Shareholder Vs. Shareholder: Individual Or Derivative Lawsuits?
As you may know, a shareholder can sue a company and its owners or directors, for mismanagement of the company, or for dereliction of their fiduciary duties to the company. But what about one shareholder or partner (in a partnership) suing another? Do those cases have to be brought as derivative actions—that is, on behalf of the company—or can they be brought individually, as one shareholder against another?
Individual vs. Derivative
Normally, a shareholder cannot sue a company or for mismanagement, at least not in the shareholder’s own name. The suit has to be filed on behalf of the company, against its own owners or managers. The suing shareholder stands as a representative of all shareholders. That’s a derivative lawsuit.
An individual lawsuit allows an individual shareholder to sue the company’s owners or management in his or her own name. The individual is not representing anyone but himself in teh lawsuit.
Criteria for Individual Lawsuits
The question of whether an individual suit can be maintained or whether an aggrieved individual must file the lawsuit as a shareholder derivative suit, and on behalf of the company, is really the same whether the case is a shareholder vs. the company, or shareholder vs shareholder.
Case law says that for a shareholder to sue another shareholder for something the shareholder did to the aggrieved (damaged) shareholder, certain criteria must be met:
- The harm caused by one shareholder’s actions must be to the other shareholder directly – that is, the damaged shareholder’s damages aren’t a result of, or a consequence of, damage or loss to the company in general (for example, reduction in the value of stock)
- The shareholder’s injury or damage must be separate and succinct from injuries or damages sustained by all other shareholders
Put another way, to sue individually, a shareholder’s injuries or damages can’t be “just because” the person happens to be shareholder. There must be something more that makes the damages or injury to the shareholder individual in nature.
Simply having someone’s stock value, or the value of their ownership interest in the company reduced, won’t be enough for the shareholder to file an individual action (that doesn’t mean the company can’t be sued—it can—the suit just would have to be maintained as a derivative suit, filed on behalf of the company, not the individual shareholder).
Another way of thinking of this is whether the wrong that is alleged by the shareholder, seeks to enforce a right that exists in the company, or by virtue of being in the company. If so, the case should be filed as a derivative lawsuit.
Courts will also ask if the shareholder’s injuries or damages are substantially different than that suffered by all shareholders in general. If so, it is more likely that the lawsuit can be filed individually.
Call the West Palm Beach commercial litigation lawyers at Pike & Lustig for help today if you have a business law dispute.