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When a Georgia Shareholder Can Receive Reimbursement for Defending Against a Breach of Fiduciary Duty Claim

Poole Huffman, LLC

When you form a business venture with another person, you doubtlessly hold out high hopes that the collaboration will be fruitful and rewarding for all. Unfortunately, that does not always happen. In real life, sometimes relationships sour and disputes arise. When they do, it is important to make sure that you have an experienced Georgia business lawyer on your side to protect your commercial interests and rights.

One example of a business entity whose shareholders ended up in litigation was a pair of North Georgia dermatologic surgeons who formed a practice together. At some point after problems erupted, one doctor (the president) threw the other (the vice president) out of the practice. This meant removing him not only as a employee but as an officer and director of the practice as well. Both doctors were equal shareholders in the practice. The expelled doctor took two steps:  he formed his own practice, and he sued for being thrown out of the original practice.

The expelled doctor won his lawsuit, and the court ordered him reinstated as an employee, as well as the vice-president, secretary, and treasurer of the practice. That case went to the Georgia Court of Appeals, and the appellate court upheld the lower court’s decision because it decided that the action was improper. (One doctor threw out the other when only the practice’s board of directors could properly take such an action.)

In the course of this ongoing dispute, the expelled doctor also faced a claim that he breached his fiduciary duty to the practice as an officer and a director of it. The doctor defended that claim and won that case entirely.

After winning, the doctor took an additional step:  he sought compensation from the practice for the money he spent defending, and winning, the breach of fiduciary duty lawsuit. The doctor argued that Georgia law, specifically O.C.G.A. Section 14-2-852, allows for mandatory compensation “of reasonable expenses incurred by a director in connection with a lawsuit in which the director was successful and was a party because he or she was a director of a corporation.”

The lawsuit against the doctor alleged that he breached his fiduciary duty to the practice and that he breached his duties as a shareholder, officer, director, and partner of the practice.

The trial court concluded that he was entitled to the compensation he sought, and the court of appeals upheld that ruling. The law does not require that a lawsuit include you as a party because you were a director of a corporation and only because you were a director of the corporation. Even if the lawsuit accused you of violating your duties in other capacities (like shareholder or officer), the fact that the lawsuit names you based upon your status as a director is enough to trigger this compensation rule in Section 14-2-852.

The skilled Atlanta business litigation attorneys at Poole Huffman, LLC have been working for many years to help their clients as they work to take the necessary steps to protect themselves and their business interests through litigation and other legal means. Contact our attorneys online or by calling 404-373-4008 to schedule your confidential consultation.

More blog posts:

Contractor’s Liens – Part II, Atlanta Business Litigation Attorneys Blog, Jan. 22, 2014

Contractor’s Liens – Part I, Atlanta Business Litigation Attorneys Blog, Oct. 19, 2013

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