Corporate shareholders have certain rights, such as voting on major corporate decisions (such as board member elections), attending annual shareholder meetings, checking the corporation’s records or books, and selling or acquiring shares.
Another important right that shareholders have is the ability to sue the company. This right, however, is not always accessible for litigation in Birmingham, AL. But certain conditions allow a shareholder to sue their corporation.
You can get legal support from a local business attorney to determine if you have grounds to sue your corporation as a corporate shareholder.
Can Shareholders Sue Anytime They Disagree with the Corporation?
It’s vital to remember that shareholders can’t just sue a company because they disagree with it. This is a guideline known as the “business judgment rule.” The business judgment rule can be used when a shareholder claims a director has breached their duty of care to the corporation. The rule serves as a presumption, requiring the court to defer to the corporation’s board of directors’ decision.
In other words, a court will sustain a director’s decision if taken in good faith, with the amount of care and judgment that a reasonably prudent person would use, and with the reasonable conviction that the director or board is acting in the corporation’s best interests.
Suppose the shareholders show that the director or board of directors participated in fraud, other criminal actions, or were extremely negligent in operating a corporation. In that case, the business judgment rule will not apply. Although these activities provide grounds for a shareholder to sue, shareholders should only do so as a last option.
If a shareholder decides to sue a corporation, they can only do it through a direct lawsuit or an indirect derivative case. The differences between the two will be scrutinized in greater depth further down.
Direct Lawsuit: Shareholder-Plaintiffs Sue on Their Behalf
A shareholder-plaintiff will bring a direct lawsuit against a corporate director, corporate officer, and the corporation itself, alleging that the directors’ or officers’ acts caused them specific or personal injury.
Although most shareholders typically do not share specific or personal suffering, a single shareholder may be selected to represent others who have suffered the same harm.
A shareholder who has experienced a personal or particular injury may pursue a direct lawsuit for a variety of reasons, including when a corporate officer or director:
- Infringed on the ownership rights of a certain shareholder;
- Infringed on the right of shareholders to vote;
- Denied a shareholder’s right to see the books and records of a corporation;
- Refused or failed to pay the shareholder the dividends that were promised; and
- Infringed on the contractual or preemptive rights of a shareholder.
A corporate office has no fiduciary responsibilities to a single shareholder. The only exception is if the officer and shareholder have a particular connection or if they have agreed to it in writing.
Derivative Lawsuit: Indicting Directors and Officers on Behalf of the Corporation
Indirect or derivative litigation is the second way a shareholder can sue a firm. In these instances, a shareholder or individual sues the company on behalf of the corporation. This can happen when a corporation’s directors or officers have breached their fiduciary obligations, breached the corporate duty of care or loyalty, or squandered the corporation’s assets.
A shareholder can only sue on behalf of a company if the board of directors has failed to address the matter or if the corporation has a genuine cause of action but refuses to prosecute. Before filing a lawsuit, the shareholder must first submit a written demand letter with the corporation detailing the violation and requesting that legal action be taken.
Contact a law firm if you believe that suing a company is the best course of action. You will be able to get legal counsel from an attorney-at-law in Birmingham, AL. Many law firms do not charge any legal costs for an initial consultation. Most states have statutes of limitations, so you may only have a certain amount of time to initiate a lawsuit.
At McCallum, Hoaglund & McCallum, LLP, our team of attorneys at law in Birmingham, AL, passionately seek justice for our clients in state and federal courts in areas ranging from complex business litigation, medical malpractice defense, insurance defense, and products liability to commercial litigation, construction law, securities and contracts litigation, employment litigation and more.