Minority Shareholders and Derivative Action Lawsuits
Minority shareholders in closely held companies have some inherent rights. When they are denied to you by the majority shareholders your investment may be in jeopardy.
There are protections for minority shareholders, some innate and some that have to be pursued. Sometimes, the only viable option is to litigate. Minority shareholders may do so by filing a shareholder derivative action.
Closely Held Companies and Derivative Lawsuits
A minority shareholder derivative action in a closely held company refers to a lawsuit brought by a minority shareholder on behalf of the corporation against parties allegedly harming the company, typically directors, officers, or majority shareholders. Other characteristics of the derivative suit:
Minority shareholder is the plaintiff - The minority shareholder serves as the representative plaintiff but acts on behalf of the interests of the corporation.
Corporation is a nominal defendant - The corporation is procedurally listed as a defendant but the corporation is actually the real party of interest in the case.
Harm is to the company - The lawsuit alleges wrongs against the corporation, not just the individual shareholder personally.
Recovery goes to the company - Any damages or settlement funds recovered go to the injured corporation, not the individual shareholder plaintiff directly.
Common claims - Derivative suits often allege breaches of fiduciary duty, mismanagement, excessive compensation, misappropriation of assets.
Demand requirement - The shareholder plaintiff must generally make a pre-suit demand requesting that the board pursue the claims itself.
Incentivizing legal costs - Attorney fees of the plaintiff may be paid out of corporate recovery.
Dismissal risk - The corporation may seek to dismiss the case if the board determines the suit is not in the company's interests.
The derivative action is a tool to police misconduct and mismanagement harming the corporation as a whole.
Steps to a Shareholder Derivative Action
Some of the steps involved in minority shareholder derivative actions:
Investigation - The shareholder plaintiff investigates and gathers evidence to support claims of harm done to the corporation.
Demand - The plaintiff makes a written demand to the board of directors requesting that the corporation directly pursue the claims.
Board response - The corporation may accept the demand and pursue claims or reject it as not in the company's interests.
Filing complaint - If demand rejected, the plaintiff files a derivative lawsuit complaint on behalf of the company against parties allegedly harming it.
Overcoming defenses - Defendants may try to dismiss the case based on plaintiff's lack of standing, failure to satisfy demand, or deference to board's business judgment.
Discovery - Plaintiff conducts discovery including depositions, documents requests, interrogatories to gather evidence to prove claims.
Resolution - The case may settle out of court or proceed to trial. Alternatively, the corporation may form a special litigation committee which seeks to dismiss the case.
Remedies - If successful, remedies like damages or governance reforms are awarded to the injured corporation.
Attorney fees - Plaintiff's legal costs may be paid out of any monetary recovery awarded to the company.
The process aims to remedy and deter corporate malfeasance but can be complex. Counsel is advisable.
Hopkins Centrich, Your Shareholder Oppression Law Firm
Hopkins Centrich PLLC provides cutting-edge, high-quality, creative legal solutions for minority shareholders in Texas Closely Held Corporations when their rights have been abused by the majority owners. Our attorneys and staff have decades of experience in virtually every aspect of business law in The Woodlands and Texas. We have designed and incorporated businesses, managed their every legal concern, engaged in litigation on their behalf, aided with mergers and acquisitions, managed mergers, acquisitions, and sales.
Hopkins Centrich knows Texas business law. We are uniquely positioned to help shareholders when they have ample cause to believe their rights are being violated. When we work with a client, our sole focus is on them. We take advantage of everything technology has to offer in order to optimize how we work. That gives us more time to spend with you, more time to understand the issues, and more time to negotiate and prepare for trial.
We get that no one wants to contact a law firm unless they feel they absolutely have to. When they do, it almost always means that ‘things have reached a head.’ The attorneys and staff of Hopkins Centrich understand what you are going through. We will make the process understandable; you will know what is happening with your case every step of the way, and you will never have to track us down for answers.
What to Do If You Think Your Minority Rights are Being Violated
First, do not believe anything you read online, or listen to someone who tells you that the Texas Supreme Court did away with Shareholder Oppression lawsuits. The Court merely limited some of the basis for bringing a Shareholder Oppression action. There are still many avenues to relief available, particularly where the majority shareholders have made decisions that are not In the best interests of the business.
Don’t wait. If you think your shareholder rights have been trampled on don’t hesitate to call. Don’t hope that things change, don’t let a matter fester, don’t try to solve the problem yourself through emails and letters and not-so-calm conversations. Contact us. The earlier you do, the better, there are deadlines for every legal action. The longer you wait, the fewer your legal options.
How We Work
Hopkins Centrich is a team with a deep bench. All our attorneys have extensive litigation experience which they fully use when necessary.
Hopkins Centrich’s attorneys also have ‘big firm’ backgrounds. They formed our firm with the goal of retaining the best and most talented lawyers who would provide a greater and more personal experience for our clients.
We do this by using technology to its fullest. We utilize cutting-edge business processes and methodologies to assure that we can continue to deliver the highest quality legal services to our clients. This, in turn, allows us to respond promptly and efficiently to client needs, exceed project requirements, operate effortlessly with narrow timeframes, and develop innovative yet flexible legal solutions at competitive fees.
We are creative. We are agile. We quickly adapt to rapidly changing circumstances, including changes in the law.
Hopkins Centrich is dedicated to upholding the rights of minority shareholders. If you feel you are not being treated right and you are invested in a closely held company – money, time, labor, experience, intellectual property, etc. – please call us as soon as possible.
Our vision statement may sum it up best. We deliver highly skilled, ethical and aggressive legal representation to every client by:
- Responding promptly to our clients’ needs.
- Anticipating business and legal trends that may affect our clients.
- Managing our clients’ matters in an efficient, caring, and proactive manner.
- Communicating regularly and clearly with our clients.
