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Two reasons corporation shareholders sue

Shareholders, it’s often said, are ultimately the owners of a corporation, so it might seem odd that they’d ever file a lawsuit against that corporation or their fellow shareholders.

Still, such legal disputes between shareholders are surprisingly common. Lawsuits involving corporate finances are notoriously complex, but here are two simplified examples to help illustrate why such lawsuits happen.

Deceit or false projections

In 2013, billionaire David Murdock took over Dole Foods, which had been a public company. He “took it private” by offering the board of directors $1.6 billion to let him buy up the company stock then owned by the public. It apparently seemed like a fair price at the time, and the board accepted his offer.

But it turned out that Murdock and the company’s general counsel had, allegedly, hidden positive information about the company’s future, allowing Murdock to low-ball the price he’d paid for the company stock.

The former stockholders sued and won. The judge found that the failure to disclose positive information about Dole’s potential for future earnings was a way to unfairly keep the price down, and to keep Murdock’s profits up. He was guilty, the court found, of a “breach of loyalty.”

Poor governance

Early this year, shareholders filed a lawsuit against Google’s parent company, Alphabet, alleging that the company had paid huge exit packages to executives who were leaving the company due to allegations of sexual misconduct.

Instead of firing the executives for their wrongdoing and reforming the corporate culture, the companies exercised its contractual right to force the executives into secret deal-making (that is, arbitration) and leave quietly with a large payout, according to the suit.

Once this strategy was revealed, 20,000 Google employees staged a walkout late last year. For shareholders’ part, the company’s motto of “Don’t be evil” had long been a selling point for Google stock. Compromising the company’s ethical reputation therefore degraded the value of company stock.

The lawsuit alleges that top executives mismanaged the company and file the suit for what essentially amounts to business malpractice on the part of corporate governance.

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