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:
- Shareholders’ contractual and preemptive rights
- Shareholders’ right to vote
- Violation of a shareholder’s ownership rights
- Non payment of promised dividends
- Denying a shareholder the ability to inspect records
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:
- Standing: The shareholder that is bring the suit on behalf of the corporation had stock ownership at the time of the act complained of or during the course of the pending litigation being brought.
- Represent Interest of Shareholder: The shareholder bring suit must represent the shareholders interest and not just their own personal interest.
- Make a written Demand: Prior to bring a derivative suit, a shareholder must make a written demand to the directors about the complaint. Then, if the directors fail to take action. The shareholder could be excused from making the demand if they show that the corporation will immediately be harmed if they make the demand and wait for a response or action by directors, and the suit must be made immediately.
- Corporation as Defendant: The Corporation must be named as a defendant even if the suit is brought on behalf of the corporation.
- Business Judgment Rule: Courts will dismiss the suit if the disinterested directors determined that the transaction was not wrongful and was done in good faith, with a rational basis and even if it harmed the corporation, there was no fraudulent or wrongful conduct.
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:
- Misappropriation of corporate assets
- Wrongful delegation of corporate duties
- Breach of corporate duty of care
- Breach of corporate duty of loyalty
- Waste of corporate assets
- A director seizing a business opportunity that rightfully belonged to the corporation
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.