Who is Responsible for Protecting Your Rights as a Shareholder?

Long Island Shareholder AgreementBecoming a shareholder in a corporation is a weighty decision. You are deciding that you trust a company enough to invest. Sometimes, it’s hard to be certain that the company is holding up its end of the deal. As a shareholder, you have certain rights that must be upheld, and it can be difficult to know where to turn if you suspect your shareholder rights have been violated.

How Shareholder Rights Work

Corporations are a unique type of organization. They aim to make a profit, but they operate on behalf of many different actors. Corporations typically rely on shareholders for investment. When things are going well for the company, this is an excellent system for everyone involved: the company continues to grow, and shareholders then “share” in the profits. Shareholders vote on major company decisions, can access information about the company’s operations, and may be given priority for buying additional stock. In some cases, however, shareholders get the short end of the stick. For example, you might:

  • Be induced to sell your shares at unfair prices
  • Not receive the opportunity to vote on important company matters
  • Not receive proper dividends
  • Not be permitted to transfer your stock

Shareholder rights are outlined in the corporation’s bylaws, but these actions are generally violations of your shareholder rights, and you have recourse if such actions have occurred. The strange thing about corporations is that they themselves have no obligation to you as a shareholder. Being a shareholder can be understood as “owning” part of the corporation, but only in a very limited way. A corporation is not one single entity, but a set of contracts between the various stakeholders. Shareholders are just one piece of a rather complex puzzle.

When you hold shares in a corporation, you aren’t in a direct relationship with the corporation as a legal entity. Instead, you’ve entered into a fiduciary relationship with the board of directors and the officers of the corporation. Therefore, it is the board of directors and officers who are responsible for upholding your shareholder rights. This is actually a good thing, because having your rights linked to the entire corporation, with all its interrelated functions and parts, would be difficult. The board of the directors, on the other hand, consists of several readily identifiable individuals who hold the duty to act in the interests of shareholders.

What to Do When Your Shareholder Rights Are Violated

If your shareholder rights are violated, the initial action is to issue a formal complaint to the directors. Hopefully, the situation will be rectified at this step. If not, you may be able to bring a lawsuit. This will typically be against one or more of the directors or officers. In a derivative lawsuit, you’ll actually be suing the corporation (represented by the directors) on behalf of the corporation. You’ll be suing as a partial owner of the corporation, and not as an individual. A seasoned attorney can assist you to determine how to move forward with a legal action, based upon the facts in your case.

If you would like to learn more about your rights as a shareholder and what you can do to protect your rights or file a lawsuit, contact us at the Law Office of Andrew M. Lamkin, P.C.

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