If you experience a financial loss because of a company’s breach of duty to its shareholders, you may file a legal action. Whether you own shares in a private or publicly traded enterprise, the outcome may result in a company changing its directors, management or policies.
Shareholders may benefit from a lawsuit when a company takes responsibility for its executives’ damaging conduct. By facing a judge, a company’s board of directors may listen to its investors’ concerns and agree to modify their practices.
When may a company’s actions harm shareholders?
Management may harm its shareholders by providing false or misleading statements such as through a press release or quarterly financial report. Misleading data may cause a stock’s price to trade higher or lower than it would have traded if investors had accurate information. Your financial losses may require you to file a legal action for relief and to repair the cause of detrimental trades.
As noted by MarketWatch, three different shareholders filed a lawsuit against a popular internet company alleging that its executives falsely reported its users’ metrics. While the plaintiffs did not receive a financial reward, the action satisfied aggrieved shareholders by forcing the company to improve its internal controls and disclosure requirements. Management also agreed to increase its oversight by adding an independent director to its board.
How may an investor’s legal action contribute to transparency?
Trade prices paid or received at the time a company published false information may not reflect a truthful status of a company’s progress. Deceitfulness or inaccuracy may lead to lower stock gains and higher losses for you and other shareholders.
A legal action may not only hold a company’s executives and directors liable, it may also bring attention to their misconduct. If the SEC reviews a shareholder’s complaint, it may file a separate civil action or recommend criminal charges.