A corporation is a business structure created and regulated by state laws. It is a legal entity that is considered separate from its owners, known as shareholders. Only the corporation itself can be held liable for corporate obligations, including maintaining certain business records.
There are many types of corporations. In general, corporations are classified according to specific factors, including:
- The corporation’s tax structure;
- The corporation’s purpose;
- The number of shareholders; or
- The amount of stock to be issued.
Some common forms of corporations include:
- A C corporation;
- An S corporation;
- A non-Profit corporation;
- A business corporation;
- A professional corporation;
- A foreign corporation; and
- A public or private corporation.
Generally, the term corporation refers to the two main categories of corporation according to tax laws: the C corporation and the S corporation. A C corporation is taxed separately from its owners. An S corporation is not taxed separately from its owners.
Benefits to forming a corporation include:
- The ability to survive changes in ownership, giving them the ability to exist forever;
- Being provided certain constitutional protections because they are considered people;
- Having limited liability because only the corporation itself can be held responsible for its obligations.
What are Shares and Dividends?
In a business setting, a share is the amount of ownership interest that an individual has in a company. This ownership interest is known as a stock. It may be categorized by different levels of priority for stockholders.
In a business setting, dividends are the profits distributed to each shareholder when stocks are traded. They are usually equal amongst the stockholders of the same class, such as preferred, common, etc.
Shares and dividends are important for the survival and success of a corporation. They help to generate profits and ensure the company’s name is known to the public. They can also, however, be a major source of legal disputes since there are many different parties to the stock activity of the company.
What are Corporate Fiduciary Duties?
Directors and officers of a corporation owe fiduciary duties to corporate stockholders as well as to the corporation itself. Corporate directors and officers are known as fiduciaries.
Fiduciary duties in a corporate setting provide that a director must:
- Apply their best business judgment;
- Act in good faith; and
- Promote the best interests of the corporation.
Duties will vary by jurisdiction, but there are three basic fiduciary duties. These are:
- The duty of care;
- The duty of loyalty; and
- The duty of good faith.
The duty of care requires directors and officers to use care and be diligent when making decisions on behalf of the corporation or the shareholders, who are considered the true owners of the corporation. This duty is met if the director or officer:
- Acts in good faith;
- With the care of a reasonable person in a similar position; and
- With the reasonable belief that their decision is in the best interest of the corporation.
The duty of loyalty requires the directors and officers to put the interests of the shareholders and the corporation above their own. The duty of loyalty may be violated if a director or officer:
- Gains a secret profit that belongs to the corporation;
- Competes with the corporation;
- Seizes a corporate opportunity; or
- Engages in self-dealing with the corporation.
An important component of the duty of loyalty is disclosure. It also includes appropriate approval from other disinterested directors and shareholders. A director should disclose a suspicious transaction and seek permission to conduct the transaction.
The duty of good faith requires the directors and officers to act honestly and in good faith regarding affairs of the corporation. It may also be known as the duty not to act with conscious disregard for the corporation or with intentional dereliction of duty.
What is the Business Judgment Rule?
Although directors and officers of a corporation must not violate their fiduciary duties, they are permitted to:
- Take reasonable risks;
- Direct corporate and business affairs; and
- Make innocent mistakes without judicial scrutiny or a court’s second-guessing.
This business judgment rule is a rebuttable presumption that directors and officers will make decisions on an informed basis and in good faith while honestly believing their actions are in the corporations’ and shareholders’ best interests.
Unless an opposing party successfully rebuts the business judgment rule presumption, the presumption will protect directors or officers from personal liability to the corporation or its shareholders. The business judgment presumption rule, however, may be successfully rebutted by proving at least one of the fiduciary duties was breached.
What are Some Common Sources of Share and Dividend Disputes?
Share and dividend disputes can arise from many different issues. Many corporate disputes occur because shareholders do not understand their rights. Disputes also arise when corporate directors or officers neglect their duties to the corporation.
Other examples of sources of shareholder and dividend disputes include:
- Failing to provide appropriate accounting, financial, or statutory information;
- Breaching shareholder agreements or contracts;
- Disagreements arising between shareholders;
- Violating shareholder rights;
- Breaching director or officer duties;
- Stock and dividend policies that are poorly written; or
- Lacking overall foresight for company management or planning strategies.
In many cases, disputes regarding shares and dividends can be resolved internally through the company’s human resources department. A company may be required to take actions such as reforming stock policies. The law requires a corporation to have a reporting mechanism for unfair business dealings within the corporation.
If it is not possible to resolve the dispute internally, it may be necessary to take legal action. Legal action may include filing a complaint with an outside regulatory agency such as the Securities and Exchange Commission (SEC). It may be necessary for the injured party to file a private civil lawsuit against the corporation.
What Does “Unfairly Prejudicial” Mean?
Business law prohibits conduct that is unfairly prejudicial to shareholders. This means that a shareholder has been treated unequally compared with other stockholders in the same class. This is the source of many shareholder and dividend disputes.
Examples of unfairly prejudicial conduct may include when:
- A shareholder is excluded from decision-making where there is a valid expectation of their participation;
- Business is diverted to a different company to the detriment of a shareholder;
- Dividends are awarded to shareholders unequally or in excess of standard financial expectations;
- There is an abuse of power by the board; or
- There are breaches of corporate articles.
If the court finds there has been unfair prejudice towards a shareholder or shareholders, it has discretion to apply an appropriate remedy. Generally, the court can order that the shares be purchased at fair market value, often by the corporation itself. Or, if the dispute is more serious, the court may exercise its power to initiate a wind-up or dissolution of the corporation.
Do I Need a Lawyer for Disputes Involving Shares and Dividends?
Yes, if you find yourself involved in a dispute regarding shares and dividends, it is important to have the help of an experienced corporate attorney. A lawyer can provide advice regarding your rights as a shareholder, review any relevant documentation, and assist you with filing a claim for recovering any losses you may have suffered.
Business laws differ by state and a lawyer can advise you on how the laws apply in your case. A lawyer can also represent you during any court proceedings, should a civil lawsuit be necessary.
