As an investor, you may initiate a legal action when board members appear conflicted or act in a way that might harm the company. The cost of litigation, however, may deprive a company of needed financial resources.
As noted by the American Bar Association, a shareholders’ lawsuit may not receive a voluntary dismissal, and the court must approve a settlement. Reaching a workable outcome that protects both the company and its shareholders may require extensive negotiations.
Why file a shareholders’ lawsuit if it might not result in a jury trial?
You may decide that raising awareness of problems associated with the current board of directors outweighs the litigation costs. Other investors may need to know about actions that might affect their holdings before trading or voting.
Court documents and media scrutiny may bring attention to an important mismanagement issue or a director’s breach of duty. A shareholders’ lawsuit may result in directors ceasing their harmful actions and lead to their making amends to investors.
How may a shareholders’ lawsuit settle?
Each legal action has its own particular issues and not all shareholders claim the same grievances. An established Texas ice cream maker, for example, faced an investor’s lawsuit over an outbreak of listeria that resulted in three deaths and a recall of its products.
A large shareholder filed a complaint alleging that the outbreak was due to several years of directors mismanaging the company. Reportedly, a lack of oversight resulted in the company maintaining operations in production facilities with unsanitary conditions.
As reported by the Austin American-Statesman, the lawsuit settled for $15 million in cash paid to several partnerships that had invested in the company. The settlement also included the cancellation of a loan worth approximately $45 million made from the company to one of its partners.
