Your Knowledgeable North Georgia Law Firm

Your Knowledgeable North Georgia Law Firm

Why shareholders may take legal action against a business

On Behalf of | Oct 16, 2023 | Business Law And Litigation

Shareholders have invested capital in a business and, therefore, have a vested interest in its success. They generally want to see the costs to operate the business remain as low as possible while sales rise, allowing for the most profit possible. Their goal is usually to profit off the company’s success, as they can receive dividends from those profits based on how much they invest.

The suggestion that shareholders would intentionally initiate litigation that might disrupt company operations or effect its bottom line may seem counterintuitive. However, sometimes those with a financial interest in an organization have reason for concern that forces them to take legal action. For example, the following scenarios may prompt shareholder lawsuits.

The mistreatment of shareholders

There are many scenarios in which the other major shareholders of a business may take issue with certain minority shareholders. They may try to deny them a say in the company’s operations in a squeeze-out or freeze-out. They might also refuse to pay dividends to those shareholders as they should. When shareholders have experienced some kind of corporate misconduct that they feel violates their rights or the contract that they have with the business, they may choose to take legal action to protect themselves.

Illegal or irresponsible activity

Sometimes, shareholders become aware of pending plans to make major moves that could harm a company’s bottom line. In that scenario, they might take legal action seeking to prevent certain transactions. They could also potentially seek to remove someone from their position at the company due to incompetence or misconduct. Litigation may not be the ideal way to address individual misconduct, but it can be useful in scenarios where shareholders are desperate to prevent upcoming business transactions.

Shareholder litigation can affect how a company operates and can prevent major losses caused by corruption, self-dealing and similar issues. Shareholders may view that as a worthwhile trade-off given the risks if they do nothing. Understanding what inspires lawsuits brought by those invested in a company might help shareholders and executives better evaluate their options during a business conflict.