Common Examples of Shareholder Fraud

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Article By: Miller Law

A Leading Commercial Litigation Firm in Michigan

Common Examples of Shareholder Fraud

Published on: December 14, 2021
shareholder fraud

Shareholder fraud occurs, most typically, when a company makes or publishes false or misleading information to induce investors to invest in the company. 

A company can also commit fraud by making other false statements that are relied on by someone who is the victim of fraud. 

A company can also engage in other wrongful conduct, including where those with a controlling interest use the company for their benefit at the expense of minority shareholders.

However, as a shareholder, your ownership interest in a company entitles you to assert your rights against those in control of the company.

Shareholder fraud represents a complex area of law. Consult with an experienced shareholder rights lawyer to assist in navigating your way through a potential shareholder fraud litigation.

Examples of Shareholder Fraud 

Corporations promote the financial standing of their company to shareholders. This critical information aids shareholders in making decisions regarding their equity investment in the company. Therefore, a corporation’s financial health, including operations, cash flow, performance, and general matters, represents a company’s complete picture.

Additionally, shareholders must be able to make decisions regarding their equity investments free from pressure or duress.

Lastly, shareholders may have a right to act when they acquire knowledge of illegal acts committed by a corporation’s officers or directors. 

Fraud and Misrepresentation

Fraud and misrepresentation occur when a company or individual makes false statements upon which an individual relies. Various scenarios define fraud and misrepresentation of shareholders and corporations.

The basic elements of misrepresentation include the following:

  1. Defendant made a false representation to another;
  2. The misrepresentation was material and false;
  3. The defendant either (1) knew the misrepresentation was false, (2) did not know whether the misrepresentation was false but asserted the positivity of the statement, or (3) had no intention to perform the promise when made; 
  4. The defendant made the misrepresentation with the intent for another to rely on; 
  5. Another did rely on the misrepresentation; and 
  6. The misrepresentation harmed another. 

It’s important to note that opinions, even if relied upon, are generally not considered misrepresentations. 

Examples of shareholder fraud include a scenario where an investor relies on falsified information regarding a company’s financial performance. Had the actual financial position of the company been known, the individual would not have invested. 

Shareholder Oppression

Shareholder oppression occurs when majority shareholders of a corporation act in a way oppressive to the minority shareholders. There are various examples of shareholder oppression, including the following:

  • Exclusion of minority shareholders from management decisions;
  • Firing of minority shareholders without distribution of dividends;
  • Fraud or waste committed by majority shareholders; 
  • Payment of excessive compensation to majority shareholders;
  • Failure to pay dividends; and 
  • Failure to provide necessary information to minority shareholders about business operations, finances, and shareholders. 

Majority shareholder actions frustrating the minority shareholders’ reasonable expectations constitute shareholder oppression. 

Corporate Malfeasance 

Corporate malfeasance occurs when an officer or member commits a wrongful or unlawful act. Acts of corporate malfeasance are accompanied by the knowledge that the acts are wrong. Despite understanding the likelihood of adverse consequences, these individuals carry out the act, causing harm to the corporation.

Examples of corporate malfeasance include:

  • Bribery—using something of value, like money, to influence the actions or decisions of others;
  • Misappropriation—using corporate money or property for one’s own benefit;
  • Money laundering—transferring money to erase the illegal source of the money; 
  • Insider trading—using corporate information not known to the general public to trade in publicly traded companies; and
  • Extortion—using the threat of force or violence to take something of value from another. 

In corporate malfeasance situations, although officers or members can be held criminally responsible, there is often no recourse for harmed shareholders. Shareholders must then collectively pursue litigation against these officers or members to obtain compensation for the malfeasance.  

Breach of Fiduciary Duty

Directors have a fiduciary duty to shareholders of a corporation to make decisions in the corporation’s best interest. However, a breach of fiduciary duty may occur when a director puts their own interests before those of the shareholders and corporation.

To prove a breach of fiduciary duty, one must show that a fiduciary duty exists and that the individual breached that duty for their own benefit.

Contact Us

The Miller Law Firm specializes in complex business litigation. If you find yourself at the center of a shareholder fraud dispute, contact our office for experienced legal assistance. The Miller Law Firm regularly represents business owners and business executives and assists in-house counsel on various business matters.

Since 1996, The Miller Law Firm has grown from a three-person firm to a nationally recognized 26-person firm. We represent clients throughout the country on litigation ranging from the low six figures to hundreds of millions of dollars. Contact The Miller Law Firm today to discuss your shareholder fraud matter with our dedicated attorneys. 

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