A well-known theory of shareholder rights states that the shareholders are the only group for which the company is responsible. Those who invest their money in ownership are the company's economic engine, and the law protects investors so they can have confidence in their investments. Otherwise, businesses will not have the capital to maintain operations and growth.
As a shareholder, you have both general and specific rights. When a company violates these rights, you can file a lawsuit.
First, you must hire an attorney to take effective legal action on your behalf because you can expect the company (or majority shareholders) to have their own legal representation.
First, you must learn all your rights as a shareholder, and if you believe something is wrong, contact a Chicago shareholder litigation attorney immediately. You may need to file an emergency lawsuit to prevent further encroachment on your rights or harm to your investment.
Here are your examples of your important shareholder rights.
The Right to Transfer Ownership of Shares
A shareholder does not have to keep ownership of their stock, and they are free to sell it at any time unless it is subject to a lockup period. A shareholder may most easily transfer stock ownership through a public exchange. Then, they can engage in an arms-length transaction where they do not even know the buyer's identity. If the stock is not publicly listed, the shareholder can negotiate an agreement when they find a willing buyer.
In some cases, the company has the right of first refusal to buy the stock when the shareholder wishes to sell, and they must specify this right in the shareholder agreement, which can set a price the company must pay when buying the stock. Alternatively, the company will need to match the price that a buyer will pay.
The Right to Inspect Books and Records
The company must make its books and records available to shareholders for inspection, and they are not obligated to send them to you upon request. However, the company must accommodate your reasonable requests to see the books and records.
You need to make a proper request to access books and records, but you cannot seek any privileged information.
Usually, the company will have an obligation to allow you to inspect:
- Financial statements
- Meeting minutes
- Shareholder lists
- Corporate stock ledgers
The company will have five days to respond to a request to view the records. If they deny the request or fail to respond, you may go to court to seek an injunction that will compel the company to allow you the right of inspection.
The Right to Vote
Your shares in a company entitle you to vote on significant corporate matters, and one of the most important things you can vote on is the selection of the board of directors.
The board will select corporate management.
Shareholders do not just have to give an up-or-down vote on the directors that management proposes; they may submit their own directors for shareholder consideration. Shareholders get oversight of the company by voting on the board of directors.
The SEC recently changed its rule to allow shareholders access to the proxy statement for their proposed board. In the past, shareholders had to conduct a proxy contest, sending their materials to fellow shareholders. Now, the company must allow shareholders access to the existing proxy statement, making it easier to propose their slate for the board.
Shareholders can also vote on critical corporate issues like mergers and transactions. Before the vote, management must provide the shareholders with information in the form of a proxy statement. The shareholders' vote will determine whether the company can engage in the transaction.
Different shares have different voting rights, and some classes of shares have more voting rights than others. For example, a controlling shareholder may have more say in corporate affairs based on their status.
The Right to Propose Resolutions
Shareholders also can put measures on the ballot for voting. If shareholders own at least 1 percent of the company, they can propose matters for consideration at the annual meeting.
The entire body of shareholders will vote on these measures. Shareholders cannot propose ballot measures that govern regular business operations, but they can offer other things, such as policies regarding environmental concerns.
Management does have the right to make recommendations for how shareholders will vote, and they may propose to vote against these measures.
The Right to Receive Dividends
The board of directors can decide to declare a dividend at their discretion.
Management essentially has three things that they can do with corporate profits:
- They can reinvest the profits back into the company, seeking to grow and sustain the business
- They can declare a dividend and share the earnings with the stockholders
- They can use profits to buy back outstanding shares of the company
Preferred shareholders receive fixed dividends as part of their stock ownership, and preferred shares have a set compensation that the company will pay regularly.
Note that a company has no obligation to pay dividends, and the only way shareholders can sue a company is if they have declared but not paid the premium.
Management may do unlawful things that take money out of the company at the expense of the shareholders. For example, management may pay themselves excessive compensation, enriching themselves at the expense of the shareholders.
As a shareholder, you also have the right not to be oppressed, and minority shareholders are particularly vulnerable to oppression by majority or controlling shareholders.
One typical example of shareholder oppression is a freeze-out. Here, the majority shareholders take action to force minority shareholders to sell their stake in the company. For example, the company can engineer a merger to eliminate minority shareholders, or the company can stop declaring dividends to make it a less attractive investment.
Here are some other examples of shareholder oppression that violate your rights:
- Illegally terminating a shareholder as an employee
- Keeping a shareholder from participating in shareholder meetings
- Wrongfully diluting a shareholder's ownership interest
- Unreasonably putting restrictions on a shareholder's right to transfer their ownership interest
- Creating a stock redemption plan that favors some shareholders over others
You need to take immediate legal action to stop shareholder oppression because the company may only halt its efforts under legal pressure.
You May Deserve Fiduciary Duties
As a shareholder, others may owe you a fiduciary duty. Fiduciary duties involve using reasonable care when making corporate decisions and avoiding conflicts of interest.
The Right to Sue for Wrongful Acts
Shareholders may file the following lawsuits:
- Class action lawsuits - When all shareholders have suffered a loss because the directors or management have violated federal or state securities laws. Shareholders may file a class action lawsuit when a company places inaccurate information on its financial statements.
- Shareholder derivative lawsuits - Shareholders may file a lawsuit on behalf of the company itself. They can file this lawsuit when the board has breached the fiduciary duty they owed the company. The directors have 1) the duty of care to act reasonably when making decisions and 2) the duty of loyalty to place the company's interests above theirs and avoid conflicts of interest.
One right you do not have as a shareholder is the ability to come before bondholders when the company goes bankrupt. When a company goes through bankruptcy, the creditors come first, and they have priority in a restructuring or liquidation.
Preferred shareholders come after the creditors, and common stockholders are often wiped out in bankruptcy, losing their entire investment. If they receive anything, it is pennies on the dollar.
The following are examples of shareholder lawsuits for damages:
- If you file a direct lawsuit, you will receive compensation for your losses. If you are part of a class action lawsuit, you will receive your proportionate share of damages based on your losses.
- If you file a shareholder derivative lawsuit, the company will receive payment for the damages it suffered because of the directors' or officers' behavior.
You may also seek an injunction, where the court orders the company to do certain things or refrain from taking other actions. For example, if the company has denied you access to the lists of shareholders for you to send out proxy materials, you can order the company to turn them over to you. Similarly, if the company denies you access to its books and records, the court can order it.
Obtaining an injunction may be even more critical than getting damages. As a shareholder, you cannot afford to wait until the outcome of the lawsuit to recoup your damages. You can lose your investment or the company can violate your rights.
Often, you need the court to take immediate action to protect your rights, and in some cases, monetary damages alone may not address the issue.
You may seek a temporary or permanent injunction as part of your lawsuit. A preliminary injunction can preserve the status quo until the court can decide your case. The court will only grant a temporary injunction if you are likely to prevail on the merits.
You Need an Attorney For Any Shareholder Dispute
If you believe that a company has violated your rights as a shareholder, you should immediately seek help from a commercial litigation attorney. Your attorney will determine the best course of action for your circumstances, and when you hire a lawyer, the other side will notice that you intend to enforce your shareholder rights. You may have more negotiation leverage because the other side may fear you will bring a lawsuit.
There is a chance that you can avoid having to sue, and your attorney can help negotiate a settlement or solution to the problem. Communication may be the key to resolving the issue and restoring your rights without going to court.
Usually, the most effective outcome is a compromise that respects both parties' rights without having to file a lawsuit. However, you may need to go to court if the other party will not compromise.
An attorney will review your case and assess the situation. They will advise you of your legal options and work with you on the most effective strategy. The longer you wait to hire an attorney, the more you may stand to lose because the facts on the ground may change.
The Shareholder Litigation Process Can Be Lengthy and Difficult
Shareholder lawsuits require a lawyer to interpret the language of the shareholder agreement and develop a factual record supporting your arguments that a company violated your rights.
You cannot always build the factual record you need to prove your case until the discovery process. Your attorney may request the production of documents, or they may conduct depositions of opposing witnesses. Either way, you will need an attorney with experience with shareholder lawsuits to present the most effective case on your behalf.
Finding the Right Shareholder Litigation Lawyer
Selecting the right shareholder litigation lawyer is paramount for protecting your interests. Start by seeking recommendations from trusted sources or professional networks. Look for attorneys with a proven track record in corporate law and shareholder disputes.
Evaluate their experience, specifically in cases similar to yours. Consider their communication style and accessibility. A transparent and responsive lawyer fosters a strong attorney-client relationship. Additionally, ensure their fees align with your budget and case expectations.
Finally, get your free consultation to gauge compatibility and assess their strategies. A skilled Business litigation lawyer can make a significant difference in achieving a favorable outcome in complex corporate disputes.