Shareholders who invest in organizations play an important role in those companies. The funds that they provide can help the company expand or continue operations. The decisions they make at shareholder meetings can shape the future of the business.
Typically, shareholders receive respect from leadership within the organization and return that respect to those running the business. However, some organizations have more contentious shareholder situations. Sometimes, the shareholders who have invested in an organization determine that they need to take legal action against the company.
Shareholder lawsuits can be costly and can disrupt normal business operations. What are some of the most common reasons that shareholders initiate litigation against the businesses in which they have invested?
1. Freeze-out or squeeze-out attempts
Sometimes, individuals who hold a majority stake in the company or who were previously sole owners may resent the involvement of shareholders. They may try to force them to sell their interest in the company by pushing them out or creating obstacles that frustrate minority shareholders.
Shareholder freeze-out attempts may involve denying shareholders access to meetings, preventing them from voting or denying them dividends. Shareholders frustrated by attempts to force them out may take legal action.
2. Concerns about company decisions
Sometimes, shareholders take legal action because of pending decisions made by executives and others in leadership roles. In scenarios where shareholders believe that the proposed course of action could undermine the company’s success and profitability, they may decide to take legal action.
The courts can intervene to prevent a transaction that could damage the company or reduce the returns on shareholder investments. In scenarios where leadership within the company does not listen to shareholder concerns, the shareholders may take legal action to protect the organization.
3. Breaches of fiduciary duty
Technically, those running a business have a fiduciary duty to its shareholders. Simply put, the best interests of shareholders should come above most other concerns.
Typically, shareholders want the company to be as profitable as possible. In scenarios where leaders within the company have breached their duty to shareholders by making questionable decisions, those who have invested in the business may take legal action to protect their interest in the company.
Both shareholders and executives at organizations need to understand why shareholder litigation may occur. Recognizing when decisions might lead to lawsuits can help shareholders assert themselves and businesses limit operational interruptions caused by litigation.