Shareholder remedies in the face of corporate malfeasance

On Behalf of | May 31, 2022 | Civil Litigation |

Shareholders play a unique role in the governance of New Jersey corporations. Although their voice is one of several in the overall decision-making process of the company and some restrictions limit their veto power, minority shareholders also have certain rights, including the ability to take legal action to resolve conflicts.

If there is evidence of malfeasance or a director’s or officer’s breach of fiduciary duties, the shareholder may pursue a lawsuit to seek relief. In the process of protecting their interests, Northern New Jersey business owners can benefit from knowing their options when seeking redress or on behalf of the corporation.

Deciding on a derivative suit or a direct claim

When choosing a claim that is direct or derivative, it is important to determine the wrong that the shareholder wishes to address. In a direct claim, the shareholder seeks damages for harm occurring due to the actions of others that have directly impacted the shareholder. This kind of lawsuit works particularly well in small corporations, where a shareholder pursues relief from actions by the board or in a shareholder oppression scenario. A shareholder may also pursue direct action in cases of fraud.

In a derivative lawsuit, on the other hand, the shareholder files the claim on behalf of other shareholders, usually to address a breach of fiduciary duty that management or the directors have committed. A derivative claim refers to the interests of all shareholders when there is mismanagement, wrongful sale of corporate interest, or malfeasance.

Shareholder actions in a derivative claim

Before filing the lawsuit, the shareholders who are filing must first demonstrate that they submitted a description of the problems to company management, and that the board declined to take action to remedy the issue. Under New Jersey law, a derivative lawsuit may proceed if:

  • The member makes the demand of the other members of a limited liability company (LLC) or the managers of a manager-managed LLC.
  • Such demand would be futile.

If the lawsuit is successful, the relief would go to the corporation, not the affected shareholders, and the corporation would pay the legal fees of both sides.