Opening a company up to shareholders has many benefits, including expanding your business and seeing it flourish. However, you also risk a shareholder lawsuit, allowing your shareholders to sue for harm related to improperly managing the company.
At BrewerLong PLLC, our experienced corporate attorneys can help you not only respond to any brewing shareholder complaints but also take preventative measures to help minimize the risk of those complaints. We have years of experience advising businesses on how best to operate while staying true to their shareholders. Contact us today!
Types of Shareholder Lawsuits
The most common types of shareholder lawsuits are direct and derivative lawsuits. In a direct lawsuit, a shareholder sues the company on their own behalf. In a derivative suit, the shareholder sues the company on the company’s behalf.
Direct Shareholder Lawsuits
A shareholder can sue another shareholder, an officer, a director, or the company itself in a direct shareholder lawsuit. The shareholder must identify some action the defendant took or may take against the shareholder’s rights or interests. The right or interest can be independent of the shareholder relationship or be rooted in a statute, bylaws, articles of incorporation, or similar corporate documents.
The shareholder has two options. First, they can show the defendant threatened or caused actual harm specific to the shareholder. Second, they can show the defendant threatened or caused actual harm resulting from violating a separate statutory or contractual duty. The company can share this harm.
Derivative Shareholder Lawsuits
To bring a derivative shareholder lawsuit, the shareholder must first show that they have a genuine stake in the case, known as having standing. To show standing, the shareholder must have been a shareholder when the alleged harm occurred and remain a shareholder at the time they filed their lawsuit. Usually, the shareholder must demand the company take corrective action before suing. The shareholder must generally give the company 90 days to respond. If the shareholder sues earlier, they must explain why waiting 90 days would cause irreparable harm. Additionally, if the shareholder can prove that complaining was futile, they can still bring a derivative action without first demanding corrective action.
Claims in Shareholder Lawsuits
Typically, shareholders claim the defendant breached a fiduciary duty, breached a contract, or both.
Breach of Fiduciary Duty
Directors and corporate officers have duties to act:
- In good faith,
- In the best interests of the company, and
- With the care of an “ordinary prudent person” in similar circumstances.
These duties can be summarized as the duty of good faith, the duty of loyalty, and the duty of care. A breach of any of these duties can give rise to a shareholder lawsuit.
Breach of Contract
Shareholders can claim a breach of contract based either on a contract the company entered into or a violation of a shareholder agreement or a similar document. Often, shareholders without direct involvement in the contract bring a derivative action when raising a claim involving a contract the company entered into. Alternatively, shareholders can base a claim on articles or incorporation, a shareholder agreement, company bylaws, or similar documents to which the company has bound itself.
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Responding to Shareholder Lawsuits
If a shareholder is considering filing a lawsuit, the first thing to do is contact your attorney. It can be tempting to go on the defensive right away, but you risk accidentally harming your case if you act before you have a plan.
If you are anxious to get started, you can begin collecting documents related to your company’s operation and locate any evidence relevant to the dispute. One of the hardest parts of managing a shareholder lawsuit can be managing your nerves and those of your colleagues.. Assure your colleagues and business partners you are responding to the complaints, but avoid making specific claims about the complaints.
Although the exact response will depend on the circumstances, it will likely involve launching an internal investigation, where your lawyer will help you figure out what, if anything, went wrong.
Then, you and your lawyer will create a plan. As your lawyer negotiates to resolve the case, they should also begin preparing defenses, including, for example:
- The shareholder’s claims are inaccurate;
- The shareholder lacks standing;
- No harm occurred to the shareholder; and
- The decision complained about was reasonable in the circumstances.
We take our cues from our clients, but we often negotiate with an eye toward settlement.
Preventing Shareholder Lawsuits
Although there is no foolproof way to prevent all shareholder lawsuits, a few tips can go a long way:
- Consult with your attorney on a plan to minimize the risks of shareholder lawsuits;
- Be as forthcoming with shareholders as is reasonable in the circumstances;
- Ask your lawyer to review decisions that could look questionable from a shareholder’s perspective;
- Respond promptly to any shareholder demands; and
- Keep organized, detailed files documenting business transactions.
Following these recommendations can help you stave off shareholder lawsuits. If, despite your best efforts, you are faced with needing to learn how to handle a shareholder lawsuit anyway, contact BrewerLong PLLC.
BrewerLong PLLC Can Help
If you have learned a shareholder is suing or may sue or want to put measures in place to prevent shareholder lawsuits, BrewerLong PLLC can help. We have over 15 years of experience working on business matters in Florida. We will listen to your concerns and then work with you to develop a plan to tackle those concerns effectively and efficiently. Contact us today to learn more.
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