Examples of Shareholder Disputes
Right to Inspection of Books and Records
Shareholders in a corporation have rights, whether they hold their stock in a large, publicly-traded corporation or a small family-owned one. Among the most important rights of a shareholder is to inspect the books and records at reasonable times and intervals. The corporation must make the books and records available and maintain them so that a reasonably capable person can make sense of the information provided. The books and records subject to examination include, but are not limited to:
- Balance Sheets
- Profit and Loss Statements
- Stock Ledgers
- Books/Records Regarding Shareholders’ Interests
The shareholder, however, is not entitled to unfettered access to books and records that would reveal trade secrets or other sensitive information. In litigation over which records are subject to inspection, a court may side with the shareholder if the records were relevant to shareholders’ interests and if a suitable protective order could prevent misuse of the information.
If you are a business shareholder and have been denied reasonable access to books and records, you may have a viable shareholder lawsuit. The Michigan business dispute attorneys at Seikaly, Stewart & Bennett are prepared to help you.
Qualifying for Shareholder Oppression
Shareholders controlling a corporation have an obligation not to abuse their control to the detriment of minority shareholders. In Michigan, the shareholder oppression statute makes it a violation for the majority to engage in behavior that is “illegal, fraudulent, or willfully unfair and oppressive.”
The current prevailing view in Michigan is that firing an employee who was also a shareholder can be considered shareholder oppression. When determining whether majority behavior is oppressive, it must be decided whether an action that harms a shareholder but benefits the company can be considered oppression.
A majority shareholder may fire a minority shareholder, causing great detriment to the minority shareholder’s interests. If the majority shareholder can demonstrate that the minority shareholder was not performing an adequate job for the corporation, the action will not be deemed willfully unfair and oppressive.
If the court determines there was shareholder oppression, the remedies available are flexible and far-reaching. The court, acting without a jury, can strike down a bylaw or article created for the purpose of oppressing a shareholder, including:
- Forcing controlling shareholders to pay back excessive salaries or other benefits
- Forcing a reinstatement of employment to a wrongly terminated minority shareholder
- Appraising the interest of the shareholder at fair market value and repaying the amount
- Prohibiting the majority shareholders from taking certain action oppressive to the minority
- Requiring the corporation to render an accounting of its activities
- Terminating a contract that is unreasonably favorable to the majority but detrimental to the corporation
- Fashioning any other reasonable cure to the oppression that will prevent recurrence
When Shareholders Harm a Company
There are times when corporate wrongdoing occurs, but the victim is the corporation as a whole. Although a shareholder may be in the minority, he may not be able to claim damages if the damage has been done to all shareholders equally. In a situation where corporate officers are acting for their own benefit to the detriment of the company and its shareholders, a minority shareholder oppression action will not work.
Under certain circumstances, the law allows shareholders to file a derivative action, as their rights derive from the rights of the corporation. There are certain prerequisites to bringing a shareholder derivative action, including:
- The shareholder filing a derivative action must establish they are capable of representing all the shareholders and does not have a personal interest being at odds with other shareholders. For example, if a terminated employee and shareholder wants to file a derivative action claiming his termination was detrimental to the corporation, he is not a suitable representative, as he has a personal interest in regaining employment.
- The shareholder must be seeking a remedy for the corporation itself and not for himself. If there is monetary recovery, it belongs to the corporation and not the individual shareholder.
- The person acting on behalf of the corporation must have been a shareholder when the action that he is challenging occurred. If he did not remain a shareholder throughout the litigation, it must have been due to the corporation’s wrongful conduct.
In order to avoid unnecessary shareholder derivative suits, the law requires that shareholders make a formal written demand upon the corporation’s board of directors before. The corporation has 90 days to investigate the claims, and the derivative suit may not be filed during that time. Even after a shareholder derivative lawsuit is filed, the court may choose to dismiss the case if a disinterested and independent majority of the board of directors can demonstrate that it has fairly investigated the claims and that they are without basis.
In extreme cases, when those in control of a corporation will not respond to a court order to cease and desist improper conduct, the court can appoint a receiver to temporarily take over the company’s affairs and operate under the supervision of the court. Needless to say, those in control of a corporation dread this prospect and will generally agree to comply with court directives.
Statutes of Limitation
The statute of limitations for actions alleging shareholder oppression depends on the relief sought. If the shareholder wishes to receive money damages, the suit must be brought within three years after the oppressive action, or within two years after the shareholder discovers or should have discovered the oppression. If the shareholder is seeking equitable relief, such as the change in a bylaw or cancellation of a corporate resolution, the statute of limitations may extend to six years.
The statute of limitations for shareholder derivative actions requires that a suit be brought no later than three years after the wrongful conduct occurred, or within two years of when the wrongful conduct was discovered or should have been discovered by the plaintiff.
Call Seikaly, Stewart & Bennett for a No-Obligation Consultation
If you are a Michigan business shareholder who has been wronged by your corporation, the business dispute lawyers at Seikaly, Stewart & Bennett can help you choose the right business entity. To schedule your no-obligation consultation, please call 866-671-8115 or fill out our contact form.