Owners of closely held corporations or LLCs often find themselves litigating for control of their "Company." When that happens, on which side of the caption does the Company line up? What role should it play? And should either warring faction enjoy access to the Company's assets to fund that side's litigation costs?
When derivative claims are asserted, the Company must be a party, but when nothing is sought on behalf of or from the Company and all the owners are before the court, should the Company be a plaintiff or a defendant, or should it be left off the caption altogether? If it is not named as a party, the court may require the Company to become one so that it will be subject to the court's orders.
When the Company is named a nominal defendant in the Complaint, the plaintiff runs the risk that the defendant owners will retain one lawyer to represent both them and the Company and pay that lawyer's retainer (and eventually a lot more) from the Company's treasury, even though as a practical matter that lawyer will be advancing one side's position in the litigation against the other. In addition to whether that is fair, joint representation raises ethical issues. The result is that the choice of counsel, the authority to choose counsel, and the use of Company funds to pay counsel become issues in a soon-to-follow pretrial application for relief by the plaintiff.
These issues were addressed, but not conclusively resolved, in a case that came before the Texas Supreme Court on pretrial applications to disqualify defendants' counsel. The underlying dispute, which had not yet been decided by the lower court, was between twelve LLC owners and six "Governing Persons" collectively divided into two factions. The disagreement arose from the majority's firing of the previously unanimously elected president and managing member who, with his supporters, claimed that a unanimous vote was required for dismissal. The minority's Complaint, asserting derivative as well as direct claims, included the LLC as a named plaintiff. The defendant majority engaged a law firm that had previously represented the LLC, funded its litigation costs from the Company treasury, and asserted counterclaims.
Late in the litigation, the minority moved to disqualify defendants' counsel charging (1) that the law firm, having previously been counsel to the plaintiff LLC, could not appear against its former client, and (2) that the defendant faction had no authority to hire a law firm to act for the LLC.