Shareholder-Trustee

Author: LegalEase Solutions

QUESTIONS PRESENTED

  1. Can a shareholder of company who has 50% interest bring a derivative action against a third party?
  2. What statute of limitation applies and what is the triggering action?
  3. If the third party is continuing its conduct as a representative of a company, does this extend the statute of limitations?
  4. Can a shareholder of a company who has a 50% interest bring an action against a designated trustee(s) of the company?
  5. Can trustees operate a company for an indefinite period of time without consent of the shareholders by a majority?
  6. Can a 50% shareholder claim direct damage as the result of the damage to the company, particularly when there is wasting of monies by the third party trustees?

SHORT ANSWERS

  1. A shareholder of a company may file a derivative action under Civ.R. 23.1 against a third party on behalf of the corporation. A shareholder can file a derivative action if the board refuses to file a suit for the injuries suffered by the corporation due to the acts of third party.
  2. The statute of limitation of four years as stated in R.C. 2305.09 is applicable and is triggered with occurrence of actual injury.
  3. It appears that extension of the conduct giving rise to the injury would toll the statute of limitations.
  4. Shareholders may bring derivative action against directors for the breach of fiduciary duty. However, direct action may be brought against directors only if there is a special duty owed to the shareholder and the shareholder has suffered damages distinct from that of other shareholders.
  5. The tenure of directors is to be found in the articles of association or regulations. In its absence, tenure continues indefinitely until shareholders take action to vote in a new director but not for a period of more than three years.
  6. Shareholders cannot demand direct damages as result of injury to the corporation due to the acts of third parties. Shareholders can bring direct action only if they suffer injury separate from that of other shareholders from a separate duty owed to them.

 

RESEARCH FINDINGS

  1. Can a shareholder of company who has 50% interest bring a derivative action against a third party?

 

Generally, “shareholders may not bring an action against a third party whose acts have impaired the capital position of the corporation.” Hershman’s, Inc. v. Sachs-Dolmar Div., 89 Ohio App.3d 74, 77, 623 N.E.2d 617, 618-19 (9th Dist.1993). Further, “‘only a corporation and not its shareholders can complain of an injury sustained by, or a wrong done to, the corporation.’” Id. at 619 (quoting Adair v. Wozniak, 23 Ohio St.3d 174, 176, 23 OBR 339, 341, 492 N.E.2d 426, 427 (1986)).

However, “a shareholder may bring a derivative action under Civ.R. 23.1 on behalf of the corporation . . . .” Kadel v. Dayton Superior Corp., 105 Ohio Misc.2d 11, 15, 731 N.E.2d 1244, 1247 (C.P.2000). “A derivative action allows a shareholder to circumvent a board’s refusal to bring a suit on a claim.” Carlson v. Rabkin, 152 Ohio App.3d 672, 678, 2003-Ohio-2071, 789 N.E.2d 1122, 1126-27, ¶ 9 (1st Dist.).

Therefore, shareholders of a company may bring derivative action against a third party on behalf of the corporation for the injuries suffered by the corporation. In the instant case, if the board has refused to file a suit for the injuries suffered by it then, the shareholder may file a derivate action for the corporation’s injuries. However, a shareholder cannot file a direct action against third parties for the injuries suffered by the corporation.

  1. What statute of limitation applies and what is the triggering action?

In Crosby v. Beam, 83 Ohio App.3d 501, 615 N.E.2d 294 (6th Dist.1992), the court observed that “under common law majority shareholders owe a heightened fiduciary duty to minority shareholders in closely held corporations. The breach of this type of fiduciary duty constitutes a tort, which is subject to the four-year statute of limitations under R.C. 2305.09.” Id. at 519. “In general, a cause of action exists from the time the wrongful act was committed.” O’Stricker v. Jim Walter Corp., 4 Ohio St.3d 84, 87, 447 N.E.2d 727, 730 (1983).

However, “the application of the general rule ‘would lead to the unconscionable result that the injured party’s right to recovery can be barred by the statute of limitations before he is even aware of its existence.’” Id. (quoting Wyler v. Tripi (1971), 25 Ohio St.2d 164, 168, 267 N.E.2d 419). Therefore, “a cause of action for damages does not arise until actual injury or damage ensues.” Id.

Therefore, the statute of limitation as explained under R.C. 2305.09 is applied for the derivative action for breach of fiduciary duty. Hence, the statute of limitation for the derivative action is four years and this statute of limitation triggers with the occurrence of actual injury or damage.

  1. If the third party is continuing its conduct as a representative of a company, does this extend the statute of limitations?

A cause of action accrues and the statute of limitations “begins to run at the time the wrongful act was committed”. Doe v. Archdiocese of Cincinnati  109 Ohio St.3d 491, 495 (2006).

Moreover, “when an act carried out on the actor’s own land causes continuing damage to another’s property and the actor’s conduct or retention of control is of a continuing nature, the statute of limitations is tolled.” State ex rel. Doner v. Zody, 130 Ohio St.3d 446, 455, 2011-Ohio-6117, 958 N.E.2d 1235, 1245, ¶ 45 (2011).

Although the above-referenced case discusses real estate, it stands for the general proposition that conduct of a continuous nature that gives rise to a cause of action tolls the statute of limitations.

  1. Can a shareholder of a company who has a 50% interest bring an action against a designated trustee(s) of the company?

Generally, “[d]irectors of a corporation, as are the individual defendants herein, owe a fiduciary duty to the corporation and to the corporation’s shareholders, collectively. “ Thompson v. Cent. Ohio Cellular, Inc., 93 Ohio App.3d 530, 540, 639 N.E.2d 462, 468 (8th Dist.1994). “[A] director’s breach of a fiduciary duty is understood to harm the corporation, and as a result, any resulting damages inure to the corporation.” Heaton v. Rohl, 193 Ohio App.3d 770, 782, 2011-Ohio-2090, 954 N.E.2d 165, 175, ¶ 55 (11th Dist.). Further, “[u]nder such circumstances, a plaintiff-shareholder is generally required to bring a derivative action, i.e., a lawsuit on behalf of the corporation.” Id.

Additionally, in shareholders’ action against directors for breach of fiduciary duty, “‘the general rule . . . [is] that directors carry the burden of showing that a transaction is fair only after the plaintiff has made a prima facie case showing that the directors have acted in bad faith or without the requisite objectivity.’” Koos v. Cent. Ohio Cellular, Inc., 94 Ohio App.3d 579, 589-90, 641 N.E.2d 265, 272 (8th Dist.1994) (quoting Radol v. Thomas (C.A.6, 1985), 772 F.2d 244, 257). However, “[a] shareholder . . . may bring a direct action against a director . . . for injuries suffered by the corporation where (1) the injury arises out of a special duty . . . or (2) the shareholder suffered damages separate and distinct from that suffered by other shareholders.” Heaton, 193 Ohio App.3d at 782.

Therefore, directors of the corporation has a fiduciary duty to the corporation and its shareholders. When there is a breach of fiduciary duty, a shareholder can bring a derivative action on behalf of the corporation. Shareholders may bring a direct action against a director of the corporation if there was any special duty owed by the director to the shareholder, and the shareholder has suffered damages separate from other shareholders.

  1. Can trustees operate a company for an indefinite period of time without consent of the shareholders by a majority?

Generally, “‘directors hold over after the expiration of their original terms in the event that their successors have not been elected or have not qualified.’” Jovenall v. Zerco Systems Int’l., Inc., 2004-Ohio-3932, ¶ 14 (11th Dist. Trumbull) (quoting Schuckman v. Rubenstein (C.A.6, 1947), 164 F.2d 952, 957). Further, the court also observed that,

[u]nless the articles or the regulations provide for a different term (which may not exceed three years from the date of his election and until his successor is elected), each director shall hold office until the next annual meeting of the shareholders and until his successor is elected, or until his earlier resignation, removal from office, or death.

 

Id. (quoting R.C. 1701.57(A)).

Therefore, the tenure of directors is usually found in the articles of association or the bylaws of the corporation.If the term is not mentioned in such document, then the directors can continue in their office until the next annual meeting of the shareholders and and a successor is elected by the shareholders. However, this period shall not exceed three years per R.C. § 1701.57 which states:

(A) Unless the articles, the regulations adopted by the shareholders, or the regulations adopted by the directors pursuant to division (A)(1) of section 1701.10 of the Revised Code provide for a different term (which may not exceed three years from the date of election and until a successor is elected), each director shall hold office until the next annual meeting of the shareholders and until a successor is elected, or until the director’s earlier resignation, removal from office, or death.

 

 

  1. Can a 50% shareholder claim direct damage as the result of the damage to the company, particularly when there is wasting of monies by the third party trustees?

Generally, “‘[a] plaintiff-shareholder does not have an independent cause of action where there is no showing that he has been injured in any capacity other than in common with all other shareholders as a consequence of the wrongful actions of a third party directed towards the corporation.’” Ohio Vestibular & Balance Ctrs., Inc. v. Wheeler, 2013-Ohio-4417, 999 N.E.2d 241, 250, ¶ 17 (6th Dist.) (quoting Adair v. Wozniak, 23 Ohio St.3d 174, 178, 492 N.E.2d 426 (1986)). Further, a shareholder can bring a direct action “‘(1) where there is a special duty, such as a contractual duty, between the wrongdoer and the shareholder, and (2) where the shareholder suffered an injury separate and distinct from that suffered by other shareholders.’” Hershman’s, Inc., 89 Ohio App.3d at 77 (quoting 12(B) Fletcher, Cyclopedia of the Law of Private Corporations (1993) 484, Section 5911).

In Adair v. Wozniak, 23 Ohio St.3d 174, 492 N.E.2d 426 (1986), the shareholders brought action against bank and third-party for conspiracy to defraud corporation. Id. at 174. The court held that a plaintiff-shareholder does not have an independent cause of action against a third party for the damages incurred by the corporation. Id. at 178.

Additionally, the court reasoned that:

Where the defendant’s wrongdoing has caused direct damage to corporate worth, the cause of action accrues to the corporation, not to the shareholders, even though in an economic sense real harm may well be sustained by the shareholders as a result of reduced earnings, diminution in the value of ownership, or accumulation of personal debt and liabilities from the company’s financial decline.

 

Id.

Moreover, “the overwhelming weight of authority holds that wrongful actions by third parties impairing the capital position of the corporation give no right of action to the shareholders as individuals for damages where there is no violation of duty owed directly to the shareholders.” Id. at 177.

Therefore, shareholders cannot claim direct damages as a result of damage to the company due to the acts of third parties. Shareholders can bring an independent action against third party only if there was a specific duty owed to the shareholder and the shareholder has suffered damages separate from that of other shareholders.

CONCLUSIONS

  1. Shareholders can file derivative action on behalf of the corporation for injury suffered to the corporation as a result of acts of third party. This is possible only if the board refuses to file a suit for its injuries. The statute of limitation is four years and it accrues as a when the injury occurs.
  2. Shareholders can file derivative action against directors of corporation for the breach of fiduciary duty. However, a direct action against directors can be brought only if there was a separate duty owed to the shareholder and shareholder has suffered injuries separate from that of other shareholders.
  3. Directors of corporation hold office until their successors are elected in an annual meeting or as otherwise provided for in the articles of association or regulations. However they may not hold office for more than three years from the date of election.
  4. Shareholders cannot claim direct damages for the injuries suffered to the corporation as a result of the acts of third parties. Direct action is available only in cases of separate duty arising from a contract or damages suffered distinct from that of other shareholder.