Business Law Study Set 13

Business

Quiz 45 :
Shareholder Rights in Corporations

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Quiz 45 :
Shareholder Rights in Corporations

Facts to this case • A shareholder filed a lawsuit against one of the founders of the company. • The shareholder filed her derivative suit as a result of the founder's insider trading activities which damaged the company's reputation. • Shareholder alleged the corporation failed to sue the founder as the corporate directors were friends with the founders. Case Issue The issue is whether the shareholder can file the derivative suit. Relevant Terms, Laws, and Cases Corporation - a company that limits liability (owners lose their investment only) of their owners. Corporations are treated as a separate person from their owners; debts owed by the corporations are not necessarily owed by the owners. Derivative Suit - a lawsuit filed by shareholder of a corporation for damages incurred by the corporation, when the corporation fails to file one itself. Analysis and Conclusion The court dismissed the derivative suit. They held that: • Shareholder can only file a derivative suit if 1) she demands the corporate directors to file a claim but they fail to do so and 2) the demand is futile because the corporate directors can't make an impartial decision. • The shareholder didn't demand the corporate directors to file a claim. • Furthermore, the professional relationship between the corporate directors and the corporation's founder wasn't enough to show that they can't make an impartial decision. • Shareholder failed to show that the directors of the corporation weren't independent of the founder. Therefore, shareholder is not allowed to file derivative suit; she must demand the corporation to file the suit for her.

Facts to this case • Shareholder of a corporation sued the corporate directors. • Shareholder claims that the directors and an accounting company maintained a low price of the corporate stock in order to purchase more shares. Case Issue The issue is whether the shareholder's claim is valid. Relevant Terms, Laws, and Cases Corporation - a company that limits liability (owners lose their investment only) of their owners. Corporations are treated as a separate person from their owners; debts owed by the corporations are not necessarily owed by the owners. Derivative Suit - a lawsuit filed by shareholder of a corporation for damages incurred by the corporation, when the corporation fails to file one itself. Analysis and Conclusion The court held that the shareholder couldn't file a direct claim. They argued: • The shareholder can file a derivative claim. • But, the shareholder failed to do so. • There was a prior case in which shareholder may file a direct claim against the corporation, but in that case the corporation was a close corporation (having only a few shareholders). • In this case, the corporation is a large one with many outstanding shares. • Furthermore, the shareholder must show that his injuries were similar to injuries that may be suffered by other shareholders due to the director's actions. Thus, the shareholder doesn't have a claim.

Facts to this case • T and H were two owners of a corporation. • The corporation later bankrupted. • T sued H claiming H took funds from the corporate proceeds. Case Issue The issue is whether T can sue H for breach of fiduciary duty to the corporation. Relevant Terms, Laws, and Cases Corporation - a company that limits liability (owners lose their investment only) of their owners. Corporations are treated as a separate person from their owners; debts owed by the corporations are not necessarily owed by the owners. Derivative Suit - a lawsuit filed by shareholder of a corporation for damages incurred by the corporation, when the corporation fails to file one itself. Analysis and Conclusion The court held for H. T cannot file a direct action against H. They argued that: • T must file a derivative suit because the injury is to the corporation. • If the court allowed the direct suit, as in this case, to proceed would neglect the corporation as a separate entity. • Furthermore, the bankrupt corporation has outstanding creditors and allowing awards to T first would put them at a disadvantage. Thus, T doesn't have a right to direct action.

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