According to the International Association of Privacy Professionals (IAPP), litigation on shareholder disputes is “not easy.” The IAPP notes that American courts tend to give business leaders “the benefit of the doubt,” and the burden of proof falls to the shareholders during these lawsuits. In order to achieve success, shareholders must establish that the C-suite or board of directors failed in their duty of care. That being said, these business leaders are not immune to legal penalties. Effective defense strategies may be critical in this situation, and company leaders may turn to Florida business litigation attorneys for assistance. Shareholders may also receive assistance from legal counsel as they strive for optimal outcomes. Those who are approaching litigation from either side may wish to continue this conversation with Clearwater Business Law. We serve all of Pinellas County, so consider contacting us at (727) 502-6874.
Lawsuits Are Often the Last Resort
Although litigation is a legitimate course of action in many cases, it is usually the last resort. Litigation can be expensive, time-consuming, and stressful for all parties. A lawsuit is also an inherently public process, and sensitive details could become public. In the context of a shareholder dispute, this information might include trade secrets, financial details, and other data that could become harmful to the overall company if released. Many shareholders and business leaders are able to resolve their disputes without going to court through a process called alternative dispute resolution (ADR). Common ADR methods for shareholder disputes include arbitration and mediation.
In fact, arbitration is sometimes a mandatory first step before shareholders bring their claims to court. These mandatory arbitration clauses are often present in shareholder agreements, making parties contractually obliged to attempt resolutions in private before going to court. That being said, some mandatory arbitration clauses could face challenges, and this may be something worth exploring with Clearwater Business Law. Florida State law does not always uphold these mandatory arbitration clauses, and some argue that the entire concept is unconstitutional.
What Are Shareholder Derivative Actions?
A shareholder derivative action is the official legal term for a shareholder lawsuit in Florida. This type of lawsuit allows the shareholders to act as a “derivative” of the company itself. In other words, the shareholder files the lawsuit on behalf of the company in an attempt to act in its best interests. In this type of lawsuit, the shareholders represent the company and sue the board of directors and or the C-suite. As a result, the shareholders can only file this type of lawsuit if the company has been harmed by the actions of the C-suite or board of directors.
If the derivative action is successful, the shareholders can facilitate major changes within the company. First, the defendants who harmed the company may need to pay financial penalties to the shareholders. However, it is important to note that the shareholders do not actually receive these financial rewards. Instead, the company receives this compensation. Remember, the shareholders are representing the company in this situation, not their own personal needs or desires. A derivative action can also implement serious changes within the leadership and policies of the company. This type of litigation can lead to court orders that mandate changes in leadership and the adoption of new policies.
When Can Shareholder Disputes Result in Litigation?
Shareholders can sue company leadership for various reasons. Poor management of daily operations may cause the company to suffer, leaving shareholders no choice but to sue. Some insiders may be guilty of fraud, self-dealing, insider trading, and other misconduct. Leaders may continuously lie to shareholders about performance or earnings. Certain privacy violations could also lead to derivative actions. A notable example was the Equifax data breach of 2017, which led to a major shareholder lawsuit against the board of directors.
Essentially, anything that damages the reputation of a company could potentially lead to a shareholder dispute and subsequent litigation. Publicly traded companies rely heavily on their reputations, and shareholders suffer when public relations (PR) nightmares cause share prices to drop. Although some of these incidents are perhaps unavoidable, many forms of reputational damage are completely self-inflicted. If shareholders can prove that poor leadership and general mismanagement caused the reputational issues in question (and the subsequent drop in share prices), litigation could be possible.
How to Defend Against Shareholder Derivative Actions
As the Florida Bar notes, the board of directors can appoint an individual or a group of individuals to investigate the underlying claim associated with a derivative action. If these individuals discover that the lawsuit has no real merit, the next step could be to file a motion to dismiss the case with prejudice. However, Florida courts may only agree to dismiss the case if this written report was drafted by a truly independent individual (or group of individuals) acting in good faith. This highlights the need to work with an independent investigator or neutral third party to compile the written report.
If there is no way to dismiss the case, the board of directors may need to work with experienced business litigation attorneys to develop a defense strategy. Although the burden of proof falls on the shareholders in this type of case, company leaders still have the option to push back with various methods. Company leaders can work with their lawyers to present evidence, call upon witnesses, and cast doubt on the evidence presented by the shareholders.
Learn More About Shareholder Disputes With Clearwater Business Law
Parties may resolve shareholder disputes with various strategies during litigation. That being said, each shareholder dispute is slightly different. While online research could represent a valid first step, it may not provide personalized, targeted guidance. Perhaps most obviously, shareholders and company leaders may have different goals and limitations when approaching litigation. These shareholder disputes may also arise for many different reasons. These include financial disagreements, daily operations, or the overall governance of the company. Due to these varying circumstances, it may make sense to discuss the unique circumstances of the dispute with a business law attorney in Clearwater. Consider continuing this discussion with Clearwater Business Law by contacting us at (727) 502-6874. We serve clients in Clearwater, Dunedin, Largo, New Port Richey, Oldsmar, Palm Harbor, Pinellas Park, St. Petersburg, and Tarpon Springs.