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Shareholder motivations for taking legal action against a company

Shareholder motivations for taking legal action against a company

On Behalf of | Sep 29, 2023 | Business Litigation |

Shareholders who have invested in a business have a financial interest in seeing it succeed. Their chance of receiving dividends or making a profit when they resell their stock depends on the company’s performance.

In general, shareholders take steps that they believe will maximize the return on their investment instead of diminishing it. However, sometimes shareholders act in a way that initially seems counterintuitive. For example, there are circumstances in which shareholders in a business may initiate legal action against the organization or its leadership. These are the most common reasons that a company’s shareholders may take legal action against it.

A freeze out or similar effort

Often, the actions of leadership within the organization or the behavior of other investors will trigger shareholder litigation. One of the more frustrating experiences a shareholder might have after investing in a company involves losing the rights and privileges that they obtained through their investment. If the shareholder no longer gets to vote or attend meetings due to a freeze out, they may then want to take legal action against the company for depriving them of their rights. Similarly, if the organization has refused to pay dividends to existing shareholders despite reporting the profit, such actions might lead to litigation by those who have invested in the company previously.

An issue with leadership

Sometimes, the issues that lead to shareholder litigation don’t relate to an attempt to push shareholders out of their role at the organization but instead questionable, unethical or even illegal conduct on the part of executives and others with leadership roles at the organization. A lawsuit initiated by shareholders might seek compensation for the damages caused by executive misconduct, for example.

Occasionally, shareholders might initiate legal action with the specific intent of preventing the business from taking certain steps. Judges can order companies to halt a transaction or cease engaging in certain practices. If a company’s leadership has violated its duty to its shareholders or to the organization itself, shareholders might initiate litigation to protect the company and the investment that they have made in it.

Successful shareholder litigation can compensate those affected by business misconduct, making it a potentially worthwhile decision even for those who worry about how litigation might affect a company’s profit margins in the near future.

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