When Can a Delaware Stockholder Sue the Board of Directors?

As an investor in a Delaware corporation, you expect the board of directors to protect your financial interests and make sound business decisions. However, boards often violate their duties through gross negligence or outright fraud. When this happens, Delaware stockholders have the right to sue.

However, before you sue, you need to understand exactly when and how you can go to court. Delaware has some of the most detailed business laws in the nation, if not the entire world. That is why concerned stockholders should consult Shlansky Law Group and our highly experienced Delaware corporate litigation team to help protect your rights.

What Are Common Reasons a Stockholder Sues the Board?

The primary reason stockholders sue the board is when the directors engage in conduct that either ruins the company’s financial value or violates ownership rights. When evaluating whether to sue, you should first look for specific signs of corporate misconduct. Common examples of corporate misconduct that give rise to Delaware stockholder litigation include:

• A director approved a financial transaction that personally benefited them, without disclosing the conflict of interest
• The board failed to properly oversee business operations, which led to significant fines and public scrutiny that tanked the company’s valuation
• Directors refused a highly lucrative buyout offer because they did not want to lose prestigious board positions and their personal standing in the business community
• Board members engaged in insider trading using confidential information

How Does the Business Judgment Rule Protect Directors?

Directors generally cannot be sued for merely making a bad decision or taking a business risk that didn’t work out as intended; this is known as the business judgment rule. This rule prevents courts from substituting their own judgment for the board’s, so long as the decision is made in good faith with due care.

Ultimately, the rule requires stockholders to prove misconduct or a violation of fiduciary duties, such as an undisclosed conflict of interest or gross negligence by the directors. For example, if a director approved a merger that exclusively benefited his or her personal side business at the expense of the stockholders, the business judgment rule will not protect him or her from personal liability. Overcoming the business judgment rule is the primary challenge in any stockholder lawsuit.

Where Are Delaware Corporate Lawsuits Filed?

The vast majority of lawsuits involving Delaware corporations and director liability will be filed with the Delaware Court of Chancery. The Court is highly specialized and focuses almost exclusively on business and corporate disputes. Delaware’s system is different from the vast majority of states, where courts often have general jurisdiction, and judges can hear cases on a wide variety of subjects at any given time.

Furthermore, the Court of Chancery does not use juries to decide cases. Instead, the chancellors (the judges of the Chancery Court) hear the evidence and make the important decisions themselves. Usually, their decisions are issued in highly detailed written opinions that the business law community pays close attention to.

Because Delaware is the oldest state in the country and so many major corporations (both domestic and international) are legally formed there, the Court of Chancery has developed a massive body of legal decisions that can help most disputes reach a relatively quick and informed resolution.

Because Delaware has such a highly detailed and specific court system for business disputes, consulting with a highly experienced Delaware corporate litigation attorney is the best way to build a successful case.

Frequently Asked Questions (FAQs) about Delaware Shareholder Litigation

Do I need to own a certain amount of stock to file a lawsuit?

No. Delaware law generally does not require you to hold a specific minimum percentage of stock or monetary value to file a direct or derivative claim, provided you owned the stock at the time the wrongdoing occurred and you continue to hold it continuously throughout the entire litigation process.

Can a former stockholder sue the board of directors?

Typically, a stockholder loses their legal standing to pursue a derivative lawsuit if they lose their shares in a subsequent merger or acquisition. However, narrow legal exceptions apply if the merger was specifically designed and executed to fraudulently eliminate standing to sue.

Can a board of directors dismiss a derivative lawsuit?

In some cases, yes. A board can form a special litigation committee composed entirely of independent and unconflicted directors to evaluate the pending lawsuit. If the committee conducts a thorough investigation and determines that pursuing the case is not in the company’s best interests, it can formally ask the court to dismiss the stockholder case.

Stockholders Trust Shlansky Law Group for Corporate Litigation

Shlansky Law Group provides aggressive representation for individual stockholders facing corporate misconduct and severe breaches of fiduciary duty. Our attorneys have decades of experience with Delaware law and can thoroughly investigate your claims and hold corporate directors accountable for their wrongful actions.

Taking on a powerful board of directors requires relentless advocacy and a deep understanding of complex corporate litigation. SLG’s legal team focuses heavily on protecting the individual investor from corporate overreach and greed. We understand the specific hurdles you face when bringing a claim in the Delaware Court of Chancery. We will thoroughly analyze the corporate transactions in question, identify hidden financial conflicts of interest, and fight aggressively to protect your financial stake and your absolute rights as a stockholder. If a corporate director has violated his or her duties to you, you certainly do not have to accept the financial damage without a fight.

Contact Shlansky Law Group today at 347.378.6990 to discuss your specific situation and learn exactly how we can help you pursue justice.