The great majority of Wright Beamer’s corporate clients are privately owned companies with one or more shareholder or member. Ideally, where multiple shareholders exist, they have established their respective rights and responsibilities within a set of by-laws, an operating agreement, or a shareholder agreement. In a perfect world, the company and its owners would nicely comply with those agreements. But what happens when they don’t?
Generally, the law respects the will of the majority and will not interfere with corporate decisions made by shareholders owning more than half of the company. However, if those decisions run contrary to the interests of the corporation in general, or to the rights of a minority shareholder in particular, relief may be available in the form of either a “derivate” or a “direct” legal action brought by the minority.
Where a minority shareholder seeks to correct perceived abuses by the majority believed to be harmful to the corporation as a whole (e.g., the company is pursuing a business model that violates governmental regulations), the minority shareholder can make a written demand on behalf of the corporation seeking redress. The corporation has ninety days to investigate and respond to that demand. If the shareholder is still not satisfied, she may then pursue a “derivative” lawsuit in the name of and on behalf of the corporation under Section 541 of the Business Corporation Act.
In contrast, where a minority shareholder complains that the company is engaging in conduct that directly confounds his individual rights as a shareholder (e.g., the company is diluting the value of his shares despite a bylaw restriction against such conduct), he may then skip the written demand and proceed immediately with a “direct” lawsuit under Section 489, challenging conduct that “substantially interferes with the interests of the shareholder as a shareholder.”
From the company’s perspective, litigation is rarely the preferred method for resolving differences. It is time-consuming, distracting, public, and expensive. Even for the disgruntled shareholder, litigation should be the remedy of last resort. While not preferred, shareholder litigation does have one salutary benefit. It “lances the boil,” forcing the parties to deal with their disputes and to start charting the course toward a new and, ideally, more harmonious shareholder relationship.