Shareholder & Close Corporation Actions

A corporation’s shareholders often have little power to control its day-to-day management. To run the corporation, the shareholders elect a board of directors to oversee its operations and hire officers who manage the company. It is the directors and officers who are charged with protecting the corporation and its shareholders.

However, by virtue of owning shares in the corporation, individual shareholders do have some power to affect change within the corporation through legal action. Most shareholder litigation falls into two categories: direct claims and derivative lawsuits.

Direct claims are filed by shareholders seeking to assert a claim that the board of directors, officers, or majority shareholders have engaged in misconduct and seek damages. Direct claims are often used by shareholders in close corporations and can offer protection to minority shareholders who are being treated unfairly by the majority shareholders. Close corporations are those where the stock is not freely traded and is generally held by only a few shareholders.

The reasons a shareholder might file a direct claim can range from illegal acts by directors or officers to management decisions that resulted in regulatory enforcement or litigation. But, as a general rule, direct claims against a corporate director or officer require a shareholder to show it has suffered harm that the other shareholders did not suffer. Finally, shareholders are rarely able to bring direct actions for breach of fiduciary duty unless the shareholder can show that the duty existed outside of their corporate relationship.

Derivative lawsuits are brought by a shareholder on behalf of the corporation, not in the plaintiff’s capacity as an individual shareholder. In essence, derivative lawsuits claim misconduct by the company’s board or management resulted in harm to the corporation. As a result, any damages from a derivative lawsuit will be awarded to the corporation and not the shareholder bringing the action.

Common grounds for derivative lawsuits include the following:

• Breach of fiduciary duty;
• Fraud or unlawful activities;
• Self-dealing by directors or officers;
• Conflicts of interest;
• Waste of corporate assets;
• False, misleading, or inflated financial statements;
• Accounting fraud;
• Inflated executive compensation; and
• Decisions by officers or directors exposing the corporation to harm.

Even when the actions of a corporation’s directors or officers cause harm to a corporation, a court may still apply the business judgment rule to dismiss a derivative lawsuit when there is evidence the actions were undertaken in good faith.

The experienced attorneys at Thomas H. Curran Associates have the skills necessary to represent shareholders in close corporations seeking to preserve their rights in disputes or shareholders seeking to file a derivative lawsuit against corporate management. They can also represent directors and officers defending themselves from a wide variety of shareholder actions. Our attorneys have a deep understanding of shareholder actions and the legal knowledge to litigate them successfully.