Shareholder Lawsuits

Question 1

Direct Actions

Answer 1

Shareholder may initiate direct legal action against the corporation in a few basic circumstances:

(1) Action to recover for harm linked to the rights of the shareholder
(2) Action that does not arise based on the plaintiff’s status as a shareholder
(3) Action in a close corporation alleging breach of fiduciary duty by another shareholder

Question 2

Direct Action: Recovery

Answer 2

Will go to the shareholder

Question 3

Derivative Actions

Answer 3

Shareholder seeks to compel the corporation to file a lawsuit to recover for harm suffered by the corporation itself

Question 4

Derivative Actions: Requirements

Answer 4

P must:

(1) Have been shareholder at time of the wrong
(2) Shareholder at time action filed
(3) Make written demand upon board of directors
(4) Fairly and adequately represent corporation’s interest

Question 5

Derivative Actions: Demand Upon Board of Directors

Answer 5

Shareholder’s complaint must allege with particularity the demand made or why one was not made

Must use impartial board of director committee composed of 3 or more disinterested directors

Decision presumed conclusive

Question 6

Derivative Actions: Exceptions to Demand Requirement

Answer 6

(1) Futility

(2) Irreparable injury

Question 7

Derivative Actions: Recovery

Answer 7

Will go to corporation

Shareholder can recover litigation expenses if lawsuit results in substantial benefit to corporation

Question 8

Piercing the Corporate Veil

Answer 8

Generally, shareholders have limited liability for activities undertaken by the corporation

To hold shareholder personally liable, P must prove by preponderance of the evidence that:

(1) Corporate FORM was ignored or controlled by the shareholder such that it was a mere instrumentality; and
(2) Misuse of the corporate form would constitute a FRAUD or PROMOTE INJUSTICE

Question 9

Factors Considered When Piercing the Corporate Veil

Answer 9

(1) Undercapitalization
(2) Absence of corporate records
(3) Fraudulent representation by corporate shareholders/directors
(4) Using corporation to promote fraud, injustice, or illegal activities
(5) Failure to observe corporate formalities
(6) Other shareholder acts/conduct ignoring, controlling, or manipulating the corporate form