When Can a Shareholder Sue the Corporation? Understanding Legal Grounds

As a shareholder, investing in a corporation comes with both opportunities and risks. While you might expect the company to act in your best interest, there are times when the corporation’s actions—or inactions—might harm your investment or violate your rights. But when is it appropriate to take legal action? Understanding when and how a shareholder can sue their corporation is crucial when it comes to protecting your interests.

In this blog post, we’ll break down the legal grounds for shareholder lawsuits, the process, and what to expect. Whether you’re a minority shareholder or a majority stakeholder, this post will help you navigate this complex area of law.

What Are the Legal Grounds for a Shareholder to Sue a Corporation?

Shareholders can sue a corporation under specific circumstances where the corporation has violated laws, agreements, or fiduciary duties. Here are the most common legal grounds:

1. Breach of Fiduciary Duty: Shareholders can sue if the corporation’s directors or officers fail to act in the best interest of the company and its shareholders. This includes cases of self-dealing, fraud, or gross mismanagement.
2. Violation of Shareholder Rights: If the corporation denies shareholders access to financial records, refuses to allow voting rights, or otherwise infringes on the rights guaranteed by corporate bylaws or state laws, a lawsuit may be justified.
3. Corporate Mismanagement or Fraud:Shareholders can bring a claim if corporate leaders engage in fraud, misuse company funds, or make decisions that are harmful to the company without reasonable justification.
4. Derivative Lawsuits: Shareholders can file lawsuits on behalf of the corporation when directors or officers have harmed the company itself. These are called derivative lawsuits, and they aim to hold those in power accountable for actions that damage the corporation.

Can a Minority Shareholder Sue the Corporation?

Yes, minority shareholders have legal recourse if their rights are being violated or if corporate decisions are disproportionately harming them. Common scenarios include:

• Oppression: When majority shareholders or corporate officers intentionally exclude minority shareholders from decision-making, dividends, or profits.
• Freeze-Outs: Actions aimed at forcing minority shareholders to sell their shares at unfair prices.
• Disregard of Bylaws: Failure to adhere to corporate bylaws, such as holding proper meetings or voting procedures.

Florida law protects minority shareholders through statutes and legal precedents. A consultation with an experienced attorney can help assess whether your case qualifies for legal action.

What Is the Difference Between Direct and Derivative Lawsuits?

When suing a corporation, it’s essential to determine whether your claim is direct or derivative, as this affects how the case is handled.

1. Direct Lawsuits: A direct lawsuit is when a shareholder sues the corporation for harm done specifically to them as an individual. For example, if the company withholds dividends or violates your voting rights, you may file a direct claim.
2. Derivative Lawsuits: A derivative lawsuit, on the other hand, is filed on behalf of the corporation itself. It’s often used to address harm caused to the company by directors or officers, such as embezzlement or gross mismanagement. The goal is to recover damages for the corporation, which ultimately benefits all shareholders.

In Florida, shareholders must usually meet specific requirements, such as first making a demand on the corporation’s board of directors to take corrective action, before filing a derivative lawsuit.

Do You Need to Prove Harm to Sue?

Yes, whether filing a direct or derivative lawsuit, you need to demonstrate how the actions of the corporation or its officers caused harm. For direct lawsuits, this harm must affect you personally as a shareholder. For derivative lawsuits, the harm must affect the corporation itself.

When Should You Consider Legal Action?

Here are some scenarios where shareholders may consider legal action against a corporation:

• Financial Mismanagement: Evidence of reckless spending, fraudulent accounting, or misuse of company funds.
• Suppression of Shareholder Rights: Denial of access to records, voting rights, or dividends.
• Conflict of Interest: Directors or officers engaging in self-dealing or prioritizing personal interests over the company’s success.
• Failure to Comply with Corporate Governance: Ignoring bylaws, failing to hold meetings, or violating state or federal laws.

What Are the Steps to Sue a Corporation as a Shareholder?

If you believe you have a case, follow these steps:

1. Review Corporate Documents: Check the corporation’s bylaws, shareholder agreements, and other governing documents to ensure your rights are being violated.
2. Consult an Attorney: Speak with a business litigation attorney who can assess your case, explain your options, and guide you through the process.
3. Make a Demand: For derivative lawsuits, you’re usually required to make a formal demand to the board of directors to address the issue before proceeding with legal action.
4. File the Lawsuit: If the board fails to act or if a direct lawsuit is warranted, your attorney will help you file the necessary paperwork to initiate the case.
5. Prepare for Litigation: Be prepared for negotiations, potential mediation, or a trial. Lawsuits can be time-consuming and complex, so having an experienced legal team is crucial.

Is It Worth Suing Your Corporation?

Suing a corporation is a significant decision and should not be taken lightly. Consider the following before proceeding:

• Cost vs. Benefit: Assess whether the potential recovery outweighs the costs of litigation.
• Impact on Relationships: A lawsuit may strain relationships with other shareholders or corporate officers.
• Long-Term Goals: Ensure the lawsuit aligns with your long-term financial and business objectives.

Protect Your Rights with Ayala Law

At Ayala Law, our attorneys specialize in shareholder disputes and business litigation in Florida, and we understand the challenges shareholders face when their rights are violated or when corporate mismanagement puts their investments at risk. 

Whether you’re considering a direct or derivative lawsuit, contact one of our attorneys at 305-570-2208. You can also email our attorney Eduardo A. Maura directly at eduardo@ayalalawpa.com.

We at Ayala Law PA are passionate about helping those in legal need, so please don’t hesitate to schedule a case evaluation with us online here.

[The opinions in this blog are not intended to be legal advice. You should consult with an attorney about the particulars of your case].