Can a Shareholder Sue on Behalf of the Company?

Corporations have centralized systems of management. The officers of the corporation, including the president, secretary and treasurer, manage the day-to-day operations of the corporation. The board of directors appoints the officers and the shareholders appoint the directors. In a roundabout way, the shareholders manage the corporation. If a shareholder perceives wrongdoing on the part of the board or the officers, he can sue on his, or the company’s, behalf.

Shareholder's Role

Shareholders obtain ownership in a corporation by purchasing shares of stock from the corporation. Ownership in the corporation affords common stock shareholders the right to vote on important corporate matters, such as electing or removing directors, approving fundamental changes within the corporation and adopting or modifying the corporation’s bylaws.

Causes of Action

Because shareholders own the corporation, they look out for the corporation’s best interest. If the board of directors or the officers of the corporation make decisions that will hurt the company, the shareholders may take action by filing lawsuits. Shareholders function as guardians of the corporation’s causes of action. A cause of action represents a legal wrong or a reason to file a lawsuit. If a company has a cause of action, a shareholder can file a derivative lawsuit. A shareholder may also sue to enforce her own claim against the corporation, the directors, the officers or a majority of shareholders in a direct action.

Derivative Action

Before a shareholder can file a derivative suit, he must first explain the cause of action to the board of directors. Then he must make a demand on the board to enforce the corporation’s rights, unless the board waives this requirement, which is unlikely. The shareholder must then wait for the board to enforce the company’s rights. If the board does not act within a certain period of time, the shareholder may go ahead with his lawsuit. If the shareholder recovers damages, he will do so on behalf of the corporation. The corporation may repay the shareholder for reasonable expenses incurred in the lawsuit. If he does not win the lawsuit, the corporation will not repay him.

Direct Action

A shareholder may file a direct action when an officer or director breaches a fiduciary duty owed to her. Consider this example: Shareholders have the right to inspect the minutes of shareholder meetings. In the event that the secretary of the corporation refuses to allow a shareholder to inspect the minutes, the shareholder can sue the officer directly so that she may have access to the shareholder meeting minutes.

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