Hello, my name is Spencer Pittman, and I am a business attorney with the law firm of Winters & King. Winters & King serves clients on a nationwide scale on issues of business litigation, including partnership or shareholder disputes, disputes between members of companies, or internal differences that may require formal legal action. This Podcast episode is directed toward our business clients who may have questions about what rights a minority shareholder or member may have in a business. There is often a misconception that a minority owner of a business has little to no rights in the operations or governance of a business and simply has to do whatever the majority owner dictates. This is not the case in Oklahoma.
Besides being entitled to receive a proportionate share of the profits of the business and voting rights as determined by their ownership percentage, minority business owners have other legally protectable rights in a business. At its most basic, minority owners of a company or a corporation in Oklahoma have the right to inspect at their own cost true and complete information regarding the state of the business and financial condition of the business. These inspection rights are mandated in statute and the procedure for exercising these rights are often contained in the corporation’s bylaws or the company’s operating agreement. Any owner of a business should have the right to, at minimum, request to inspect or a copy at their own cost, of the corporate governing documents, such as historical meeting minutes, the general corporate book, and other financial information such as profit and loss statements, balance sheets, and tax returns, if the inspection has some legitimate purpose or is reasonably related to the person’s position as a, for instance, director or shareholder.
But what would occur if someone in control of the business or a majority shareholder or owners of a business were doing something not in the best interest of the company? As a minority owner, do you have any rights to protect the company? You do, and it is called a derivative action or suit. A derivative suit is an action brought by an owner of a business not for his or her own benefit for some wrong done to him but, instead, a suit on behalf of the entity to recover damages for harm done to the business entity. The shareholder, in this case, is acting as a “derivative” of the corporation, meaning that they are seeking to enforce the rights of the corporation rather than their own individual rights.
The purpose of a derivative suit is to hold the individuals who are responsible for the harm to the company accountable and to seek compensation for the company and its stakeholders. The person bringing the suit must show that the corporation has suffered harm and that the other directors, officers, managers, or owners breached fiduciary duties to the company or the other stakeholders. Common allegations in these suits include breach of fiduciary duty, fraud, mismanagement, self-dealing, or failure to disclose material information.
Procedurally, a derivative suit is initiated after the person seeking to act as a “derivative” of the organization, has sufficiently determined that others in a more appropriate position will either fail or refuse to take the necessary action to protect the business. This is shown through a “demand.” This demand is a formal request for the company to take the necessary action to protect its own interests before the minority person steps in through a “derivative” capacity. Whether a demand is sufficient under the law is dependent upon the facts and circumstances. First, demand may be considered waived as “futile” in certain circumstances. A good example of this may be if the ownership structure has two shareholders each owning 50% of the business. One 50% shareholder should not be required to make a demand upon the other shareholder to investigate him or herself for wrongdoing. This would be the same as issuing a demand to an antagonistic and adversely interested person who is intimately involved in the claims that are being asked to be investigated. The other circumstance is when demand would not be futile. A derivative action may commence when the formal demand is refused by the more appropriate positions. An example of this might be if a minority owner issues a formal demand to a board of directors to investigate the financial mismanagement of a corporate officer, and the board of directors either fails to timely respond or refuses to take appropriate action.
When the derivative demand is futile or refused, the minority may then step in as a “derivative” of the company and file a lawsuit on behalf of the company against the allegedly bad actor. It is important to note, however, that these types of lawsuits are often complex and require differentiation between whether the harm caused by the bad actor was to the company or directly to the minority owner. In other words, the claims in the lawsuit may be couched as derivative claims, direct claims, or both. A court may require the person bringing the derivative suit to post a bond to cover the cost of the litigation.
Partnership, ownership, and internal corporate disputes can be lengthy and expensive, but also may be easily avoided if you know your legal rights, understand the internal governing documents of the company, and have an experienced attorney assisting you from the beginning. The attorneys at Winters & King are well-versed in business rights that affect owners, including shareholders and managers. If you have a concern that you may soon involve in a corporate dispute and want to protect your rights, call Winters & King at 918-494-6868.
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