When you invest in a corporation, you expect it to act in the best interest of its shareholders. But what happens when the corporation’s leadership does not seem to have its shareholders’ interests in mind?
Shareholders may be able to enforce their rights and the rights of other shareholders through litigation.
Shareholders have several options when it comes to filing a shareholder lawsuit. For example, in some shareholder lawsuits, the shareholder acts as a direct plaintiff or may even file a derivative lawsuit on behalf of the corporation itself. While shareholder lawsuits can allow shareholders to enforce their rights and protect their interests, shareholder lawsuits also have limitations.
Below, we will discuss some of the common shareholder rights lawsuits. These include:
- Lawsuits to enforce shareholder inspection rights,
- Shareholder derivative lawsuit, and
- Shareholder oppression claims.
As a shareholder, it’s essential that you understand your rights and shareholder remedies in the event of wrongdoing or oppression.
- Accounting records,
- Record of shareholders, and
- Minutes of shareholders’ meetings.
A shareholder usually needs to make a written request to inspect the records. The corporation will then have five days to respond.
If the corporation does not allow the shareholder to inspect the records, then the shareholder may compel the inspection in court.
Unless the corporation denied the request in good faith, the court can also order it to pay the costs and attorney fees associated with enforcing the shareholder’s rights.
Enforcing your inspection rights in court can show directors that you are serious about protecting your rights as a shareholder and prevent them from engaging in more serious acts of shareholder oppression down the road.
In some cases, denying inspection rights can be grounds for a shareholder oppression suit, particularly when combined with other illegal actions designed to shut out minority shareholders.
A shareholder derivative lawsuit is a lawsuit by shareholders against directors, officers, or others on behalf of the corporation for shareholder injuries. In this type of action, the shareholders represent the interests of the company against the officers or directors who are not acting in its best interests.
Shareholder derivative lawsuits are often permitted when they are necessary to address officers’ or directors’ breach of duty to the company. In addition, shareholders often file when the corporation fails to take appropriate action. Shareholder derivative lawsuits often have requirements that are unique to individual states, including in some states, sending a notice in advance of filing a derivative lawsuit.
Who can file a Shareholder Derivative Lawsuit?
Shareholders often file on behalf of all shareholders. You will likely need to meet the filing criteria to file a shareholder derivative lawsuit:
- Be a shareholder of the corporation at the time the wrongful act occurred,
- Fairly and adequately represent the interests of the corporation, and
- Continue to be a shareholder until the time of judgment.
You will likely need to make a written demand upon the corporation to take action due to the issue before filing your claim. The corporation will then have 90 days to resolve the case before the shareholder can pursue a shareholder lawsuit.
What Might Trigger a Shareholder Derivative Lawsuit?
When a director or officer of a corporation is operating the business in a manner that is contrary to the shareholders’ interests, shareholders may file a shareholder derivative lawsuit. Directors and officers of a corporation have a duty to act in the best interest of shareholders. The most important duties are the duties of care and loyalty.
Duty of care
The duty of care obligates a director or officer in a business to act in good faith with diligence and within their authority. They need to know what is going on with the business and make good decisions.
Duty of loyalty
The duty of loyalty requires that any corporate officer or director avoid conflicts of interest or putting their own interests ahead of the corporation’s. Breaches of the duty may include:
- Self-dealing—when an officer or director enters into an agreement with the corporation which is not fair or equal to other shareholders;
- Conflict of interest—when a director or officer’s private affairs may influence their judgment in running the company; and
- Improper use of corporate position—when an officer or director uses information acquired through their position for personal gain instead of using it for the corporation’s benefit.
To demonstrate that an officer or director breached their duty of loyalty or care, you will need to show that their error was more than just an error in judgment.
Business judgment rule
Michigan gives some leeway to management. For example, the business judgment rule protects decisions made in good faith and without the intent to further an officer or director’s self-interest. The more an act seems outside the scope of a typical business decision, the harder it may be to apply the business judgment rule.
For example, if an officer entered into a contract with another company that ended up losing the company money, that could fall within the business judgment rule. But if the reason the company got the short end of the stick in the deal was that the officer had a financial interest in the other company, then they may have violated their duty of loyalty.
All shareholders, including those who do not have a controlling interest in the corporation (minority shareholders), have certain rights. Depending on the corporation’s bylaws, these rights often include:
- To participate in shareholder meetings,
- To vote on shareholder resolutions, and
- To inspect shareholder records.
If a shareholder feels that a controlling shareholder has violated the shareholder rights, they may be able to file a shareholder lawsuit for oppression. There usually must be oppressive actions taken against the shareholder to do this. Shareholder oppression may include:
- Restricting their right to transfer stock interest,
- Dilution of shares, and
- Termination of employment.
Usually, shareholder oppression must be illegal, fraudulent, or willfully unfair to be actionable. Acts that are allowed by an agreement, the articles of incorporation, the bylaws, or a written corporate policy or procedure typically are not considered shareholder oppression.
What Sort of Relief Can you Seek?
In a shareholder lawsuit for oppression, you can usually seek the following:
- Dissolve and liquidate the assets of the corporation,
- Cancel or alter certain parts of the articles of incorporation or bylaws,
- Cancel or change certain resolutions of the board of directors or shareholders,
- Prohibit or terminate acts taken by management or shareholders, or
- An award damages.
Shareholders typically need to file their claim within three years of the act that gave rise to the lawsuit or within two years of discovering the act. The two years may also apply when the shareholder should have reasonably discovered the act.
Being a minority shareholder does not mean you give up your rights. If another shareholder is hurting your rights or management has done something wrong, we want to help you. Miller Law’s shareholder rights attorneys understand shareholder oppression and derivative cases. Our team has been through the shareholder litigation process and knows what damages may be available to you. We take shareholder’s rights seriously. For more information, don’t hesitate to contact us to arrange your consultation.