Sometimes, actions that benefit a corporation as a whole do not coincide with the separate interests of the individuals making up the corporation. In considering those situations, it is important for your students to be aware of the rights and duties of the participants in the corporate enterprise.
This chapter focuses on the rights and duties of directors, managers, and shareholders and the ways in which conflicts between and among them are resolved. The duty of care and duty of loyalty owed by directors, the business judgment rule and the immunity it provides directors from honest mistakes, and the duty owed by majority shareholders to the corporation and minority shareholders are among the topics.
Roles of Directors and Officers
Directors act for and on behalf of their corporation, but no individual director can act as an agent to bind the corporation, and directors collectively control a corporation in a way that no agent can control a principal. Directors hold positions of trust and control over their corporation, but, unlike trustees, they do not own or hold title to property for the use and benefit of others.
Election of Directors
The number of directors is stated in the articles or bylaws. Close corporations may eliminate the board altogether. The incorporators, or the corporation in the articles, appoint the first board, which serves until the first shareholders’ meeting. A majority vote of the shareholders elects subsequent directors. Directors typically serve for a year or more.
Removal of Directors
A director can be removed for cause (and usually not without cause).
Vacancies on the Board of Directors
A vacancy can occur through a director’s death or resignation or if a new position is created.
Compensation of Directors
There is no inherent right to compensation, but many states permit the articles or bylaws to authorize it, and in some cases the board can set its own. Directors may set their own compensation [RMBCA 8.11]. A director who is also a corporate officer is an inside director. A director who does not hold a management position is an outside director.
Board of Directors’ Meetings
The dates for regular board meetings are set in the articles and bylaws or by board resolution, without further notice. A quorum is generally a majority of the number of authorized directors. Each director has a vote [RMBCA 8.24] Ordinary matters require majority approval; certain extraordinary matters may require more.
Rights of Directors
The main right is participation in management, which includes a right to be notified of board meetings, and to have access to all corporate books and records. Most states (and RMBCA 8.51) permit a corporation to indemnify a director for costs, fees, and judgments in defending corporation-related suits.
The Timing of Directors’ Actions in an Electronic Age
Corporate directors can hold special board meetings to deal with extraordinary matters, provided that they give proper notice to all members of the board. If a special meeting is called without giving sufficient notice to all of the directors, are the resolutions made at that meeting invalid? If so, can the directors validate these resolutions by holding a second special board meeting with proper notice? In today’s electronic age, matters of timing can be complicated and can affect a variety of other issues, including the effective date of a director’s resignation and the validity of a resolution appointing a new director.
Committees of the Board of Directors
Executive Committee
Most states permit a board to elect an executive committee from among the directors to handle management between board meetings. The committee is limited to ordinary business matters.
Audit Committee
Selects, compensates, and oversees independent public accountants who audit the firm’s financial records under the Sarbanes-Oxley Act of 2002.
Nominating Committee
Chooses candidates on which shareholders vote for the board of directors.
Compensation Committee
Sets salaries and benefits for corporate executives and may determine directors’ compensation.
Litigation Committee
Decides whether to pursue litigation on behalf of the corporation.
Corporate Officers and Executives
The board normally hires officers; qualifications are set in the articles or bylaws; rights are defined by employment contracts. One person can hold more than one office and be both an officer and a director. Officers’ duties are the same as those of directors. Directors and officers are corporate fiduciaries.
Duty of Care
The duty of care includes acting in good faith and in the best interests of the corporation, and exercising the care that an ordinarily prudent person would use in similar circumstances [RMBCA 8.30(a), 8.32(a)]. Breach of the duty may result in liability for negligence.
Duty to Make Informed and Reasonable Decisions
Directors must be informed on corporate matters and act in accord with their knowledge and training. A director can rely on information furnished by competent officers, or others, without being accused of acting in bad faith or failing to exercise due care. Directors must exercise reasonable supervision when work is delegated. Directors must attend board meetings; if not, he or she should register a dissent to actions taken (to avoid liability for mismanagement).
The Business Judgment Rule
Directors and officers are immune from liability when a decision is within managerial authority, as long as the decision complies with management’s fiduciary duties, acting on the decision is within the powers of the corporation, there is a reasonable basis for the decision, and no conflict of interest.
Duty of Loyalty
Directors and officers must subordinate their self-interest to the interest of the corporation. This means no self-dealing, no usurping corporate opportunities, etc.
Conflicts of Interest
Directors and officers must fully disclose any potential conflict of interest. After full disclosure, the individual may go ahead if the other directors or shareholders approve (assuming the circumstances are otherwise fair and reasonable).
Liability of Directors and Officers
Directors and officers are personally liable for their torts and crimes, and may be liable for those of subordinates (under the “responsible corporate officer” doctrine or the “pervasiveness of control” theory). The corporation is liable for acts done within the scope of employment.
What must directors do to avoid liability for honest mistakes of judgment and poor business decisions? Directors and officers must exercise due care in performing their duties. They are expected to be informed on corporate matters. They are expected to act in accord with their own knowledge and training. Directors are expected to exercise a reasonable amount of supervision when they delegate work to others. Directors are expected to attend board of directors’ meetings. In general, directors and officers must act in good faith, in what they consider to be the best interests of the corporation, and with the care that an ordinarily prudent person in a similar position would exercise in similar circumstances. This requires an informed decision, with a rational basis, and with no conflict between the decision maker’s personal interest and the interest of the corporation.
Role of Shareholders
A shareholder is the owner of the corporation in which he or she holds shares but has no right to manage the firm, and does not have title to its property. There is no legal relationship between a shareholder and a creditor of the corporation (unless, of course, the shareholder is a creditor of the corporation). Shareholders have the power to choose the board of directors, but are owed no special duty individually.
Shareholders’ Powers
Shareholders approve fundamental changes to the corporation before the changes are affected. Shareholders elect the board and may remove a director (in some cases, without cause).
Shareholders’ Meetings
Notice of Meetings
Shareholders must be notified of shareholders’ meetings [RMBCA 7.05]. Special-meeting notices must include a statement of the purpose of the meeting; business transacted at a special meeting is limited to that purpose.
Proxies: Shares are often voted by proxy. Shareholders that own stock worth at least $1,000 can submit proposals to include with proxy materials. The materials may be furnished online.
Why might a company or other party choose to solicit proxies the old-fashioned way, by providing paper documents instead of Internet access despite the added costs? Reasons to provide proxy materials in a paper format include chiefly the personal preference of the shareholders and other corporate participants. There may have at one time been a technological impediment—the company or its owners may not have had access to, or known how to use, compatible technology.
Conducting Shareholders’ Meetings
Corporate articles or bylaws may provide for the conduct of shareholders’ meetings. Typically, the company president or the chairperson of the board of directors presides, and the corporate secretary records the minutes of the meeting. The agenda may include reports of management, the amendment or repeal of bylaws, resolutions submitted on behalf of management or shareholders, extraordinary corporate matters or decisions that require shareholder approval, and other subjects. Shareholders can offer and respond to proposals and resolutions. For example, shareholders concerned about social and political issues have used shareholders meetings to propose changes in corporate activities that relate to the issues.
SEC Rule 14a-8 — SEC Rule 14a-8 requires that when a company sends proxy materials to its shareholders, the company must include whatever proposals will be considered at the meeting. Section 14(a) of the 1934 act regulates management’s solicitation of proxies from shareholders of Section 12 companies. There must be full and accurate disclosure. SEC Rule 14a-9 is similar to the antifraud provisions of Rule 10b-5. Remedies for violation range from enjoining a shareholder vote to damages.
Shareholder Voting
Quorum Requirements
A shareholder quorum is generally more than 50 percent. (Unanimous written, shareholder consent is, in some states, a permissible alternative to a shareholders’ meeting.) A majority vote of the shares at the meeting is usually required to pass resolutions. Extraordinary corporate matters, require the approval of a higher percentage of shares entitled to vote, not just a majority of those present at a meeting.
Voting Lists
Persons whose names appear on the corporation’s records as owners, as of a record date, are entitled to vote.
Cumulative Voting
In most states, shareholders elect directors by cumulative voting; otherwise, the vote is by a majority of shares at the meeting.
Other Voting Techniques
Shares can be voted in accord with a shareholder voting agreement or voting trust.
Why is disclosure to the shareholders considered significant? Disclosure in any fiduciary situation is considered important and is emphasized repeatedly in the duties that, for example, an agent is said to owe a principal. Shareholders are the owners of their corporations. Without disclosure, a shareholder (or any party to whom disclosure is due) is making a decision that he or she might decide another way if the “full story” were revealed.
What is a voting proxy? A proxy is written authorization given by a shareholder to a third party to vote the shareholder’s shares at a shareholders’ meeting.
What is cumulative voting? Cumulative voting is a method of voting designed to allow minority shareholders representation on the board of directors. The number of members of the board to be elected is multiplied by the number of voting shares a shareholder owns.
Rights and Liabilities of Shareholders
Rights of Shareholders
Stock Certificates
In jurisdictions that require the issuance of stock certificates, shareholders can demand a certificate and demand that their names and addresses be recorded in the corporate record books. In most states, shares can be uncertified. Notice of shareholder meetings, dividends, and reports are distributed according to the ownership listed in the corporation’s books, not on the basis of possession of a certificate.
Preemptive Rights
The articles of incorporation determine the existence and scope of preemptive rights. Generally, they apply only to additional, newly issued stock sold for cash and must be exercised within a specified time period. Preemptive rights are most significant in a close corporation because of the relatively few number of shares and the substantial interest each shareholder controls.
Stock Warrants
When preemptive rights exist and a corporation is issuing additional shares, each shareholder is given transferable options to acquire a given number of shares from the corporation at a stated price. Warrants are often publicly traded on securities exchanges.
Dividends: Dividends can be paid in cash, property, stock of the corporation that is paying the dividends, or stock of other corporations.
Illegal Dividends
A dividend paid while a corporation is insolvent is illegal and must be repaid if the shareholders knew that it was illegal when they received it. Directors may be personally liable for paying such a dividend.
From what sources may dividends be paid legally? In what circumstances is a dividend illegal? What happens if a dividend is illegally paid? Depending on state law, dividends may be paid from retained earnings, current net profits, and any surplus. A dividend paid while the corporation is insolvent is an illegal dividend. Dividends improperly paid from an unauthorized account are illegal. Shareholders must return illegal dividends if they knew that the dividends were illegal when they received them. Whenever dividends are illegal or improper, the board of directors can be held personally liable for the amount of the payment.
Directors’ Failure to Declare a Dividend
That corporate earnings or surplus is available to pay a dividend is not enough for a court to compel directors to distribute funds that, in the board’s opinion, should not be paid. Abuse of discretion must be clearly shown.
Directors’ Failure to Declare a Dividend
In Dodge v. Ford Motor Co., 204 Mich. 459, 170 N.W. 668 (1919), in the interest of setting aside money for future investment and expansion, the Ford Motor Co. announced that it would pay no special dividends after October 1915, even though surplus capital in 1916 exceeded $111 million. The minority stockholders, who owned one-tenth of the shares of the corporation, petitioned a Michigan state court to compel the directors to declare a dividend. The court ordered the payment, and the defendants appealed. The Supreme Court of Michigan affirmed. The court determined that a declaration of dividends would not be a detriment to Ford’s business and that continued failure to declare such a dividend in view of the large capital surplus could amount to such an abuse of discretion as to constitute fraud. The court, however, refused to specify an amount, perhaps recognizing that it was getting too deeply involved in a matter beyond its scope of expertise. In any event, the court concluded that there was some unspecified point beyond which a corporation could not continue hoarding its cash but instead had to pay out a dividend.
This case is a striking exception to the general rule that directors should not ordinarily be forced to declare dividends to stockholders. Courts are usually very reluctant to become involved in such issues because there is no clear answer as to when the capital surplus of the corporation is so large that the board of directors should be required to declare a dividend. Certainly the contents of this opinion do not suggest that the court engaged in extensive calculations in determining the proper dividend payable to shareholders. In the absence of some evidence of fraud, would it be better to give the directors complete discretion in deciding when to declare dividends to shareholders (assuming that there is adequate capitalization)?
Inspection Rights
The shareholder’s right of inspection is limited to the inspection and copying of corporate books and records for a proper purpose, provided the request is made in advance. A shareholder can be denied access to prevent harassment or to protect trade secrets or other confidential corporate information.
Transfer of Shares
Although stock certificates are negotiable and freely transferable, transfer of stock in closely held corporations is generally restricted by contract, the bylaws, or a restriction stamped on the certificate. Any restrictions on transferability (which typically include a right of first refusal) must be noted on the face of the certificate.
Rights on Dissolution
When a corporation is dissolved and its debts and the claims of its creditors have been satisfied, the remaining assets are distributed on a pro rata basis among the shareholders. Certain classes of preferred stock can be given priority.
The Shareholder’s Derivative Suit
If directors fail to sue in the corporate name to redress a wrong suffered by the corporation, shareholders can bring a suit. Some wrong must have been done to the corporation, and any damages recovered usually go into the corporation’s treasury.
A Brief History of Derivative Suits
The right of shareholders to sue derivatively on the behalf of their corporation was indicated as early as the 1830s. In 1855, the United States Supreme Court upheld a shareholder’s right to sue on behalf of a corporation whose officer had paid a tax that the shareholder claimed was unconstitutional [Dodge v. Woolsey, 59 U.S. 331, 15 L.Ed. 401 (1855)].
The derivative suit developed more fully in the second half of the nineteenth century. Procedural restrictions on derivative suits also developed in the federal courts late in the nineteenth century and in the state courts in the first half of the twentieth century. In 1980, at least one study found that during the 1970s, there was only a slight increase in the amount of shareholder litigation [Jones, “An Empirical Examination of the Incidence of Shareholder Derivative and Class Action Lawsuits, 1971–1978,” 60 Boston University Law Review 306 (1980)].
During the 1980s, however, the amount of shareholder derivative litigation for alleged breaches of management duties was extensive. Today, most of the claims brought against directors and officers in the United States are those alleged in shareholders’ derivative suits. Other nations, however, put more restrictions on the use of such suits. German law, for example, does not provide for derivative litigation, and a corporation’s duty to its employees is just as significant as its duty to the shareholder-owners of the company. The United Kingdom has no statute authorizing derivative actions, which are permitted only to challenge directors’ actions that the shareholders could not legally ratify. Japan authorizes derivative actions but also permits a company to sue the plaintiff-shareholder for damages if the action is unsuccessful.
If a group of shareholders perceives that the corporation has suffered a wrong and the directors refuse to take action, can the shareholders compel the directors to act? If so, how? The shareholders cannot compel the directors to act to redress a wrong suffered by the corporation, but if the directors refuse to act, the shareholders can act on behalf of the firm by filing what is known as a shareholder’s derivative suit. Any damages recovered by the suit normally go into the corporation’s treasury, not to the shareholders personally.
Liabilities of Shareholders
Shareholders are not usually personally liable for the debts of a corporation.
Watered Stock
A shareholder may be liable if he or she receives watered stock without paying the share’s stated value. In that case, the shareholder may be liable to the corporation for the difference between the price paid and the stock’s stated value, and to creditors for corporate debts.
Duties of Majority Shareholders
A majority shareholder has a fiduciary duty to the corporation and to the minority shareholders when he or she (or a few shareholders acting together) owns enough shares to exercise de facto control over the corporation.
Frequently Asked Questions
Why is it incorrect to characterize a director as either an agent or a trustee of a corporation? Even though directors act for and on behalf of the corporation, no individual director can act as an agent to bind the corporation. Moreover, directors, as a group, collectively control the corporation in a way that no agent can control a principal. Directors are also often incorrectly characterized as trustees because they occupy positions of trust and control over the corporation. Unlike trustees, however, directors do not own or hold title to property for the use and benefit of others.
What are the most common situations in which directors allegedly violate their duty of loyalty? A director typically breaches his or her duty of loyalty when he or she (1) competes with the corporation; (2) usurps a corporate opportunity; (3) has an interest that conflicts with the interest of the corporation; (4) engages in insider trading; (5) authorizes a corporate transaction that is detrimental to minority shareholders; and (6) sells control over the corporation.
What actions must a director or officer take to avoid liability when a corporation enters into a contract or engages in a transaction in which an officer or director has a material interest? The director or officer must make a full disclosure of the interest and must abstain from voting on the proposed transaction. Although standards vary from state to state, a contract will generally not be voidable if it was fair and reasonable to the corporation at the time the contract was made, there was a full disclosure of the interest of the officers or directors involved in the transaction, and the contract is approved by a majority of the disinterested directors or shareholders.
What sort of legal protection is offered to directors and officers by the business judgment rule? The business judgment rule immunizes directors and officers from liability when a decision is within managerial authority, as long as the decision complies with management’s fiduciary duties and as long as acting on the decision is in the power of the corporation. To benefit from the rule, directors and officers must act in good faith, in what they consider to be the best interests of the corporation, and with the care that an ordinarily prudent person in a like position would exercise in similar circumstances. This requires a rational, informed decision having no conflict between the decision-maker’s personal interest and the interest of the corporation.
Are directors entitled to be indemnified for any legal costs they incur in defending suits against the corporation? Because directors are often named as defendants in suits filed against their respective corporations, most states permit corporations to indemnify directors for any reasonable legal costs, fees and judgments involved in defending corporation-related suits. Many states expressly allow a corporation to purchase liability insurance for its directors and officers to indemnify them for any costs or damages. When statutes are silent on this matter, the power to purchase such insurance is usually considered to be part of the corporation’s implied power.
What are some of the more important powers that may be exercised by shareholders? Shareholders must approve fundamental changes affecting the corporation before the changes can be effected. Hence, shareholders are empowered to amend the articles of incorporation (charter) and bylaws, approve the merger or dissolution of the corporation, and approve the sale of all or substantially all of the corporation’s assets. The shareholders also elect and remove the board of directors. Some states require that the removal of directors be for cause but other states will allow a director to be removed without cause.
Describe how cumulative voting works. Most states permit or require shareholders to elect directors by cumulative voting – a method of voting designed to allow minority shareholders representation on the board of directors. The number of members of the board to be elected is multiplied by the total number of voting shares held. The result equals the number of votes a shareholder may cast. This total can be cast for one or more nominees for director.
What are the limits on the shareholder’s right to inspect corporate records and books? A shareholder is limited to inspecting and copying corporate records and books for a proper purpose if the request is made in advance. The shareholder can properly be denied access to corporate records to prevent harassment or to protect trade secrets or other confidential information. Furthermore, the right of inspection may be conditioned on the shareholder possessing his or her shares for a minimum period of time prior to his making the demand to inspect the records.
What are some of the ways in which a corporation or its shareholders can restrict the transferability of shares? A corporation or its shareholders can restrict transferability by reserving the option to purchase any shares offered for resale by a shareholder. This right of first refusal remains with the corporation or the shareholders for only a specified or reasonable time. Alternatively, a shareholder could be required to offer the shares to other shareholders or to the corporation first.
Can a shareholder institute an action to dissolve a corporation and liquidate its assets? Yes. In some states, a shareholder has the right to petition a court to appoint a receiver and to liquidate the business assets of the corporation in certain specified situations. A shareholder may institute a dissolution action if (1) the directors are deadlocked in the management of corporate affairs, shareholders are unable to break that deadlock, and irreparable injury to the corporation is being suffered or threatened; (2) the acts of the directors or those in control of the corporation are illegal, oppressive, or fraudulent; (3) corporate assets are being misapplied or wasted; or (4) the shareholders are deadlocked in voting power and have failed to elect successors to directors whose terms have expired or would have expired with the election of successors.
How do the duty of care and the duty of loyalty govern the conduct of directors and officers in a corporation?
Duty of Care. In exercising their duty of care, directors are obligated to be honest and to use prudent business judgment in the conduct of corporate affairs. Directors must exercise the same degree of care that reasonably prudent people use in the conduct of their own personal business affairs. As such, directors can be held liable to the corporation and its shareholders for breaching their duty of care. When directors delegate work to corporate officers and employees, the directors are required to make reasonable efforts to supervise them or else the directors will normally be held liable for negligence or mismanagement of corporate personnel. Furthermore, if a director fails to attend board meetings and takes no actions to prevent illegal actions undertaken by the board, then that director could be held liable for any losses suffered by the company even though that director was not actively involved in the illegal actions. Although the standard of care has been variously described in many court decisions, it essentially requires that directors carry out their responsibilities in an informed, businesslike manner. Directors and officers are expected to act in accordance with their own knowledge and training but they are also usually permitted to make decisions based on information provided by competent officers or employees without being accused of acting in bad faith or failing to exercise due care if such information turns out to be faulty. As the directors oversee the operation of the corporation, they are expected to attend board of directors’ meetings—as noted above—and their votes should be entered into the minutes of corporate meetings. Unless a dissent is entered, the director is presumed to have assented to a particular decision. Directors who dissent are rarely held individually liable for mismanagement of the corporation. When a director does vote on matters at board meetings, however, he or she is expected to be informed on corporate matters and to understand legal and other professional advice rendered to the board. A director who is unable to carry out such responsibilities must resign. Even when the required duty of care has not been exercised, directors and officers are liable only for the damages caused to the corporation by their negligence.
Duty of Loyalty. The duty of loyalty of a director to a corporation is grounded in the idea that directors should be faithful to their obligations and duties. In essence, the duty of loyalty is a fiduciary duty requiring the subordination of self-interest to the interest of the entity to which the duty is owed. It presumes constant loyalty to the corporation on the part of the directors and officers. The duty of loyalty prohibits directors from using corporate funds or confidential corporate information for their personal advantage. It requires officers and directors to disclose fully any corporate opportunity or any possible conflict of interest that might occur in a transaction involving the directors of the corporation. Most cases involving breaches of the duty of loyalty typically occur when a director or officer:
- competes with the corporation;
- usurps a corporate opportunity;
- has an interest that conflicts with the interest of the corporation;
- engages in insider trading;
- authorizes a corporate transaction that is detrimental to minority shareholders; or
- sells control over the corporation.
What are the rights of the shareholders of a corporation? Shareholders own the corporation. Although they have no legal title to corporate property vested in the corporation, they do have an equitable interest in the firm. The rights of shareholders are established in the articles of incorporation and under the state’s general incorporation laws.
Stock Certificates. In jurisdictions that require the issuance of stock certificates, shareholders have the right to demand that the corporation issue a certificate and record their names and addresses in the corporate stock record books. Notice of shareholding meetings, dividends and operational and financial reports are all distributed according to the recorded ownership listed in the corporation’s books, not on the basis of possession of the certificate.
Preemptive Rights. A preemptive right is a preference given to a shareholder over all other purchasers to subscribe to or purchase a prorated share of a new issue of stock; this right allows the shareholder to maintain his or her portion of control, voting power, or financial interest in the corporation. In general, the articles of incorporation determine the existence and scope of preemptive rights. Preemptive rights apply only to additional, newly issued stock sold for cash and must be exercised within a specified time period. Such rights are far more significant in a close corporation because of the relatively few number of shares and the substantial interest each shareholder controls.
Stock Warrant Rights. When preemptive rights exist and a corporation is issuing additional shares, each shareholder is usually given stock warrants, which are transferable options to acquire a given number of shares from the corporation at a stated price. When the warrant option is for a short period of time, the stock warrants are usually referred to as rights.
Dividend Rights. A dividend is a distribution of corporate profits or income ordered by the directors and paid to the shareholders in proportion to their respective shares in the corporation. Dividends can be paid in cash, property, or corporate stock. Once declared, a cash dividend becomes a corporate debt enforceable at law like any other debt. In general, corporations can only use certain funds, such as retained earnings, net profits, or surplus, for paying dividends.
Voting Rights. Shareholders exercise ownership control through the power of their votes. Each shareholder is entitled to one vote per share. The articles of incorporation, however, can exclude or otherwise limit voting rights, particularly to certain classes of stock.
Inspection Rights. Shareholders in a corporation enjoy both common law and statutory inspection rights. The shareholder’s right of inspection, however, is limited to the inspection and copying of corporate books and records for a proper purpose, provided the request is made in advance. A shareholder can properly be denied access to corporate records to prevent harassment or to protect trade secrets or other confidential corporate information. Some states require that a shareholder must have held his or her shares for a minimum period of time immediately preceding the demand to inspect or must hold a minimum number of outstanding shares.
Stock Transfer Rights. Although stock certificates are negotiable and freely transferable by endorsement and delivery, the transfer of stock in closely held corporations is generally restricted by contract, the bylaws, or a restriction stamped on the stock certificate. The existence of any restrictions on transferability must always be noted on the face of the stock certificate and these restrictions must be reasonable. When shares are transferred, a new entry is made in the corporate book to indicate the new owner. Until the corporation is notified and the entry is complete, voting rights, notice of shareholders meetings, dividends, etc., are all given to the current record owner.
Rights on Dissolution. When a corporation is dissolved and its outstanding debts and the claims of its creditors have been satisfied, the remaining assets are distributed on a pro rata basis among the shareholders. Certain classes of preferred stock can be given priority to the extent of the contractual preference.
Shareholder’s Derivative Suit. When the corporate directors fail to sue in the corporate name to redress a wrong suffered by the corporation, shareholders may file a derivative suit on behalf of the corporation. The injury must have been suffered by the corporation and any recovery will generally be paid into the corporate treasury. Many states require that shareholders hold a minimum number of shares or have been shareholders for a minimum period of time to file a derivative suit.