Shareholder’s Suits

9. Shareholder’s Suits

1. Shareholder’s Direct Suits

Shareholders’ direct suits ( shareholders’ individual suits) involve contractual or statutory rights of the shareholders,the shares themselves,or rights relating to the ownership of shares. Shareholder has the right to sue in his own name to prevent or redress a breach of the shareholder’s contract. Such direct suits include actions to recover dividends and to examine corporate books and records,voting rights,and to enforce preemptive rights,etc.

2. Class Action Shareholder Direct Suit

When some people have been injured similarly by the same persons in similar situations, one of the injured people may sue for the benefit of all people injured. Likewise, if several shareholders have been similarly affected by a wrongful act of another, one of these shareholders may bring a class action on behalf of all the affected shareholders.

3. Stockholders’ Derivative Actions

A derivative suit is different from a direct suit brought by a shareholder to enforce a claim based on the shareholder’s ownership of shares. It is a legal action in which a shareholder of a corporation sues in the name of the corporation to enforce or defend a legal right because the corporation itself refuses to sue.

When a corporation has been harmed by the actions of another person, the right to sue be­longs to the corporation and any damages awarded by a court belong to the corporation, hence, in this case,as a general rule,a shareholder has no right to sue for the corporation in his own name, and he may not recover for himself damages from that person. This is the rule even when the value of the shareholder’s investment in the corporation has been impaired.

Nonetheless,one or more shareholders are permitted under certain circumstances to bring an action for the benefit of the corporation when the directors have failed to pursue a corporate cause of action,e. g. ,the corporation is unlikely to sue the CEO’s wrongfully diverting corporate assets to his personal use because he controls the board of directors. Consequently, corporation law au­thorizes a shareholder to bring a derivative action against the CEO on behalf of the corporation and for its benefit. Such a suit may also be used to bring a corporate claim against an outsider.

A stockholder’s derivative suit is a type of litigation brought by one or more shareholders to remedy or prevent a wrong to the corporation. In a derivative suit,the plaintiff shareholders do not sue on a cause of action belonging to themselves as individuals. Instead,they sue in a repre­sentative capacity on a cause of action that belongs to the corporation but that for some reason the corporation is unwilling to pursue. The real party in interest is the corporation, and the shareholders are suing on its behalf. Most often, the actions of the corporation’s executives are at issue. For example,a shareholder could bring a derivative suit against an executive who alleged­ly used the corporation’s assets for personal gain.

M. Fundamental Corporate Changes

The relationship between shareholders, corporation and the state issuing the Corporate Li­cense is a kind of agreement or contract which creates the basic frame of organization and the operational construction. Shareholders have the right to change the nature of the corporation so as to fundamentally alter the existed corporation. Fundamental corporate change means that the permanent and material alteration of the corporate construction, including the amendment of the Articles of the corporation, certain types of merge, almost entire corporate assets selling, recon­structing and corporate dissolution.

Statutes of the most states in the U. S. require that the proposal of the fundamental corpo­rate changes must be reviewed by the board of directors before the resolution being made, and then must be proved by the majority of the shareholders.

1. Amendment of Corporate Articles
2. Corporate Consolidation

Consolidate is a general term used to refer to the consolidation of corporation, that is to combine the assets,liabilities and other financial items of two or more entities into one. A con­solidation is that,two corporations lose their separate identities and unite to form a completely new corporation.

3. Mergers and Acquisitions(M&A)

1. Merger

A merger is the union of one or more constituent business entities into one of these constit­uents (the survivor). The merger is accomplished by the managing body(e. g. ,board,general partner,manager) of each constituent adopting a plan of merger and through owner approval of the plan.

Although the owners(e. g. shareholders,partners,members)of the constituent business en­tity which disappears in the merger typically receive ownership interests in the disappearing business entity,the plan of merger may provide for other consideration,such as cash,in which case they may not become owners of the survivor. A variation is the triangular merger, where business entity" A" creates subsidiary" S," contributing" A" ownership interests to" S" in return for all ownership interests of” S. " Business entity" B" then merger with" S," and" B" owners re­ceive the" A" ownership interests held by" S" in return for their" B" ownership interest. The re­sult is that"S"survives,operatings the former assets of"B,"and the owners of"B"become the owners of" A. "

( 2) Acquisition

Acquisition is the purchase of one corporation by another with no new corporation being formed.

Regulation is based on the concern that mergers inevitably eliminate competition between the merging firms. However, since the 1980s the federal government has become less aggressive in seeking the prevention of mergers.

Antitrust merger law seeks to prohibit transactions whose probable anticompetitive conse­quences outweigh their likely benefits. The critical time for review usually is when the merger is first proposed. This requires enforcement agencies and courts to forecast market trends and fu­ture effects. Merger cases examine past events or periods to understand each merging party’s po­sition in its market and to predict the merger’s competitive impact.

1. Types of Mergers

There are some types of mergers,based on the competitive relationships between the mer­ging parties.

In a horizontal merger, one firm acquires another firm that produces and sells an identical or similar product in the same geographic area and thereby eliminates competition between the two firms.

A vertical merger takes two basic forms: forward integration, by which a firm buys a cus­tomer, and backward integration, by which a firm acquires a supplier.

Vertical integration by merger does not reduce the total number of economic entities oper­ating at one level of the market, but it may change patterns of industry behavior. Whether a for­ward or backward integration, the newly acquired firm may decide to deal only with the acqui­ring firm, thereby altering competition among the acquiring firm’s suppliers, customers, or com­petitors. /

1. Conglomerate Mergers

Conglomerate Mergers take many forms, ranging from short - term joint ventures to com­plete mergers. Whether a conglomerate merger is pure, geographical, or a product line exten­sion, it involves firms that operate in separate markets. Therefore,a conglomerate transaction or­dinarily has no direct effect on competition. There is no reduction or other change in the number of firms in either the acquiring or acquired firm’s market;

2. Triangular Merger                                 ............................. . . .                                         

Triangular Merger involves two types;in a forward triangular merger,the subsidiary’s equi­ty merges with the target firm’s stock. As a result of the merger,the target becomes a part of the original subsidiary of the acquirer. This form of acquisition is often used for regulatory reasons; while in a reverse triangular merger, when the subsidiary of the acquiring corporation merges with the target firm. In this case, the subsidiary’s equity merges with the target firm’s stock. As a result of the merger, the target would become a wholly - owned subsidiary of the acquirer and shareholders of the target would get shares of the acquirer;

3. De facto Merger Doctrine

Some courts have held that the substance of a combination attempt determines whether statutory protections should be made available to shareholders. Thus,where an asset acquisition