Shareholders play a critical role in the financial stability and management of many successful corporate organizations. They take a financial risk by investing in the business. As such, the executives running the organization have a fiduciary duty to the shareholders.
They should act in the best interests of the company and pursue profits to compensate the shareholders. In scenarios where they fail to uphold that duty by engaging in misconduct or incompetently managing the business, shareholders may need to take action.
How executives may violate shareholder rights
There are several unique forms of recourse available to shareholders when the misconduct or incompetence of company executives affects their interest in the business or the company’s finances. Shareholders have certain rights, along with responsibilities related to company oversight. Their investments provide capital that may facilitate business expansion. The decisions they make at shareholder meetings can affect the future of the company’s operations. They can vote on key issues and receive dividends when the company is profitable.
In cases involving a shareholder freeze-out or squeeze-out, often initiated by executives who may have once been sole owners of their companies, shareholders can work together to take legal action and assert their rights. Freeze-outs often involve refusing to let shareholders attend meetings, denying them access to dividends or preventing them from exercising their right to vote on critical issues.
Shareholders typically have contractual rights that executives cannot violate with impunity. Attempting to freeze them out of their position to acquire their shares is a breach of duty and of the shareholder agreement. Proof of that misconduct may allow affected shareholders to take action and hold executives accountable.
Other times, when an executive has proven incompetent or incapable of effectively fulfilling their role at the company, shareholders can potentially take action. They can replace the people seated on the Board of Directors, who control executive employment for the organization.
Finally, shareholders have the option of pursuing a derivative action on behalf of the company. A derivative action is a lawsuit filed by a shareholder on behalf of the business against an executive. They seek to prevent transactions that could leave the company at a financial disadvantage or demand reimbursement from an executive who has cost the company money through embezzlement or self-dealing.
Each of these solutions is relatively complex and typically requires the support of an attorney familiar with shareholder disputes, derivative lawsuits and shareholder agreements. Shareholders who act promptly can place themselves in the strongest possible position to protect their rights and their investments.