Shareholder litigation is a complex area of corporate law, rooted in disputes between shareholders and the company’s management or board of directors. These legal actions are typically filed to protect shareholder rights and interests or to address misconduct within a company.
Understanding the most common reasons behind such litigation can provide valuable insights into how corporations can safeguard against the risks of such actions and when shareholders may be in a position to take a dispute to court.
Breach of Fiduciary Duty
One of the primary reasons for shareholder litigation is the alleged breach of fiduciary duty by directors or officers of a company in which shareholders have an interest. Fiduciary duty refers to the obligation of loyalty and care that these individuals owe to the shareholders.
When shareholders believe that directors or officers have acted in their own interests instead of those of the company and its shareholders, they may file a lawsuit alleging a breach of this duty. Alleged mismanagement of company assets, failure to disclose conflicts of interest and making decisions that benefit a few at the expense of the majority are all common reasons why breach-related litigation is filed by shareholders.
Misrepresentation or Fraud
Shareholders may also litigate against a company for misrepresentation or fraud. This occurs when shareholders believe that they were provided with false or misleading information about the company’s financial status or business operations, impacting their investment decisions. Such cases often involve inaccuracies in financial statements, undisclosed liabilities or exaggerated reports of company performance.
Minority Shareholder Oppression
Minority shareholders sometimes feel that their rights are being ignored or suppressed by majority shareholders or the company’s management. They might file litigation alleging oppression, which could include being excluded from important decisions, not receiving fair dividends or being denied access to corporate records.
Concerns that may ultimately inspire shareholder litigation underscore the importance of transparency, ethical governance and respect for shareholder rights within the corporate structure. This subject also highlights just a few of the reasons why corporations and their shareholders alike may need to seek legal guidance in order to better safeguard their interests and respond to concerning situations effectively.