Can Shareholders Be Sued for a Company’s Lawsuit?
Often, corporate governance and the legal responsibilities of shareholders are misunderstood. This article delves into the intricacies of when and under what circumstances shareholders can be held personally liable for a company’s legal actions.
The Corporate Entity Theory
According to the law, a company exists independently from its founders or owners. This principle is known as corporate entity theory, which means a company can be sued independently of its owners or investors. Suing a company does not necessarily mean that its shareholders or investors are being sued too. However, there are exceptions if the shareholders or investors are found to be actively involved in illegal activities.
Personal Involvement in Illegal Activities
Shareholders are not automatically liable for a company’s lawsuit. They can only be sued if they have also committed some illegalities according to the law. If an investor is involved in the business’s day-to-day operations and engages in illegal activities either directly or using the company’s name, they can be sued in a court of law.
Piercing the Corporate Veil
The corporate veil is a legal doctrine that protects shareholders from personal liability for the company’s actions. However, “piercing the corporate veil” is an exception that allows shareholders to be held personally liable under certain circumstances. The conditions for piercing the corporate veil include the lack of sufficient resources or insurance and defective formation or management of the entity.
Conditions for Piercing the Corporate Veil
Lack of resources and insurance: Companies that lack the financial resources or insurance to pay claims may have their corporate veil pierced. Defective formation and management: Companies formed and managed in an improper manner may be disregarded for legal purposes, leading to shareholder liability. Intermingling of personal and company assets: If personal assets and company assets become indistinguishable, the corporate veil is considered non-existent, and any judgement can target personal assets.Role of Shareholders in Business Operations
Shareholders who are actively involved in business operations may find it easier to include them in a lawsuit. These shareholders are seen as having more direct control and therefore more personal responsibility. On the other hand, shareholders who have no personal involvement in the business operations are generally protected from personal liability.
Protection of Public Company Shareholders
Shareholders in public companies have a unique layer of protection due to limited liability. Once shares are bought, the liability is limited to the extent of the investment. This protection is a cornerstone of investing in publicly traded companies and is often detailed in corporate governance documents.
Conclusion
Understanding the relationship between a company, its investors, and the potential for personal liability is crucial for both corporate and personal legal security. Investors should remain aware of the legal protections and limitations that exist under corporate law, particularly regarding the principle of corporate entity theory and the exceptions that allow for shareholder liability.
For those interested in further understanding the complexities of corporate law and shareholder liability, consulting with a legal expert is highly recommended.