Shareholder disputes are a common source of business litigation. A shareholder is either an individual or entity that has purchased shares of stock in a company and thus has a portion of ownership. Majority shareholders have control over certain aspects of the company, including financial and operational matters. Minority shareholders do not have control over the company in the way majority shareholders do but still have rights.
The lawyers at Levy Goldenberg LLP, New York’s leading business law and commercial litigation firm, represent both shareholders and companies in these complex matters. Here is what you need to know.
Shareholder Derivative Actions vs. Direct Actions
Generally, one or more shareholders, or one shareholder on behalf of a class of all shareholders, may file suit to challenge actions taken by board directors and officers. A shareholder derivative action is a lawsuit brought on behalf of a corporation to prevent or remedy a wrong committed by the corporation. Although a shareholder or a group of shareholders initially brings the derivative action, this is done solely in the shareholders’ representative capacity because, ultimately, the claim and any recovery obtained in the action belong to the corporation. The shareholders who bring the derivative action stand in the place of the corporation.
Derivative actions have long been recognized as an important form of litigation intended to deter directors from breaching their obligations to the corporation and its shareholders. These cases often involve allegations of:
- Corporate waste or mismanagement
- Stock price manipulation
- Fraud
- Misappropriation
- Conflicts of interest
- Self-dealing
- Overcompensation of executives or directors.
In contrast to derivative suits, direct shareholder actions involve harm to the shareholders that are distinct from damages sustained by the corporate entity. In these cases, the plaintiff has to prove a breach of some duty owed directly to the shareholder. This includes contractual duties that arise from shareholder agreements which clarify how the company will operate, how it will be managed, and what kinds of decisions will require shareholder approval.
A breach of a shareholder agreement may give rise to a claim for breach of contract damages. Common examples of direct actions include suits aimed at:
- Protecting rights of minority shareholders violated by majority shareholders
- Compelling the payment of a dividend or distribution
- Protesting the issuance of shares improperly diluting a shareholder’s stake
- Protecting voting rights
- Accessing corporate books and records for inspection
Breach of Fiduciary Duty Claims
One of the primary theories of liabilities for shareholders to pursue against directors and officers is breach of fiduciary duty. Directors and officers of corporations owe fiduciary obligations to stockholders. A breach of fiduciary duty claim asserts that the directors or officers acted either without sufficient care or in their own self-interest.
In addition to a duty of care owed to the corporation, directors, and officers owe a duty of undivided loyalty and a duty of disclosure. In the context of mergers and acquisitions, these actions typically allege that the directors engaged in a flawed process, agreed to an inadequate price or deal terms, or failed to make sufficient disclosures about the transaction.
New York courts generally examine the conduct of directors and officers under the deferential business judgment rule. The business judgment rule generally insulates business decisions from judicial review absent indications of bad faith, fraud, or self-dealing. Without applying the business judgment rule, the burden falls on the directors and officers to show the reasonableness of the challenged corporation action and fairness to the shareholders.
Alternative Dispute Resolution
Litigation can be both time-consuming and expensive. In some instances, going to court may not be the best option to resolve differences within a business. For example, papers filed with the court in a lawsuit usually become a matter of public record. As a result, litigation carries the risk of revealing a company’s inner conflict to the world.
Alternative dispute resolution (ADR) methods can help shareholders resolve disputes privately without needlessly exposing the company to public scrutiny. Arbitration involves presenting the claims, defenses, and arguments to a neutral third person who makes a legally binding award that can be enforced in court. Mediators do not make binding decisions but assist the parties in trying to reach a settlement agreement.
Choose The Shareholder Dispute Attorneys at Levy Goldenberg LLP
There are a variety of ways in which shareholder disputes can arise. Whether you are starting a new business in Manhattan and need to take measures to avoid a shareholder dispute, or you are facing a shareholder dispute in your current company, it is critical to understand what shareholder disputes often entail and what you may be able to do to resolve them.
If you are a shareholder and suspect that a fellow shareholder, director, or officer of a corporation is guilty of misconduct, it is important to know what your legal options and remedies are. Whatever the cause of the dispute or the nature of the claim, our New York business litigation attorneys stand ready to assist you. Contact Levy Goldenberg LLP today.