Shareholder Lawsuit Dismissed by NC Business Court a Reminder of Corporate Liability Principles
The North Carolina Business Court has dismissed a lawsuit brought by a 50% owner of a corporation. The court’s decision reiterates key principles of corporate governance related to fiduciary duty to shareholders and shareholders’ derivative rights. The decision is relevant for all corporations, but especially to closely held corporations.
The plaintiff, a 50% shareholder in the corporation, sued the defendant, the other 50% shareholder. The plaintiff alleged that the defendant breached his fiduciary duty to the defendant.
The defendant had allegedly removed the plaintiff from the company’s website, held himself out as the only found of the company, and used corporate resources for personal purposes.
Ultimately, the court dismissed the plaintiff’s lawsuit, citing three key legal principles of North Carolina. First, rather than filing an individual lawsuit, the plaintiff probably should have filed what is called a “derivative” lawsuit under N.C.G.S. § 55-7-40.
A shareholder derivative lawsuit is a lawsuit brought by a shareholder, but on behalf of the corporation (rather than on behalf of the shareholder individually). If the lawsuit is successful, the corporation benefits from the settlement or judgment.
A shareholder derivative lawsuit is typically filed against an officer of the corporation who has committed wrongdoing, or against a third party who committed wrongdoing against the corporation but is not being pursued by the corporation. In this case, the shareholder may have fared better if he filed a shareholder derivative lawsuit against the corporation, rather than an individual lawsuit.
Second, there are two circumstances in which a shareholder is permitted to file an individual case against the corporation. This is where either (1) the corporate wrongdoer owes a special duty to the shareholder, or (2) where the shareholder has suffered damages that are unique from the damages suffered by the corporation. In this case, however, the plaintiff did not satisfy either criteria.
Third and finally, North Carolina corporate law holds that, as a general principle, a 50% shareholder is not owed a fiduciary duty. Instead, a 50% shareholder would be able to create deadlock on any issue requiring a majority shareholder vote. This is why it is usually a bad idea to have 50/50 stock ownership.
Though these principles are not new, they are important, and the case is a good reminder to North Carolina business owners.
A link to the decision is here: Copeland v. Winters, 2019
If you have questions or concerns about your business – whether about formation of a business, shareholder or management disputes, litigation, or issues related to a franchise – contact Fairview Law to see how we can help your business succeed.