Shareholder Lawsuits and Duties

Question 1

What are the types of shareholder litigation?

Answer 1

1. Direct
   
   1. Preferred!
   2. An action that principally harms the shareholder
      
      1. interference with voting rights
      2. interference with dividend rights and
      3. challenges to a merger.
2. Derivative
   
   1. Corporation is harmed as an entity
      
      1. Directors mismanaged corporation.

Question 2

How does a shareholder seek a direct action suit?

Answer 2

Sue in your own name and you get the recovery babay!

Direct action gets the goods.

Question 3

What is the process for a derivative action?

Answer 3

The shareholder is the named plaintiff, but suing on behalf of the corporation.

• Almost always against directors

Question 4

What special requirements must be present for a derivative suit?

Answer 4

1. Shareholder must have been a shareholder from the time of the harm through the case’s resolution.
2. The shareholder must make a written demand to the directors to bring the suit before the shareholder can bring suit
   
   1. UNLESS doing so would cause irreparable injury to the corporation.

Question 5

Who gets money from a derivative suit?

Answer 5

The corporation, but the corporation will have to pay for the shareholder’s attorney’s fees IF the litigation produces a substantial benefit to the corporation.

Question 6

Will shareholders be liable for the actions of a corporation?

Answer 6

Generally no, unless the corporate veil is pierced.

Question 7

When is the corporate veil pierced?

Answer 7

Very fact-sensitive, but the question is essentially whether the shareholders have abused the corporate form.

Factors:

1. Alter ego/corporate formalities: Did the shareholder use the corporation as her personal piggy bank or fail to hold meetings/observe other formalities?
2. Undercapitalization: Was the corporation formed without enough assets to cover its likely obligations?
3. Fraud: Did the shareholder engage in fraud or fraud-like behavior?

Question 8

Which type of cases are more likely to yield a finding that the corporate veil was pierced?

Answer 8

Tort cases, not contract cases.

In contract cases, the plaintiff could have done more research.

Question 9

Do shareholders owe duties to each other?

Answer 9

Generally, no, EXCEPT

1. Sale to a looter
   
   1. You’re a controlling shareholder
   2. You sell your stock to a looter
   3. You may be liable for damages caused to other shareholders by the looter ONLY IF
   4. There are obvious signs that the buyer will misuse the corporation’s assets.
2. Shareholder has an interest in a particular transaction.
3. Duty not to freeze other shareholders out.

Question 10

What is required to be a controlling shareholder?

Answer 10

NOT 50.1% ownership–enough ownership that you have effective control of the corporation.