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How Your Corporation Can Successfully Stop a Disgruntled Shareholder’s Direct Lawsuit in Georgia

Poole Huffman, LLC

As a businessperson, you must face many challenges. One of the challenges your corporate entity may encounter is the disgruntled shareholder. Fortunately, the law limits what disgruntled shareholders can do by prohibiting them from undertaking a direct lawsuit (limiting them only to shareholder derivative suits) in many, though not all, situations. Whether you are a shareholder of a corporation needing to defend itself against an improper direct action or are a shareholder who needs to take legal action, you are someone who should retain the services of an experienced Atlanta business attorney to help you navigate your case.

Here’s an example from right here in the Metro Atlanta area. T.C., P.S. and K.W. were the three corporate shareholders of a suburban Atlanta-based mortgage lender. Each had a 1/3 interest in the company. After several years, the business failed, and the lender ceased operations.

T.C. subsequently filed a direct lawsuit against the other two shareholders, along with a number of corporate structures that P.S. and K.W. controlled, alleging that the defendants were liable for breach of fiduciary duty, unjust enrichment and violations of Georgia’s RICO Act.

According to the defendants, a direct lawsuit was improper. The defendants argued that T.C. did not have proof of the sort of “special injury” that the law requires in order to bring a direct action. Therefore, they argued, the case should be thrown out on summary judgment.

Georgia law says that, for a shareholder to have the required special injury, the shareholder must have incurred harm “separate and distinct from that suffered by other shareholders” or else a contractual right that existed “apart from any right of the corporation.”

The two shareholders were correct that T.C.’s allegations didn’t meet these standards. T.C. accused them of misappropriating assets owned by the corporation and hiding that misconduct through the deceptive way they completed certain corporate documents. Those injuries weren’t enough, as they didn’t allege any harm that was unique to T.C. In fact, Georgia law specifically says that, in general, “allegations of misappropriation of corporate assets and breach of fiduciary duty can only be pursued in a shareholder derivative suit brought on behalf of the corporation, because the injury is to the corporation and its shareholders collectively.”

There are exceptions, but this shareholder’s case didn’t meet them

There are some exceptions to that general rule. If you can show that your direct action (1) will not lead to multiple suits by multiple shareholders, (2) will not put any corporate creditors at risk, (3) will not lead to an outcome where one or more injured shareholders won’t be properly compensated and (4) will not lead to an outcome that gives preference to some injured shareholders while prejudicing other injured shareholders, then you may be able to go ahead with your direct action.

Criterion #2 was the primary problem for T.C. in her case. An Ohio partnership had sued the corporation in Fulton County, alleging that the corporation had failed to pay the partnership a debt the corporation owed.

Allowing T.C. to proceed would potentially mean a judgment going to her instead of to the corporation, which would potentially circumvent the Ohio partnership’s ability to recover the full amount the corporation owed it. That made the partnership a “creditor in need of protection,” and it also meant that T.C.’s direct action didn’t meet the requirements necessary to go forward under Georgia law.

Whether you need to take direct or derivative action – or to defend against direct or derivative action – in a corporate dispute, you need the right legal team that knows how to get results. Count on the skilled shareholder dispute attorneys at Poole Huffman, LLC to be that sort of powerful and efficient advocate for you or your business. Contact our attorneys online or by calling 404-373-4008 to schedule your confidential consultation.

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