- A corporate shareholder can sue a corporation’s officers or board of directors either through a direct lawsuit or indirectly through a derivative lawsuit.
- A corporate shareholder may not bring a derivative action against a corporation’s officers or board of directors simply because he/she disagrees with a decision made on behalf of the corporation.
What is a Shareholder?
A shareholder is any person, company, or other institution that owns at least one share of the company’s stock. Essentially, a shareholder is the company’s owner. As more companies become publically owned, there has been an increase in those individuals who qualify as shareholders. As a result, there has been more confusion as to whether a shareholder has any rights against an officer or the board of directors of a corporation.
Type of Lawsuits a Shareholder Can File
Direct Lawsuit
A corporate shareholder can sue a corporation’s officers or board of directors either through a direct lawsuit or indirectly through a derivative lawsuit. A direct lawsuit brought by a shareholder may consist of a range of theories, including but not limited to:
1) a shareholder’s right to vote
2) demand for payment of dividends that were promised
3) failure to allow a shareholder to inspect records
4) a violation of a shareholder’s ownership rights
A direct lawsuit against a corporate officer or director will usually require a shareholder to have some special or personal harm that is not shared by the remainder of the shareholders. Further, it is important to note that corporate officers do not owe a fiduciary duty to an individual shareholder unless there is some contract or special relationship between them in addition to the corporate relationship.[1]
Derivative Lawsuit
On the other hand, a shareholder can always bring a derivative suit on behalf of the corporation itself. However, in order to bring a derivative suit, a shareholder must meet certain requirements.
First, a shareholder will only have standing to bring a derivative suit if:
1) the individual plaintiff was a shareholder of the corporation at the time of the act or omission complained of or became a shareholder by operation or law from a person that was a shareholder at the time
2) that shareholders must be able to fairly and adequately represent the interest of the corporation as opposed to his/her own interest.[2]
Second, a derivative action may not be brought by a shareholder until:
1) a written demand is filed with the corporation setting forth with particularity the act, omission, or other matter that is the subject of the claim or challenge and requesting that the corporation take suitable action
2) 90 days have passed since the demand was made unless the shareholder was earlier notified that the demand was rejected by to corporation or unless irreparable injury would result to the corporation if required to wait out the 90-day waiting period.[3]
Additionally, although a demand letter may be sent on behalf of a shareholder to the corporation, the demand letter must state the name of the shareholder who is making the demand.[4]
Moreover, a corporate shareholder may not bring a derivative action against a corporation’s officers or board of directors simply because he/she disagrees with a decision made on behalf of the corporation. Even where there was harm done to the corporation, a court applying the business judgment rule will dismiss a derivative cause of action where disinterested directors determine that the act committed was done in good faith. Therefore, before bringing a derivative action, it is important that you consult with an experienced attorney.
Written by*:
Jorge Mares
WATTS GUERRA LLP
4 Dominion Drive, Bldg 3, Suite 100
San Antonio, Texas 78257
Phone (210) 447-0500
Email: jmares@guerrallp.com
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[1] Cotton v. Weatherford Banshares, Inc., 187 S.W.3d 687, 698 (Tex. App. – Fort Worth 2006)
[2] Tx. Bus. Corp. Act Art. 5.14(B)
[3] Tx. Bus. Corp. Act Art. 5.14(C)
[4] In re Schmitz, Case No. 07-0581, 285 S. W. 3d 451, 457 (Tex. May 22, 2009)
*This information is provided to supply relevant information concerning causes of actions that corporate shareholders have against officers and directors of a corporation, and should not be received as legal advice. Legal advice is only given to persons or entities with whom Watts Guerra LLP has established an attorney-client relationship. Available remedies vary from case to case and depend on the underlying facts of each. If you have another lawyer, you should consult with your own attorney, and rely upon his or her advice, rather than the information contained herein.
© Watts Guerra LLP 2015
