Shareholder lawsuits are a common source of litigation for corporations, particularly those who have large numbers of shareholders that are not actively involved in the day-to-day operations of the business. Shareholders have certain rights to information about the business and, if there is a liquidation, purchase, or bankruptcy, they have some rights to the proceeds from that event.
Classes of Stock
Most larger companies have multiple classes of stock, each with its own rights and privileges. Generally speaking, companies have preferred stock and common stock, and sometimes levels of those. Common stockholders have specific rights including voting power, ownership, transfer of ownership, dividends, the right to inspect certain corporate documents, and the right to sue.
Preferred stock often has additional rights that are enumerated on the stock itself. If a business has a liquidation event or goes through bankruptcy, preferred stockholders are the first owners, after creditors and bondholders are satisfied, to receive a share of the cash generated by the liquidation.
Common Stockholders are Entitled to Information
Since common stockholders are entitled to vote on many issues, including electing directors and fundamental changes such as mergers and liquidations, they need to be informed about what this decision would mean for the company. This is generally handled at the annual meeting and information about the options is provided to shareholders in the corporation’s annual report to shareholders. However, if a special meeting is called for some purpose, there must still be enough time to educate shareholders on how they can vote. Timing and information required should be outlined in the corporate bylaws.
Shareholders are also allowed to inspect corporate books and records. This includes bylaws, board minutes, and financial documents as required by the Securities and Exchange Act. While there are some topics for which the board can go into an executive session, for most topics, the minutes need to be available to shareholders to review if requested.
It is also important to note that rights vary slightly from state to state. In Utah, which refers to corporations formed in the state, shareholders of both regular and close corporations may, after making a written demand at least five days in advance, come to the corporate headquarters and inspect the “articles of incorporation, bylaws, minutes of shareholders’ meetings and records of actions taken without a meeting in the previous three years, written communications to shareholders in the previous three years, certain financial statements, names and business addresses of current officers and directors, and the corporation’s most recent annual report.” Utah Code § 16-10a-1601(5).
If you or your business is having problems with shareholders or facing shareholder litigation, the team of litigators at the Dunn Law Firm can help you respond in an appropriate fashion, understand how best to provide the required information, and help you handle any conflicts in a method that keeps your business goals in mind. To learn more, reach out to the Dunn Law Firm by calling (435) 628-5405 and set up a free consultation today.