Suing a Corporation as a Corporate Shareholder

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Suing a Corporation as a Corporate Shareholder

A corporate shareholder who wants to sue his corporation usually has two alternatives: he can sue the corporation directly or he can bring an indirect, derivative lawsuit.

Can Shareholders Sue Anytime They Disagree with the Corporation?

No. The business judgment rule requires that courts defer to the board of directors in business matters. The only exception is if shareholders can show that the board of directors engaged in fraud, illegal activities, or were grossly negligent while managing the corporation.

If a majority of shareholders disagree with the corporation’s actions, the shareholders can simply take a vote. Shareholders are suppose to bring lawsuits against the corporation they own as a last resort.

Direct Lawsuit: Shareholder-Plaintiffs Sue on Their Own Behalf

In a direct suit, the shareholder-plaintiff claims some personal harm, irrespective of possible harm to corporate assets. The defendants in a direct lawsuit typically include the corporation itself as well as its directors and officers.

A lawsuit by a shareholder may be based on the following:

Derivative Lawsuit: Suing Directors and Officers on Behalf of the Corporation

In a shareholder derivative suit action, an individual or shareholder of the corporation would bring suit against the corporation on behalf of the corporation, rather than as a individual person. Derivative suits are usually brought against insiders of the corporations like the directors, officers, board members who have been accused or suspected of acts that caused harm against the corporation.

In order for a shareholder to bring a derivative suit, it must be shown that:

Who Is Entitled to the Damages: Corporation or Shareholders?

If the shareholder wins the derivative suit, the corporation will receive the money from the judgment, which is distributed towards the corporate assets. The shareholder who brought the suit in court will be entitled to attorney’s fees.

If the shareholder loses the derivative suit, shareholder cannot recover the costs and fees. If the suit was brought in bad faith, shareholder will also be liable for defendant’s costs and fees and other shareholders cannot bring the same claim against the defendant since the previous shareholder lost the suit on behalf of the corporation.

Derivative shareholder lawsuits may be based on the following:

Should I Contact a Business Attorney?

If you are a corporate shareholder, a qualified business attorney can help you determine if you should file a lawsuit against the corporation. An experienced attorney will guide you through your available options, which may even include the possibility of a class-action lawsuit.

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Last Modified: 06-03-2015 04:12 PM PDT

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