Los Angeles corporate litigation lawyers frequently face questions about corporate shareholder lawsuits and breach of fiduciary claims. Corporate shareholder disputes are the corporate version of a partnership dispute, except that a corporation is made up of shareholders rather than partners. Oftentimes a minority shareholder will disagree with the actions of a majority shareholder and a lawsuit will ensue. Lawsuits by minority shareholders typically involve breach of fiduciary duty, fraud, breach of contract, accounting, dissolution and breach of the California Corporations Code. Here are some basic things to know when involved in corporate shareholder litigation.
Is the lawsuit a derivative claim? An action is derivative if the gist of the complaint is injury to the company rather than to an individual member or members. In other words, if the injury complained of damaged the entire company, resulting in reduced company assets or a decrease in the value of everyones membership interests, then the action would be considered derivative (as opposed to a direct action for unique injury to one specific member or group of members that other members did not suffer). Any judgment in a derivative claim would go to the corporation and not the individual plaintiff.
Does the lawsuit involve a breach of fiduciary duties? Californias Supreme Court has defined a fiduciary duty as arising whenever trust and confidence is reposed by one person in the integrity and fidelity of another and that person obtains control over the other persons affairs. In other words, the shareholders in the corporation (especially the majority shareholders) often owe the other shareholders a fiduciary duty in the way they operate the corporation. A breach of fiduciary duty lawsuit in California must include the following elements: (1) a fiduciary duty, (2) a breach of that fiduciary duty, and (3) damage arising from that breach of duty. The plaintiff will have the burden of proving that the defendant had a fiduciary duty towards him or her and that the plaintiff breached that duty. Moreover, the plaintiff must prove that some damage arose from the breach of the duty.
Does the lawsuit involve fraud? Generally an attorney must prove the following elements in a claim for corporate fraud: (1) a misrepresentation (such as a false representation, concealment or non-disclosure), (2) knowledge of falsity (called scienter in legalese), (3) intent to defraud or induce reliance, (4) justifiable reliance, and (5) resulting damage. A fraud cause of action can involve an explicit misrepresentation or the concealment of a material fact. Has the majority shareholder made false representations or concealed important facts from the minority shareholder or the corporation?
Does the lawsuit involve breach of contract? Every breach of contract lawsuit has to establish the following elements: (1) a contract, (2) plaintiffs performance of his or her obligations under the contract or an excuse as to why plaintiff did not perform, (3) defendants breach of the contract, and (4) plaintiffs damage arising from the breach of contract. The shareholders may have a written, oral or implied contract between them.
Does the lawsuit involve accounting issues? Most corporate shareholder disputes and corporate litigation involves accounting issues. The breach of fiduciary duties and fraud claims generally involve the diversion of money or assets from the corporation that will need to be accounted for. Typically this accounting will take place during the discovery phase of the litigation and will be used to bolster the other causes of actione.g., prove the fraud or breach of fiduciary duty. Most corporate litigation will require the use of forensic accountants as expert witnesses to investigate and explain where the money has been going.
Is the minority shareholder being given access to the books and records of the corporation? Every shareholder is entitled to inspect certain corporate financial records. Often, in a small corporation, the personality conflict between the shareholders (like a partnership dispute) leads the majority shareholders to deny the minority shareholder the right to look at the books of the corporation. The corporation should consult with an attorney before denying this right to a minority shareholder. In California a minority shareholder can enforce this right and collect all attorneys fees in doing so.
Is your lawyer experienced in corporate litigation? Many of the obligations of the corporation and its shareholders are set forth in the California Corporations Code. Moreover, a specialized body of law has developed dealing with corporate shareholder disputes. While there are numerous corporate litigation lawyers in Los Angeles, make sure that you are working with an attorney who has experience in corporate litigation and trials.
Laine T. Wagenseller is a Los Angeles corporate litigation lawyer. The founder of Wagenseller Law Firm, Mr. Wagenseller has trial experience in partnership and shareholder litigation, commercial litigation and business litigation throughout Southern California. For more information on corporate litigation, contact Mr. Wagenseller at (213) 996-8338
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