Shareholders of a corporation who do not approve how the directors are managing the corporation have the option of bringing a shareholder suit to compel the directors to act in the best interest of the corporation. This form of lawsuit aims to protect the corporation from directors who make decisions outside their authority that threaten to harm the company’s success. At the Law Offices of Salar Atrizadeh, an attorney with extensive knowledge and experience in both corporate transactions and litigations can help inform, advise, and counsel you through a shareholder lawsuit.
In fact, shareholders can bring two types of actions—direct actions, or derivative actions. In a direct action, a shareholder files a suit to claim injury to his or her interest as a shareholder. A shareholder may also bring a direct action to claim an injury on behalf of a class of shareholders with a common injury. This type of suit would be a class action lawsuit involving a class of shareholders against the corporation. In both cases, the injury must be to a shareholder and not to the corporation. If the shareholders are successful in their lawsuit, they will collect damages individually. Shareholders may also bring derivative suits. In a derivative suit, shareholders file a lawsuit on behalf of the corporation, claiming injury to the corporation. This form of a lawsuit may involve the failure or refusal, on the part of the corporate officers, to bring suit for the best interest of the corporation. In a successful derivative suit, any collected damages will go to the corporation, not the shareholders who bring the suit. While direct actions and derivative actions are mutually exclusive, (i.e. shareholders cannot bring both suits), in some instances involving small corporations with very few shareholders, the two actions become intertwined. Indeed, in small corporations, the participants may hold multiple positions, and the actions of one shareholder may directly impact other corporate members and the corporation itself.
Furthermore, shareholders reserve the right to file either a direct or a derivative suit for a dissolved corporation. In general, corporations continue to exist after closing down their operations to manage certain affairs. These responsibilities may include defending and prosecuting legal actions as necessary. Additionally, shareholders do not cease to exist as shareholders for dissolved corporations, so long as the corporation continues to manage ongoing issues. Accordingly, dissolution does not by itself deprive a shareholder from pursuing legal remedies, either in an individual capacity or for the corporation.
In addition, shareholders should be aware of any limitations to their right to bring a lawsuit. For example, a shareholder who purchased his or her shares of the corporation after a wrongdoing, cannot bring a lawsuit to claim damages from that wrongdoing. Therefore, a shareholder must be an active shareholder at the time of a wrongdoing to file a direct or derivative suit. Indeed, in certain circumstances, a shareholder who purchased shares after a wrongdoing is not permitted to convince active shareholders from the time of the wrongdoing to pursue legal action. As such, it is important for corporate officers and shareholders to seek legal counsel from an attorney with experience in corporate litigation, who can help guide you through the intricate procedures.