At some point in the development of your business, you may decide to take on investors. This allows you to acquire additional capital that allows your company to take its next big step toward success. Typically, individuals or other companies will give you money in exchange ownership of a part of your company. As such, they become your shareholders.
While shareholders may seem like passive investors with little interest in the management of your company beyond the return on their investment, the reality is that shareholders have many important rights – and when they think those rights have been violated, they can sue. Without necessary care, shareholder lawsuits can wreak havoc on your bottom line.
Understanding the Rights Available to Rancho Cucamonga Shareholders
Shareholders have two primary types of rights: Direct and Derivative. Direct rights are rights that belong to the specific shareholder at issue and derive from injury suffered specifically by that shareholder. For example, if the company breaches a contract with a shareholder, that is a direct right that can lead to direct action.
Derivative rights are those rights that are actually owned by the company, but which the shareholder may assert on behalf of the company. These rights typically arise when individuals at the company do something that is bad for business, and therefore bad for a shareholder’s investment. An example of this would be if an officer or director were to steal from the company.
More often than not, litigation brought by shareholders is done to assert derivative rights, as these are more easily violated.
The Scope of Derivative Action Litigation
Within a business, many different individuals owe duties to the business and to its shareholders. Officers like CEOs and CFOs owe duties of good faith, fair dealing, and loyalty to the company. This means they must act in the best interest of the business and cannot pursue side deals with competitors, or take action that would hurt the company while benefitting them personally.
The same duties apply to those on the board of directors. Board members must always act in the best interests of the company. When they make business decisions they must put the interests of the company above their own personal interests.
Finally, shareholders may also owe duties to the corporation and to other shareholders. Shareholders have responsibilities to refrain from making decisions that adversely affect other shareholders.
If any one of these individuals fails in their duties, a shareholder may have a right to bring a derivative shareholder action on behalf of the company to address these wrongs. But, in order to do so, the shareholder must first take certain steps.
Notice Before Litigation
Because shareholder derivative actions are taken on behalf of a company, they can only be brought when the company itself fails to act. For example, if officers of the company learn that a member of the board of directors is stealing from the company, they may bring a lawsuit against that board member.
But if they are conspiring with that board member to fill their own pockets – and do not want to sue the board member for his misdeeds – then a shareholder may step in and take action on behalf of the company, asserting the company’s interests in its own profits and funds.
Thus, any shareholder who wants to a sue a company must be careful to raise the issue with the corporation first and give them the opportunity to respond. Only when they fail to do so may the shareholder step in.
California Business Attorneys Helping Protect You From Shareholder Litigation
Every business owner must realize that when shareholders enter the corporate mix, there is increased opportunity for conflict and litigation. Officers, owners, and the board of directors must be careful to educate themselves as to their responsibilities to the company, and to their colleagues and investors.
At CKB Vienna LLP, our business litigation attorneys can help you prepare to take on shareholders before the necessity arises. We work with you to develop policies and procedures that will protect shareholder interests, and work to minimize litigation. For more information, contact us online or at 909-980-1040.