Can I as a shareholder sue my own company?

Can I start a lawsuit to enforce my rights as a shareholder in my company?

Can I start a shareholder lawsuit?

If there is a cause of action, yes, you can start a shareholder lawsuit to enforce your rights against other shareholders or the company. You can also potentially start a lawsuit on behalf of the company itself, to protect it from mishandling of funds, self-dealing or corporate waste. This kind of lawsuit is called a “derivative” lawsuit.

What are causes of action?

A cause of action is simply a legal basis for bringing a suit. Many causes of action arise in shareholder conflicts. Breach of fiduciary duty is a claim that can be raised by a shareholder against other shareholders for acting unfairly as to one another. A cause of action also exists where a shareholder has acted contrary to a shareholder agreement or contrary to shareholder reasonable expectations. Breach of fiduciary duty can also be raised on behalf of a company where a shareholder fails to act in the best interest of the company or engages in self-dealing. Often in shareholder disputes there are other issues as well such as usurpation of corporate opportunities, breach of contract, breach of the duty of loyalty or tortious interference.

What is a derivative action?

A derivative suit is a claim that is brought on behalf of and in the name of the company. To bring a derivative lawsuit, a shareholder must to follow certain procedures intended to ensure that the board of directors of the company has an opportunity to review the issue and take action. Sometimes the board of directors has the right to appoint its own investigation group called a “special litigation committee” before any action can be taken.

Assuming appropriate procedures are followed and the company has failed to take action and assuming a cause of action exists against corporate officers or directors who have acted contrary to their duties, a shareholder can bring a derivative action on behalf of the company.

What is a direct action?

When a shareholder’s claims are not derivative, meaning they are directed at the shareholder’s rights individually rather than rights of the company, a shareholder has a direct claim. As an example, shareholders have a right to certain corporate and financial information regarding the company. If such information is not provided, the shareholder has a direct claim. Often, shareholders who are in control of a private company take action to squeeze out minority shareholders. These minority shareholder “squeeze outs” or “freeze outs” give rise to a direct claim against the offending shareholders.