When Business Gets Tough: What You Need to Know About Shareholder Litigation

By Christopher B. Posner

Do you own stock in a public or private corporation? Do you feel that the corporation is not properly addressing certain issues or that a director is abusing their power? Perhaps you feel that the corporation has infringed upon your rights as a shareholder.

Sometimes business gets tough and it’s good to know your options as a company shareholder. Depending on the type of harm you are alleging, you may want to look into bringing forward either a shareholder derivative or a direct lawsuit.

Shareholder Derivative Lawsuits

A derivative suit is a lawsuit brought by a shareholder plaintiff on behalf of the corporation. The shareholder “steps into the shoes” of the corporation and asserts rights belonging to the corporation because it is alleged that the management or board of directors is refusing to take appropriate action or is unable to do so.

Corporations may refuse to pursue legal action themselves for various reasons. For example, a member of the board or corporate officer could be the source of the alleged harms. Derivative lawsuits can also be used to “snuff out” fraud or possible breaches of director or officer duties.

Prior to bringing forth a shareholder derivative suit in Florida, a shareholder must satisfy two procedural requirements that are codified in Section 607.07401 of the Florida Statutes:

  • First, the shareholder must have owned shares in the corporation at the time the alleged harm occurred. A shareholder that receives shares through inheritance or by operation of law may bring suit if the original owner of the shares owned them at the time of the alleged harm. However, a shareholder that receives the shares through other means, such as purchasing the shares on the stock market, will not satisfy the stacking ownership requirement.
  • Second, the shareholder must make what is called a written pre-suit demand on the board of directors. This demand must ask the board to take matters into their own hands and address the harms that the shareholder alleges are being done to the corporation. The board may then decide to pursue legal action or they may reject (or ignore) the shareholder’s demand. If the board rejects or ignores the demand, the shareholder may proceed with the derivative lawsuit as if they were the corporation.

Most importantly, in the event the shareholder is successful in bringing the derivative lawsuit, any proceeds from the suit will go to the corporation, not the shareholder. Fortunately, the statute also allows the court to award the shareholder plaintiff their reasonable attorney’s fees and costs.

Shareholder Direct Lawsuits

Shareholder direct lawsuits, by comparison, are more akin to common civil law suits in which an injured plaintiff sues a defendant for damages. In a shareholder direct suit, the shareholder sues the corporation to seek damages for a harm done directly to the shareholder by the corporation.

Various causes of action can be brought through a direct suit, such as fraud or breaches of the corporation’s statutory duties (i.e., failure to comply with the corporation’s bylaws).

In contrast to the derivative lawsuit, a shareholder who is successful in bringing a direct suit against the corporation may recover the damages directly.

If you feel you, or your company, are being wronged, you can file suit to correct any deviant actions. No matter what type of shareholder suit you wish to bring, it’s important to hire an attorney who really knows your recourses and how to protect both you and your shares in the company. Ward Damon is experienced with a wide range of business and corporate matters, including shareholder litigation, and can assist you with your claim every step of the way.

Christopher B. Posner is an attorney at Ward Damon who focuses his practice in the areas of commercial and civil litigation, as well as marital and family law., Ward Damon is an AV-rated, multi-disciplined law firm that is knowledgeable and experienced in handling all matters of business and corporate law. You can contact Chris at cposner@warddamon.com or call 561-842-3000.

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