Derivative Action | Shareholder lawsuit | misappropriation company or partnership assets

Can you sue a company officer in North Dakota for mismanaging the company?

One issue that often confronts shareholders is when a controlling officer or manager of the company mismanages company business or misappropriates company assets. In general, such acts represent harm to the business rather than the individual shareholders or members.

To bring a legal action in North Dakota, and elsewhere, a party seeking redress for harm caused to the company must demonstrate that they were a shareholder at the time of the harm. A shareholder with less than 5% of company stock may be required to post a bond large enough to cover the potential costs and attorney’s fees of the litigation. The shareholder must also have reasonable cause to bring action. In the absence of reasonable cause, a court may award costs and attorney’s fees against the claimant. See N.D.C.C. §10-19.1-86.

In other words, for a claim that belongs entirely to the company, a shareholder may bring a derivative action, but at a substantial financial risk.

For small, closely-held businesses though, the line between a direct claim and a derivative claim is a little more subjective given the fiduciary duties implied at law among shareholders. In such businesses, a shareholder may bring a direct action where the shareholder can arguably allege direct harm or breach of a special duty owed to the shareholder bringing the action. See Schumacher v. Schumacher, 469 N.W.2d 793, 798 (N.D. 1991).

It is important to carefully analyze the nature of the potential claims that may exist a company before bringing an action. For a derivative claim, one must carefully consider the risks and decide whether such risks can be offset.