The very concept of shareholder litigation can seem counterintuitive. After all, lawsuits cost companies money and can damage their reputations. Shareholders who have invested in businesses generally want to maximize the returns that they receive on their investments by guiding the company towards success.
However, shareholders sometimes have no option other than to take legal action to protect their rights and the companies in which they have invested. Shareholder litigation can occur due to a variety of different issues, but the three challenges below are among the most common reasons for those who have invested in the business to take legal action against it.
1. Shareholder oppression
Businesses generally have a responsibility to their shareholders. There are specific rights outlined in shareholder agreements, and shareholders generally have certain legal protections. They have the right to attend and vote at meetings. They receive dividends when the company is profitable. They also have the right to information about the company’s performance and plans. Shareholder oppression can include withholding information, excluding shareholders from votes or refusing to pay them when the company is profitable. Shareholders dealing with organizational misconduct may file lawsuits to assert their legal and contractual rights.
2. Executive malfeasance
Shareholders have an insider’s perspective on company operations. They can more readily identify scenarios in which leaders, including executives, have engaged in misconduct or proven incompetent. If an executive breached their fiduciary duty to the company and its shareholders, a lawsuit could help resolve the issue. Shareholders may file lawsuits on behalf of the organization to hold executives accountable for misconduct or to prevent further harm to the organization.
3. Financial misrepresentation
In some cases, shareholders may learn eventually about inflated financial statements and other forms of economic fraud. They may then seek to take legal action against the company because of the inaccurate and misleading information that they previously received. In scenarios where fraudulent misrepresentation is likely to result in shareholders losing their investment, litigation might be necessary to resolve the issue. Shareholder lawsuits can cost companies money, but they can also sometimes protect organizations from additional misconduct and losses.
Both shareholders and leaders within an organization may find themselves facing scenarios in which shareholder litigation is likely. Those intending to file business lawsuits or defend against them may need support as they evaluate the origins of a shareholder dispute, and that’s okay.