Impact of Shareholder and Director Litigation on the Company

Shareholders, particularly those holding majority interests, have fiduciary responsibilities to the company as well as to minority shareholders. Additionally, these shareholders are often directors, officers, and employees of the company. Each of these roles comes with its own set of responsibilities, and potential litigation. Officers and directors, in particular, have fiduciary duties of loyalty and care and an obligation to maximize the wealth of their shareholders. A primary defense to allegations that these duties have been breached is the business judgment rule. Generally, this rule protects against hindsight evaluations when good faith decisions lead to bad outcomes.

Minority shareholder oppression claims are a substantial avenue of litigation, mergers and acquisitions in particular now that the economy has improved. Non-competition agreements also may be an issue. They are generally enforceable where they are reasonable in duration and geographic area and protect legitimate business interests. One of the most effective mechanisms for protecting the company is a clear understanding of shareholder agreements and other organizational documents. Most state statutes allow such documents to contain provisions for management of the business and conduct of its affairs, while limiting or regulating powers of directors or shareholders.

Overall, a significant preventative measure against litigation and the impact of unnecessary costs is understanding rights and duties of shareholders, directors and officers. Even more important is ensuring that those involved examine their own activities so that they are behaving ethically.