A corporate shareholder, commonly referred to as a stockholder, is an individual or entity that legally owns one or more shares of a corporation’s stock. This basically means that they own a certain percentage of the corporation and will experience the same financial benefits and risks as its founder.
In addition, corporate shareholders also enjoy certain rights, such as voting on important decisions that affect the corporation (e.g., electing board members), attending annual shareholder meetings, inspecting the corporation’s records or books, and selling or purchasing shares.
One other significant right that shareholders may exercise is the right to sue the corporation. However, this right is not always available. Specifically, there are certain circumstances that will permit a shareholder to sue their own company. For example, a corporate shareholder may sue a corporation when any of its directors or officers violate a fiduciary duty or conduct various other illegal activities like defrauding investors.
To find out whether you have grounds to sue your corporation as a corporate shareholder, you should consult a local business attorney for further legal advice.
Can Shareholders Sue Anytime They Disagree with the Corporation?
It is important to note that shareholders cannot sue a corporation simply whenever they have a disagreement. This is due to a regulation known as the “business judgment rule”. The business judgment rule can be invoked during lawsuits in which a shareholder is claiming that a director violated its duty of care to the corporation. The rule acts as a presumption that requires the court to defer to the judgement of the corporation’s board of directors.
In other words, a court will uphold a director’s decisions so long as they were made in good faith, executed with the level of care and judgment that a reasonably prudent person would use, and made with the reasonable belief that the director or board is acting in the best interests of a corporation.
However, if the shareholders can prove that the director or the board engaged in fraud, other illegal activities, or were grossly negligent in managing a corporation, then the business judgment rule will not apply. Although these actions will give a shareholder grounds to sue, shareholders should only file a lawsuit against a corporation as a last resort.
If a shareholder does decide to take legal action against a corporation, they can only do so in one of two ways: either through a direct lawsuit or an indirect derivative lawsuit. The distinctions between the two will be discussed in further detail below.
Direct Lawsuit: Shareholder-Plaintiffs Sue on Their Own Behalf
In a direct lawsuit, a shareholder-plaintiff will file an action against a corporate director, corporate officer, and/or the corporation itself, alleging some special or personal harm that occurred as a result of the directors’ or officers’ actions.
Although the special or personal harm is usually one that is not shared by the majority of shareholders, a single shareholder may be appointed to represent other shareholders who have also experienced the harm in question.
Some reasons that a shareholder who has suffered a personal or special harm might file a direct lawsuit include when a corporate officer or director:
- Violated a specific shareholder’s ownership rights;
- Infringed on the shareholder’s right to vote;
- Denied the shareholder its right to inspect a corporation’s books or records;
- Refused or failed to pay dividends that were promised to the shareholder; and
- Violated a shareholder’s contractual or preemptive rights.
It should be noted, however, that a corporate officer does not owe any fiduciary duties to a single shareholder. The one exception is if the officer and shareholder have a special relationship or have entered into a contract that specifies as much.
Additionally, depending on the facts of a case, there are some instances when these lawsuits may entail suing an individual of a corporation, such as when a corporation is accused of committing a tort (e.g., fraud) or if an individual commits some type of personal violation that is separate from their role at the corporation.
Derivative Lawsuit: Suing Directors and Officers on Behalf of the Corporation
The second way that a shareholder can sue a corporation is through an indirect or derivative lawsuit. In these types of cases, an individual or shareholder will sue the corporation on behalf of the corporation itself. This may occur when a corporation’s directors or officers have done something that has caused harm to the corporation, such as violating their fiduciary duties, breaching the corporate duty of care or loyalty, or wasting a corporation’s assets.
A shareholder may only file suit on behalf of a corporation after they have attempted to resolve the issue with the board of directors and if the corporation has a valid cause of action, but refuses to sue. Prior to suing, the shareholder will also be required to file a written demand letter with the corporation that sets forth the details of the violation and includes a request to take legal action.
Furthermore, 90 days must have passed since the demand letter was submitted before they can file suit. There are two exceptions to this general rule. First, the shareholder can file a claim before 90 days have passed if the corporation rejected the demands. Second, the shareholder may also file suit before 90 days have passed if the corporation would be in danger of irreparable injury should the shareholder have to wait.
The shareholder who files the derivative lawsuit must also have standing to bring the action. This means that they must have been a corporate shareholder at the time of the violation or became one through an inheritance from a person who was a shareholder at that time. They must also be able to fairly and adequately represent the interest of the corporation, not just their own personal stake.
Given the complexity involved in these types of lawsuits, it is best to consult a local business attorney before filing. Otherwise, the suit may be dismissed.
Who Is Entitled to the Damages: Corporation or Shareholders?
In a direct lawsuit, the prevailing shareholder will be entitled to any remedies or damages received. In contrast, in a successful derivative lawsuit, the corporation will be the one to receive any damages. Such damages will then be distributed towards the prevailing corporation’s assets. It should be noted that since a shareholder is the person who brings a derivative lawsuit on behalf of a corporation, they will be entitled to collect attorneys’ fees.
If a shareholder loses a derivative lawsuit, however, then they will not be allowed to recover any attorneys’ fees or associated costs. Additionally, if a shareholder filed a derivative lawsuit in bad faith, then they will also be liable for the opposing party’s attorneys’ fees and related costs.
Lastly, a shareholder who both loses and files a derivative lawsuit in bad faith, will prevent the other shareholders from bringing the same claim against the defendant since the prior shareholder already lost the suit.
Should I Contact a Business Attorney?
If you are a corporate shareholder and believe you have grounds to file a direct or derivative lawsuit against your corporation, it is strongly recommended that you contact a local business attorney for further guidance. An experienced business attorney will be able to identify the type of lawsuit you should file and can ensure that you follow the necessary procedures before filing a claim.
Your attorney can also ensure that your claim is viable and that you have proper standing to file it. Additionally, your attorney can help you draft a demand letter and any other correspondence required before taking legal action. Finally, your attorney can also provide representation on your behalf in court.