Business Law Writing Task
Task
Read the following materials to understand what a shareholder derivative suit is. Please write a scenario that can make a shareholder derivative suit stands on sound ground based on your understanding of the different types of shareholder derivative suit given in the five examples.
For example, based on the Corporate Waste and Unreasonable Executive Compensation case, I can imagine a scenario of a shareholder derivative suit. Here is the story,
John is a shareholder of Company X. He checks the account of the company frequently. He found that the executives got a very high salary, about 50% higher than those of similar companies. You believe that this is damage to the company, thus your dividend. You decide to sue the company.
You need to argue for your right to sue. In this case, your right is the exceeding pay to the executives. But you cannot just say that. You need to support your arguments with law and facts.
Writing Task
1. Take one of the five standings of the shareholder derivative suit as the starting point. Imagine a scenario that allows you to sue on the basis of that standing. That is, you make a story in which the fact will allow a shareholder derivative suit, just like what I did above.
2. Make preliminary research to find the law that governs the standing of your choice. For example, you choose the standing of self-dealing. Then, you conducted research for information on self-dealing. Again, for example, you find IRS has discussed what acts of self-dealing by a private foundation are ( https://www.irs.gov/charities-non-profits/private-foundations/acts-of-self-dealing-by-private-foundation). There are 7 transactions are considered self-dealing per IRS.
3. Based on the transaction of Sales or Exchanges of Property (one of the 7 types of transactions that give you standing to sue). You make the following story (this one is from IRS):
On May 17,1988, the Gray Foundation, a private foundation, received a donation of a life insurance policy from Joe Brown, a disqualified person. The policy, which had a face value of $100,000, was subject to an outstanding loan of $46,000 that was made to Joe by the insurer within the 10–year period ending on the date of the donation. The cash surrender value of the policy was $50,000 on May 17, 1988. Under the terms of the policy, failure to repay the principal or interest on the policy loan reduces the proceeds that are payable to the beneficiary upon voluntary surrender of the policy or upon the death of the insured. The donation is an act of self-dealing.
4. Based on the story you made above, analyze how this scenario consists of self-dealing. For example, IRS writes:
The transfer of real or personal property by a disqualified person to a private foundation is treated as a sale or exchange if the foundation (1) assumes a mortgage or similar lien, which was placed on the property before the transfer, or (2) takes the property subject to a mortgage or similar lien that a disqualified person placed on the property in the 10–year period ending on the date of transfer. (You get the rule here).
5. Write with the IRAC format to argue why you have the standing to sue in such a story with such rules.
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A shareholder derivative suit is a lawsuit brought by a shareholder on behalf of a corporation. Generally, a shareholder can only sue on behalf of a corporation when the corporation has a valid cause of action but has refused to use it. This often happens when the defendant in the suit is someone close to the company, like a director or a corporate officer. If the suit is successful, the proceeds go to the corporation, not to the shareholder who brought the suit.
Through a shareholder derivative suit, an individual shareholder or group of shareholders can bring a claim on behalf of the company. Most often, shareholder derivative lawsuits are filed against someone close to the corporation, such as an officer, director, or other insiders. Here, our West Palm Beach shareholder dispute attorneys highlight five specific examples of corporate violations that could warrant a shareholder derivative lawsuit.
Corporate Waste and Unreasonable Executive Compensation
Under Florida law, Delaware law, and other state corporate laws, the officers and directors of corporations have a legal responsibility to act in good faith and loyalty to the company, including when negotiating and receiving executive compensation. The waste and/or abuse of corporate assets through unreasonable executive compensation could be addressed in a shareholder derivative action.
Accounting Fraud and Financial Misstatements
One of the core responsibilities of a corporate officer or corporate director is to ensure that the company’s finances are fully accounted for. When accounting fraud occurs or there are serious financial misstatements, it can cause serious damage to individual shareholders. In some cases, the matter is best handled through a shareholder derivative claim.
Self-Dealing Transactions
Self-dealing is, by definition, a breach of fiduciary duty. As described by Investopedia, self-dealing occurs when a person takes advantage of their controlling/insider position at a company to act “in their own best interest in a transaction, rather than in the best interest of their clients.” You could file a shareholder derivative lawsuit on the grounds of self-dealing.
Insider Trading
There are strict federal and state rules and regulations in place regarding securities transactions. An example of conduct that could run afoul of these laws is insider trading. With an insider trading case, there are typically allegations that a corporate officer violated their fiduciary obligations or their duty to act in good faith by personally trading on non-public information. Through a shareholder derivative lawsuit, shareholders that suffered losses as a result of illegal insider trading may be able to recover financial compensation.
Corporate Governance Issues
Finally, a dispute over a corporate governance issue may also serve as the basis of a shareholder derivative lawsuit. These types of cases are especially complicated, as corporate officers and corporate directors are assumed to have wide discretion to make business decisions. Still, a corporate governance matter may warrant a shareholder derivative action if the officers/directors of a company failed to act properly under the law.
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