Shareholders Derivative Lawsuits Hold Company Ownership Accountable

If you have a business with shareholders, your shareholders make money, when your business makes money. But what if it doesn’t? Can your shareholders sue you, as the owner or manager of a company, for your failure to make them a profit off of their investment in their shares?

The answer largely  depends on why they are not making money.

No Guarantee of Profit

Not all businesses make money, and not all shareholders profit from their investment in shares of a business. The fact that your business did not realize a profit for shareholders does not, by itself, give your shareholders any right to sue the owners of the company or the company itself.

Mismanagement and Carelessness

But sometimes, the reason why the business did not make money, is because of the absolute dereliction of duty by its owners. Sometimes, the owner or manager of a business can be so negligent, so reckless, and so oblivious to due care, that a business fails. When that happens, the business could end up sued in what is known as a shareholder derivative lawsuit.

Shareholder Derivative Lawsuit

A shareholder derivative lawsuit is a lawsuit where shareholders sue the company itself, as well as its owners, alleging that the owners were so careless with the management of the company, and so derelict in their duties, that the shareholders have lost money.

In more serious situations, a shareholder derivative lawsuit may allege that owners are engaging in self-dealing, or that they have a conflict of interest that is preventing the company from being profitable, or that owners are actually stealing from the company, keeping it from being profitable.

Who Can Bring a Derivative Lawsuit?

To bring a shareholders’ derivative lawsuit the injury alleged (that is, the loss of money, or the lack of profitability for the company), must be an injury that is shared by all shareholders. In other words, this is not a lawsuit where a single shareholder has an individual conflict or dispute with the company. Rather, the owners of the company have done something or failed to do something that has caused injury to all shareholders.

The person bringing the lawsuit must obviously own shares in the company.

Bad Faith

If the lawsuit alleges simple negligence or incompetence, the shareholders must show that the owners acted in bad faith. The action must be so careless, that it is obvious that no reasonable business person would have made those business decisions, or chosen the actions for the company that the owner chose. The owners must act in such a way that there is malice, or abject carelessness.

Shareholder derivative lawsuits can be dangerous and costly for companies. But for aggrieved shareholders, who may have little or no say over the operation of the business, shareholder derivative suits can be a way that shareholders can hold management accountable for the decisions that they make.

Call the West Palm Beach business litigation lawyers at Pike & Lustig today if you are a shareholder of a company and feel your rights have been violated–or if you are a company being sued by your shareholders.

Sources:

justia.com/business-operations/business-disputes/shareholder-derivative-lawsuits/thebusinessprofessor.com/business-governance/shareholder-derivative-action-process