Jade C. answered • 04/19/19
Lawyer and Former Teacher
Shareholder rights are generally determined by state law. Most states have statutes which specifically govern business associations, including corporations, and that provide for the rights and responsibilities of shareholders in a corporation. The types of actions that shareholders can bring depend on the factual circumstances and the problem that the shareholder or multiple shareholders are trying to fix. The most common types of cases are (a) shareholder derivative actions; (b) actions to partition the corporation; and (c) common law claims against other shareholders or boards of directors, such as claims for breach of fiduciary duty and misappropriation of corporate opportunities.
A shareholder derivative action typically arises where there are allegations that the board of directors, one or more officers, or one or more shareholders (usually majority shareholders) have taken some action that is likely to harm the corporation, such as fraud, theft or gross mismanagement. Under state law, shareholders who want to intervene and force the board or officers to put a stop to the action are generally required to make a demand to the board to investigate and resolve the issue. After a certain period of time set by statute, the shareholders have the right to file a derivative action in which they stand in the shoes of the corporation and pursue the lawsuit on its behalf. The theory is that, if the corporation will not take action (particularly where misconduct on the part of the board or officers is the source of the problem), the shareholders are empowered to do so.
An action to partition a corporation is usually provided by the state corporation code. It is also sometimes referred to as "judicial dissolution" of the corporation. It typically arises in closely held corporations (entities that only have a small number of shareholders, usually with some personal relationship to each other) where the relationships between the shareholders have broken down and the parties are not able to conduct meetings regularly or agree on how to resolve problems facing the company and there may be a deadlock between groups of voting shares. So, one or more shareholders who want to get out of the business or believe that it may be in the corporation's best interest that it be dissolved may file an action for partition. It also may be used to allow a minority shareholder to force the other shareholders to buy his shares or allow him to transfer them to a third party, particularly where the articles of incorporation restrict the transfer of shares without the other shareholders' permission. This type of claim is sometimes referred to as an "election to purchase shares." Typically, the minority shareholder first moves to partition the corporation, and in order to avoid partition, the shareholders have the option to purchase his shares, or "buy him out." This option can be particularly useful to minority shareholders whose rights are generally very limited under the corporation's articles of incorporation and bylaws and who may need to resort to state law protections for relief.
Finally, shareholders may bring certain common law claims for relief. A claim for breach of fiduciary duty may lie where the board of directors or one or multiple majority shareholders are taking advantage of the corporation's resources and depleting the investment of the other shareholders, perhaps by making regular distributions to themselves of corporate profits, but not to other shareholders, for example. Under the law of most states, a fiduciary relationship exists between shareholders or boards of directors and shareholders, so the shareholder must act in good faith and in the shareholders' best interest. So, the shareholder could assert a claim for breach of that obligation to recover damages associated with the breach (generally, money that the breaching party has taken or a benefit to which the plaintiff shareholder argues that she is entitled). Another claim is generally referred to as "misappropriation of a corporate opportunity." The corporate opportunity doctrine provides that directors, officers, and controlling shareholders must not take personal advantage of a business opportunity that could benefit the corporation. For example, a director who is approached about a proposal to purchase land or property which may benefit the business must present the opportunity to the corporation first rather than taking it for himself. This claim, however, usually belongs to the corporation, so a shareholder who wants to pursue it may have to do so in a derivative action.
A close examination of the state's corporation statutes as well as the case law of that state which provides for causes of action which state courts have recognized and in which they have ruled in favor of shareholder plaintiffs are the best starting points for determining what claims a shareholder may have based on the facts of the dispute.
