This argument was rejected for the same reason as the argument relating to financial institutions. Indeed, in the case of insurance contracts, the company was under a legal obligation to disclose any and all relevant matters to the insurance company when applying for a bonding contract.

3. The applicant argued that the company would have difficulty winning future tenders if the details of the dysfunctional relationship between its directors were made public. Again, the court rejected the submission and held that an in camera hearing was not intended to be used by a company to escape scrutiny, especially where that company carries on important construction work funded by the Government and charitable authorities.

4. It was submitted that disclosure of details of the directors' dispute would have a negative affect on the morale of company employees and could potentially lead to staff resignations. The court, in rejecting this submission, noted that the company's employees had been aware for a number of years of the hostility between the two directors. Even if they had not been aware, this was nowhere near a strong enough reason to prevent the proceedings being heard in public.

5. The respondent submitted that, even aside from details of the dispute between the company's directors, there was other "highly sensitive information" which would emerge and would be highly prejudicial to the company if made public. In particular, the information might have a prejudicial affect on disputes and ongoing settlement negotiations between the company and third parties. Cregan J rejected this argument and pointed out that the respondent had failed to specify exactly what this "highly sensitive information" was. In any event, if such information was to be introduced in the substantive proceedings then the judge hearing those proceedings could make redaction orders where appropriate.

Cregan J further noted that details of the company's troubles were already in the public domain arising from a number of newspaper articles. These articles related to the fact that the company had been removed from a construction contract it had with Galway City Council (GCC) owing to delays which, according to GCC, were caused by the company. That contract related to the construction of social housing for 245 people. GCC then sent a new contract out to tender for completion of the unfinished work but refused to allow the company to tender for this work. The dispute was referred to conciliation where the conciliator held that GCC were right to terminate the contract. Cregan J observed that:

"It is clear from all of the above that the company has suffered a major blow to its reputation as a result of the decision by GCC to terminate its contract with the company, the Council's decision to put the remaining 80% of the works out to a new tender and its decision to not permit the company to tender for this 80%. Moreover, this damage to the company's reputation was a matter which was fully aired in public both in the High Court and in the newspapers".

Conclusion

It is clear from the decision in this case and those before it that an applicant for a private hearing has an uphill task in displacing the constitutional requirement that justice must be administered in public. The fact that section 212 has a specific provision permitting "in camera! hearings means that the courts will at least entertain such an application, but the circumstances justifying an order must be exceptional. The reasons offered by the respondent in Re Glenman were distinctly ordinary and were no more than statements of the natural and foreseeable consequences of litigating disputes between company directors. It is unlikely that a list of mundane consequences masquerading as serious prejudice will be enough to satisfy the test in Re R Limited. What is required is something extraordinary, bordering on public policy reasons or perhaps the risk of irreparable damage to an unconnected third party, before a court is likely to make an order for an in camera hearing under section 212(9).

Author: Mahmud Samad BL
Publication date: 7th June 2024

CORPORATELEGAL