Corporate shareholders have a variety of legal tools at their disposal to seek recompense for injuries caused by the corporation, by the board of directors, controlling shareholders, or others. At Einbinder Dunn & Goniea, LLP, we frequently assist shareholders in seeking redress from corporations. The most common tools we use in assisting our shareholder clients are a shareholders’ demand to inspect books and records; a shareholders’ derivative suit; and claims for minority shareholder oppression.
Inspection of books and records:
A demand to inspect books and records can be made by shareholders of any corporation. The procedure for making such a demand and the records that are subject to inspection depends on the state the company is incorporated in. For example, in Delaware, stockholders must make a written demand, under oath, stating the purpose of their demand, and may thereafter inspect, make copies and take extracts from specified documents in the corporation’s possession or that the corporation can obtain from its subsidiaries. The stockholder has the right to do this during usual business hours. See 8 Del. C. § 220.
Shareholders may utilize this tool as a means to conduct informal discovery prior to making a shareholder derivative demand or otherwise initiating a lawsuit. By obtaining information upfront, the shareholder may be able to determine what claims he/she should bring and/or whether his/her potential claims have merit. Corporations may take note, however, that such demands are a precursor to a lawsuit, and file their own lawsuit first. Corporations may also challenge the demand; typically this is done by arguing that the documents requested are outside of the scope of the statute, or by arguing that the inspection is not sought for a proper purpose. The burden is on the corporation to establish an improper purpose.
Shareholders’ derivative suit:
A shareholders’ derivative suit is an action brought by a stockholder, on behalf of the corporation, to enforce a claim belonging to the corporation. Typically, the shareholder is seeking redress for damage to the value of the corporation’s stock or assets, and involves claims against a director, board of directors or an officer of the corporation for mismanagement or breach of fiduciary duties.
Most state statutes require shareholders to prove they have standing to make such a suit; for example, in Delaware, the shareholder must show that it owned stock at the time of the alleged wrongdoing, and must own that stock throughout the lawsuit. There is a critical procedural requirement in shareholders derivative suit that practitioners must be mindful of. In many states the shareholder must first make a demand on the corporation for the relief it will request in its lawsuit. This is significant because it must be pleaded in the shareholders’ complaint and because it gives the corporation notice of the complaint.
Minority oppression statutes:
Minority shareholders may also bring an action against the corporation and/or the majority shareholders of the corporation, depending on the state in which their company is incorporated, based on oppressive conduct by majority shareholders. The ability to make such a claim and the requirements of such a claim will vary from state to state. In New Jersey, for example, a plaintiff must demonstrate that the defendant’s alleged misconduct constituted oppression, and that a nexus exists between the alleged misconduct and the minority shareholder’s interest in the corporation. Brenner v. Berkowitz, 134 N.J. 488, 506-07, 634 A.2d 1019, 1028 (1993)(defining oppression as “frustrating a shareholder’s reasonable expectations.”) A corporation or majority shareholders of a corporation facing a claim of minority oppression in New Jersey may raise, as a defense to the claim, whether the minority shareholder was aware of the alleged misconduct prior to filing the lawsuit but failed to act and/or whether the minority shareholder participated in the alleged misconduct. In re Sharkey, 272 B.R. 574 (D. N.J. 2001). See generally N.J. Stat. §14A:12-7(c)(1).
Choosing a strategy that works for you:
Whether you find yourself on the side of the shareholder or the corporation, the strategy chosen, whether one or more of the above-referenced actions, or another remedy, will depend on the facts of each case, the jurisdiction, the client’s goals and the risks and costs unique to each litigation. No two cases or clients are alike and the attorneys’ approach should always be specifically tailored to each client.