Shareholder lawsuit & duties

Question 1

General

Answer 1

In addition to voting rights, shareholders have the right to sue to enforce the directors’ fiduciary duties

Shareholder faces two risks

Question 2

Shareholder Litigation - Direct v. Derivative Suits

Answer 2

General - shareholders sue directly if possible

Direct v. Derivative - basic idea is that an action that principally harms the shareholder is a direct action while an ction that arms the corporation as an entity is a derivative suit

Note 1 - shareholder suits arguing their voting or dividend rights have been interfered with, or challenges of merger, usually considered direct

Note 2 - allegations that directors mismanaged the corporation is usually derivative

Question 3

Shareholder Litigation - Direct Suits

Answer 3

If litigation is direct, shareholder suits in her name and any recovery comes directly to her

Shareholder may sue directly if she is enforcing her rights as a XXX (.e.g, alleging voting rights have been interfered with) or if corp has harmed her in some other capacity (.e.g, hit by corp truck)

Question 4

Shareholder Litigation - Derivative Suits

Answer 4

Cause of Action - belongs to the corporation and the shareholder is suing on the corporation’s behalf

Derivative Action Requirements and Effects:

1. Standing - shareholoder must have been a shareholder both at the time of the harm and at the time the case is resolved (“contemporaneous ownership”)
2. Demand - shareholders must make “demand” on directors that requests that they bring suit (before shareholder brings suit themselves)
3. Demand Futility - may sue without first demand upon board if deman would be futile ; futility factors are:
   a. whether the directors are disinterested and independent; and
   b. whether the transaction was the product of a valid exercise of business judgement

Business Judgment Rule - low standard for board to meet; applied when board rejects demand

Recovery - goes to the corporation rather than straight to shareholder

Atty Fees - if litigation produces a substantial benefit to the corp, then P’s atty are enttitled to payment to their fees by corp

Question 5

Federal Securities Claims - 10b-5 Anti-Fraud Action

Answer 5

Most common federal securities law claim from shareholders.

Requirements:

1. Jurisdictional Nexus - alleged fraud must have involved an instrumentality of interstate commerce (email, phone, etc.)
2. Transsactional Nexus - allged fraud must be “in connection with” the purchase or sale of a security
3. Must allege a material misstatement or ommission
4. D acted intentional or reckless
5. P relied on the D’s conduct (though reliance may be presumed in some cases)
6. P’s suffered a loss as a consequence of D’s conduct

Insider Trading - also prohibits trading by:

1. company insiders
2. constructive insiders (outside bankers, lawyers, or accountants)
3. people who recieve tips from insiders
4. someone who owes a duty to keep company information confidential (spouse)

Question 6

Federal Securities Claims - Insider Trading & Sec 16

Answer 6

Application - sec 16 applies to corporate directors, officers, and shareholder who hold more than 10% of any class of stock

Imposes Two Requirement:

1. reporting of changes in stock ownership
2. “Short Swing Profit “ Rule - during any 6-month period, a corporate insider who both buys and sells his corporation’s stock is liable to the corp for any profits made

Profits Calculation - profits computed by matching the highest sale price with the lowest purhcase price, then the next highest sale price with the next lowest purchase price, and so on, during the six month period. No loss is taken into account.

Question 7

Liability of Shareholders: Peircing Corporate Veil

Answer 7

General Rule - limited liability - shareholders are generally not liable for the debts of the corp

Exception - XXX - if shareholders have abused the corproate form, creditors can seek to hold a shareholder or shareholders responsible for a debt

Corporate Veil - courts are generally reluctant to peirce the corproate veil, and their analysis is very fact intesnive upon following factors:

1. shareholder controlled or dominated the corporationso that the corp had no separate mind, will, or existence of its own
2. the control is exercised to commit a faurd or illegal act
3. shareholder’s wrong caused injury or harm loss to the P

Question 8

Duties to Other Shareholders

Answer 8

General Rule - shareholders don’t owe a duty to their fellow shareholders or to the corporation

Exception - a controlling shareholder owes:

1. a duty not to sell her stock to a looter and
2. a generaly duty in connection with corporate transactions

Effective Control - need not own 51%, can have much less if rest of widely dispersed

Exception for Close Corp - in corp with just a few shareholders, shareholders do owe a fiduciary duty to deal with one another in to deal in good faith