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Types of Lawsuits Filed Against Boards of Directors

Contracts Law

While corporation boards of directors maintain considerable authority, the ultimate authority is its shareholders, who have a vested interest in the company’s success. Shareholders are individuals, companies, or others who own at least one share of the corporation’s stock, giving them partial ownership in the company.

Shareholders have a majority or minority interest in the corporation. Majority shareholders are those with more than 50 percent of the corporation’s shares, entitling them to the majority control of the company. Minority shareholders are those owning less than 50 percent of the company’s shares.

Directors have a fiduciary duty of loyalty and care to the corporation and its shareholders. Fiduciary duties can apply to various types of wrongful acts that may or may not be prohibited, but generally means the directors must put the interests of the corporation and shareholders above their own, as follows:

  • Duty of loyalty: When making decisions for the corporation, directors must put the interests of the corporation and its shareholders over their own personal interests. Directors cannot take advantage of opportunities for themselves before the corporation or shareholders or divulge proprietary or confidential information for personal gain.
  • Duty of care: Directors must exercise care and act in good faith when making decisions they believe are in the best interest of the corporation and the shareholders.

3 Types of Lawsuits Against Board of Directors

Shareholders have the right to bring a lawsuit against the board of directors or officers if they believe the directors are undertaking actions that harm the corporation and the value of its shares. There are three main types of lawsuits that can be brought against boards of directors:

Derivative lawsuits:

Actions brought against the board of directors or officers by a single or group of shareholders on behalf of the corporation. Derivative suits typically allege a breach of fiduciary duty for the corporation failing to pursue legal remedies against those who have harmed the company. In such circumstances, the shareholders can take the matter into their own hands to protect the corporation. Minority shareholders can also file a derivative lawsuit against majority shareholders for the wrongful sale of corporate control, causing minority shareholders to suffer damages.

Direct lawsuits

Direct claims are often utilized by minority shareholders alleging unfair treatment by the majority shareholders, causing personal harm. There are several reasons for filing a direct suit, including:

  • Violation of shareholders’ rights to vote.
  • Demand for payment of unpaid dividends.
  • Failure to allow shareholders to review records.
  • Violation of shareholders’ ownership rights.
  • Company harm against a specific shareholder.

Non-shareholder lawsuits:

Boards of directors or officers can also be sued by non-shareholders, such as employees or vendors for defamation, sexual harassment, or breach of employment law or contracts.

Right to Inspect

Another secondary, but common shareholder lawsuit is the right to inspect. Most states have legal statutes giving shareholders the right to inspect certain accounting records and meeting minutes. A right to inspect lawsuit is generally brought as a breach of fiduciary duty, but can also be brought as a criminal case, depending on the circumstances. Typically, state statutes dictate how and when shareholders must demand inspection, as well as the corporation’s response.

Lawsuits against directors or governing bodies are not limited to large corporations. Any business or non-profit organization with a corporate board or advisory committee can face potential lawsuits. Suits of this type are common enough that many businesses, large or small, purchase insurance to protect the directors from personal liability in the event of a lawsuit.

Director and Officer insurance has limits, however, and generally does not protect directors from illegal acts, such as lying to government officials, complicity in lying to the public, embezzlement, and stealing corporate resources or confidential information.

Not all harmful actions by the board or an individual director are intentional or willful breaches of duty, but simply bad decisions. Directors can protect themselves under the “business judgment rule” over a bad decision if they can prove they acted in good faith, were not self-serving, and were kept informed of the company’s activities. The rule allows directors leeway to make independent decisions without fear of facing a lawsuit by a shareholder who disagrees with the decision or the outcome.

To avoid potential liability, it is important that the board of directors are fully aware of and understand their fiduciary responsibilities to the company and its shareholders. Directors who do not inform themselves of what the duties require of them are certain to breach them, putting themselves and the corporation at risk.

Maryland Business Lawyers at Oliveri & Larsen Provide Businesses and Corporations With Exceptional Legal Representation

When directors fail to meet their duties, they risk significant liability and face potential shareholder lawsuits. Our Maryland business lawyers at Oliveri & Larsen are skilled corporate litigators with the knowledge and experience of providing excellent representation for boards and officers. Call us at 410-295-3000 or contact us online to schedule an initial consultation. Located in Annapolis, Maryland, we serve clients in Ocean City, Anne Arundel County, Baltimore County, Baltimore City, Calvert County, Harford County, Howard County, Queen Anne’s County, St. Mary’s County, Worcester County, Kent County, and the upper and lower Eastern Shores of Maryland.

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