Oftentimes, mergers and acquisitions will trigger shareholder lawsuits.

Shareholders have rights and are owed fiduciary duties by corporate officers and directors. When corporate officers and directors act contrary to their duties, shareholders are entitled to question the behavior and take legal action.

Shareholder Rights

State and federal laws provide numerous protections for investors. As a shareholder, you are guaranteed certain rights regarding your investments. Shareholders are entitled to:

• The right to vote on certain business decisions, including electing directors and changes to company ownership
• The right to view certain financial documents and records, such as the minutes of board meetings
• The right to receive dividends that the company pays
• The right to own a portion of company assets
• The right to transfer ownership of stock
• The right to sue for acts of wrongdoing

Fiduciary Duties

Corporate fiduciaries are required to act ethically on behalf of the company and its shareholders. This responsibility is known as “fiduciary duties” and if breached can open the door to a shareholder litigation. These duties include:

• Duty of care (assurance that a financial decision proceeds only after a reasonably diligent assessment of all key information)
• Duty of loyalty (conflict-avoidance; a director/officer’s actions must be made with utmost regard for shareholders’ well-being and not based upon personal entitlements or profit)
• Duty of good faith measured by adherence to legal requirements
• Duty of disclosure (shareholders must be kept duly informed of facts/data relevant to a director’s decision)
• Duty of confidentiality (no corporate information divulged for personal benefit)

Why Legal Action?

Mergers and acquisitions can trigger shareholder lawsuits because they affect shareholder rights, ownership, and the value of their investment. Any change in company ownership requires due diligence and scrutiny by board members. However, board members are not always transparent and do not always act in the best interest of shareholders.    

Because shareholders have the right to vote on certain ownership changes in the company, they can utilize their rights to view certain financial documents and records and to sue for acts of wrongdoing to challenge questionable mergers and acquisitions in light of possible breaches of fiduciary duties. Some instances in which shareholders may sue include:

• Breach of the duty of care: When company officers or directors fail to act in the best interests of the shareholders by selling the company at a low price, choosing a specific bidder in lieu of maximizing shareholder value, or negotiating deal terms for their own benefit.
• Breach of the duty of disclosure: When proxy statements and related merger filings fail to disclose material information, such as missing financial projections or conflicts of interest, that prevent shareholders from making informed decisions about the deal. 
• Breach of the duty of good faith: When the sales process was unfair, such as giving preference to certain bidders, failing to seek competing bids, or using deal protections that discourage additional offers.
• Breach of the duty of loyalty: When conflicts cloud the deal and allow insiders to obtain personal gains not aligned with minority shareholders.

What is gained through legal action?

By taking legal action against the officers and directors, shareholders can obtain various types of recovery:

• Additional disclosures to cure defects in proxy statements (such as missing financial information) that provide information to help shareholders in deciding whether to vote for or against the merger or acquisition.
• Improved deal terms, such as more money per share or the removal of deal protections that discourage competing bids.
• Monetary damages when shareholders can prove clear self-dealing, conflicts of interest, or fraud.
• Appraisal rights, which allow shareholders to seek a judicial determination of the "fair value" of their shares instead of taking the merger price.
• Deterrence and governance changes that can inform future transactions and send the message that fairness, independence, and disclosures are expected. 

If you own stock in a company that is involved in a merger, acquisition, or take private deal, contact us for a free evaluation of your legal options.

The information provided here is for general purposes and should not be considered as legal, financial, or investment advice.