by Christopher Katers, Esq.
[Ed. Note: The following is a guest post by colleague and personal friend, Christopher Katers. I have enjoyed working with Christopher on a previous multi-million fraud case in Missouri. We team up with his firm to team up on high dollar and complex fraud cases and other business litigation. Chris is a partner at Judge, Lang & Glynn in Milwaukee. He can be reached at 414-777-0778.]
Under traditional notions of law, management is responsible for bringing and defending legal actions on behalf of the company. When officers and directors fail to do so, shareholders are often forced to take action.
A “shareholder derivative action” is a legal action brought by a shareholder or group of shareholders in the name of the corporation to redress an injury to the corporation. Generally, shareholders cannot bring individual actions against third-parties or Corporate Directors and Officers, instead shareholders must pursue derivative actions on behalf of the corporation. In rare circumstances an individual can bring a direct claim against a third party of Corporate Director, but only if the damage was “separate and distinct” to the individual shareholder and did not affect all of the shareholders.
Shareholder Derivative Suits are often the only remedy when Corporate Officers and/or Directors through fraud, neglect or mismanagement have failed to take the proper actions on behalf of the corporation. Shareholder Derivate Suits are also a powerful tool to remedy intentional wrongdoing of Corporate Directors and Officers, such as self-dealing, usurpation of business opportunities, and failure to maintain the duty of loyalty to the Corporation. A plaintiff in a shareholder derivative suit brings the action on behalf of and in the name of the Corporation, and represents the Corporation and all other similarly situated stockholders. The suit is for the benefit of all those entitled to participate in distribution of assets.
Any recovery from a Shareholder Derivative Suit belongs the corporation. Shareholder Derivative Suits are a powerful tool to combat Corporate Director and Officer malfeasance in both large and small corporations. The stockholders of closely held corporations can bring shareholder derivative suits to protect their rights and hold majority shareholders, directors and officers liable for their actions.
In recent years many disgruntled stockholders have attempted to bring direct actions against the Corporation’s Directors and Officers as a result of the diminution in stock value. Courts have routinely rejected these direct claims as the shareholders claims are not “separate and distinct” from those of all other shareholders. Shareholders seeking to hold the Corporations Directors and Officers liable for the diminution of stock value or of corporate assets are required to bring the claims on behalf of the corporation and all of the shareholders. All proceeds received from any such suit flow to the Corporation, theoretically causing the value of the shares to increase.
Often incompetent and self-dealing officers and directors are also removed from their position or step down as a result of a settlement or court action. Shareholders can thereby remove Directors and Officers who have caused harm to the corporation or have put their personal interest ahead of those of the corporation.
If you believe that a corporation in which you are a minority shareholder or a stockholder has been harmed by the actions of the current directors and officers, contact us and we can help. [END POST]
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The rules relating to shareholder derivative actions are complex and vary widely between jurisdictions. Judges tend to carefully scrutinize them as well. Frequently the cases we see involve insider self-dealing and often occur in tightly held companies. Sometimes, disputes arise between different factions of the same family.
Having qualified legal help is an absolute must. Few lawyers are qualified to handle these matters and the few that do often charge tremendously high fees. If you are the minority shareholder in a business and think you have suffered economic loss because of mismanagement or failure to pursue economic opportunities, let us know. Our team of fraud lawyers and litigation partners are ready to help.
Brian Mahany, partner – Mahany & Ertl (Milwaukee, Detroit, Minneapolis, Portland & San Francisco). (direct)