Shareholder Rights and Derivative Actions

Shareholder Rights and Derivative Actions

Sometimes a CEO or other corporate insider puts the value of a company at risk by committing crimes such as wire fraud or embezzlement. When a shareholder believes that a director or officer has harmed the corporation by breaching a contract or breaching their duties, the shareholder can assert their rights and seek relief. One option is to file a derivative lawsuit. This article discusses shareholders rights and derivative actions, including information on the following:

  • The shareholder’s role in the corporation
  • The requirements for filing a derivative action
  • Shareholder activism

Corporate Roles

The shareholders (also called stockholders) are investors who own shares in the corporation. The directors have obligations and duties to both the shareholders and the corporation itself. This role differs from that of the officers and executives who handle corporate governance by running the operations of the corporation, although the roles can overlap.

Derivative Actions and Shareholder Rights

Being a shareholder comes with certain duties, responsibilities, and rights. Shareholders have a general range of rights concerning the corporation, which include:

  • ownership in a portion of the company;
  • ownership transfer rights;
  • voting rights; and
  • an entitlement to dividends.

One of the most significant shareholder rights is the right to sue an officer or a director who has harmed the corporation. This type of litigation is referred to as a shareholder derivative action or lawsuit. Unlike a securities class action suit, where individual investors and shareholders are seeking relief, the derivative action includes the interests of all shareholders and permits them to file on behalf of the corporation.

Shareholders often bring derivative suits against their corporation to try to resolve conflicts between the shareholders and the officers, directors, or board members who have harmed the corporation through mismanagement or other wrongdoing. For instance, a shareholder of the fast food corporation Wendy’s filed a derivative action against its directors and officers for its security practices that ultimately led to a massive data breach.

Requirements for Shareholder Derivative Lawsuits

Many states require that a plaintiff must be a stockholder at the time of the alleged improper conduct in order to file a derivative action. Others require that the shareholder own stock at the time of the improper conduct and continuously throughout the resolution of the lawsuit; this is referred to as the “continuous ownership requirement.”

Notice Requirements

Prior to filing the suit, the affected shareholders must demonstrate that they informed the company’s management of the problems in writing and that the directors decided against pursuing any action. If management fails to comply, the shareholders must show that the management’s conduct adequately harmed their position and that they refused to resolve the issues.

The shareholder must give notice (on their own or at the expense of the corporation if ordered by the court) to the other shareholders that the action has been initiated, providing them the opportunity to join the lawsuit.

Damages for the Corporation

If a shareholder prevails, they won’t recover individually; any recovery obtained from a derivative action is for the corporation only. However, a shareholder will generally receive legal expenses from the corporation.

Shareholder Activism

While a derivative suit is a very specific way to affect corporate governance, shareholder (or stockholder) activism is another more broader means to promote interests through shareholder rights, especially voting rights. Shareholder activism occurs when shareholders attempt to use their power to pressure management and affect a corporation’s behavior resulting in favorable results for the shareholder or to promote broader political or social causes, As an example, some Apple investors have sought to pressure the company to address smartphone addiction, especially among children. This can be achieved through various actions including litigation, proxy contests, publicity campaigns, and more.

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It’s not a matter of if, it’s a matter of when. Legal problems come to everyone. Whether it’s your son who gets in a car wreck, your uncle who loses his job and needs to file for bankruptcy, your sister’s brother who’s getting divorced, or a grandparent that passes away without a will -all of us have legal issues and questions that arise. So when you have a law question, call Ascent Law for your free consultation (801) 676-5506. We want to help you!

Michael R. Anderson, JD

Ascent Law LLC
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States

Telephone: (801) 676-5506

Ascent Law LLC

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Contested Guardianship Cases in Utah

Contested Guardianship Cases in Utah

Guardianship proceedings are commenced by the filing of a petition with the Court.  The contents of the petition is set forth in Utah Mental Hygiene Law (MHL) Section 81.08.  Among other items, the petition must include information regarding an alleged incapacitated person’s (AIP) functional level and his ability to take care of his activities of daily living.  As a Utah contested guardianship lawyer can explain, guardianship petitions need to provide the Court with the basics of the AIP’s circumstances and the prima facie case for the appointment of a Guardian for personal needs and property management.  MHL Section 81.02(b) provides that a Court needs to have clear and convincing evidence to determine that a person is incapacitated.

In many cases the need for the appointment of a Guardian is clear and without dispute.  For example, a person may suffer from dementia or a serious illness or accident and be totally dependent upon his family or friends for all daily activities such as feeding and personal hygiene.  In these cases there may also be no dispute as to whom should be appointed as Guardian such as an AIP’s spouse or other close family member or friend.

However, as a contested guardianship lawyer in Utah, I have represented clients where there are major disputes in the Guardianship case.  These controversies have many different aspects.  The following is a list of some of the most commonly contested Guardianship areas that I have encountered:

(a)   Disputes Regarding Incapacity – sometimes the AIP opposes the

Petition and sets forth a position that he does not need a Guardian.  The Court then would need to determine whether the person meets the statutory criteria of being incapacitated.

When a petition is filed with the Court, the Court then signs and issues an Order to Show Cause. This Order is served on various parties including the AIP. MHL 81.07 states that the AIP is entitled to be present at the hearing and to advise the Court if he does not want a Guardian appointed. The Order also must state that the AIP has the right to be represented by a Utah contested guardianship attorney. Typically, when an AIP is opposing the Guardianship appointment, the Court will appoint an attorney to represent the AIP.

(b)   Available Alternatives to Guardianship: there are instances where

The AIP is clearly incapacitated and cannot handle his activities of daily living.  However, before becoming incapacitated, the AIP may have signed and put into effect a Durable Power of Attorney, a Health Care Proxy or a Living Trust.  When there exists alternate and advance directives so that the AIP has already established a means by which his needs can be taken care of, the Court will not appoint a Guardian.  Many Guardianship contests involve the validity of these advance directives.  If the AIP signed a Power of Attorney or Health Care Proxy at a time when he was already incapacitated, the Guardianship court has the power to revoke or void such papers.  These Judicial powers are set forth in MHL Section 81.29.

(c)    Disputes Regarding the Person to Be Appointed as Guardian:

Another area of controversy concerns disputes as to the proper person to be appointed as Guardian.  In these cases there may be little question regarding the need for the Guardian.  However, different family members may be competing for appointment so that they can control the personal needs and property management of the AIP.

It is not unusual for one family member to claim that a competing family member either did not adequately care for the AIP’s health and personal needs or that there was improper involvement with the AIP’s assets.  In view of the myriad of complaints that one person may have against the other, the Court may be faced with very bitter tension between the competing potential family members.  One standard manner by which Guardianship Courts resolve these arguments is to appoint an independent third party as the Guardian.


In Utah, “distributees” are persons who are designated by law as having the primary right to receive a decedent’s estate in the case of intestacy – i.e. where a person dies without a Will.  Utah Estates, Powers and Trusts Law (“EPTL”) Section 1-2.5 defines a distributee as “a person entitled to take or share in the property of a decedent under the statutes governing descent and distribution”. A Utah distributee lawyer can advise you on your rights and assert them for you.

When a person dies without a Will, his or her distributees (next of kin) inherit as the statutes provide.  Generally, the order of priority is the spouse and children, parents and brothers and sisters.  EPTL Section 4-1.1 sets forth the order of priority for persons to receive their distributive share.

The identity of distributees is also important in other types of proceedings such as probate.  Utah laws and procedures require that a decedent’s distributees be provided with notice of a probate proceeding and given the opportunity to contest the decedent’s Will.  In the probate proceeding, the probate petition must contain the names and address of all of the decedent’s distributees.  The petition also contains an estimate of the value of the decedent’s personal property and real property interests.   At the outset of the probate case, the distributees may be given the opportunity to sign a paper by which they consent to the probate of the purported Last Will.  If a distributee does not consent, he will be served with a Citation which is issued by the Surrogate’s Court and is like a Summons.  The Citation contains a Court date on which the served party must appear in Court and let the Court know if they want to move forward towards objecting to the Will.  Objections to a Will need to prepared and filed according to various rules and procedures.    For example, a distributee lawyer in Utah can help an objectant prepare and file estate litigation papers in the Queens Surrogate’s Court.  The testimony of the attesting witnesses and the person who drafted the Will can be obtained even before filing Objections pursuant to Surrogate’s Court Procedure Act Section 1404.

The rules of kinship and the determination of distributees, along with the protection of distributees’ interests, can be complex.  When a person fails to prepare a Will, the laws of intestacy control estate distribution.  It may be necessary for family members to present evidence at a hearing on kinship to prove their right of inheritance.

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If you are here, you probably have an estate issue you need help with, call Ascent Law for your free estate law consultation (801) 676-5506. We want to help you.

Michael R. Anderson, JD

Ascent Law LLC
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States

Telephone: (801) 676-5506

Ascent Law LLC

4.9 stars – based on 67 reviews

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Lawyer for Excessive Use of Margin

Purchasing securities “on margin” equates to investing with borrowed funds. The risks of trading on margin are unsuitable for many investors. If a financial adviser encourages margin trading without regard for a client’s investment profile, or without a client’s full understanding of the risks involved, the client can potentially seek to recover any money lost as a result of the margin transaction.

Lawyer for Excessive Use of Margin


An investor can buy securities using money borrowed from a brokerage firm (rather than paying for the securities in full). This is known as “buying on margin.”

Buying on margin requires opening a margin account and depositing an initial amount of purchased securities. The initial account equity (margin) is used as collateral to borrow money and purchase additional securities. Like other types of loans, interest is charged on the amount borrowed until it is repaid.


The risks involved with trading on margin include:

  • Securities purchased on margin do not break even, or earn at least the amount of interest charged on the loan, resulting in the loss of funds.
  • Securities used as collateral drop in price and the firm issues a “margin call,” which requires the customer to repay all or part of the loan. The customer is not entitled to a time extension on a margin call.
  • The client has limited control over their margin account. For example, the firm can force the sales of margin account securities without notice, sell securities without contacting the client, and increase margin requirements at any time.


Margin investing isn’t an appropriate strategy for most investors. Margin loans, however, can be highly profitable for brokerage firms (because of the interest paid on borrowed money) and for brokers, who might be paid a fee based on the size of the client’s loan.

Investment professionals must understand a client’s investment profile, including their willingness and ability to incur risk. Before a client opens a margin account, they should fully understand how margin transactions could affect their portfolio.

If your broker misrepresented the risks of a margin account, opened an unauthorized account in your name, or made excessive trades in your account, any lost money may be recoverable through a legal claim.


Once reserved strictly for wealthy, financially sophisticated investors, hedge funds have become increasingly popular investment vehicles for traditional investors. Often, this is achieved through investment in “funds of hedge funds.” Because I’m a securities lawyer, I’ve seen both good and bad from this.

Both hedge funds and funds of hedge funds have risks that are inappropriate for most investors. Financial advisers may make exaggerated and misleading claims about these funds in order to lure potential investors. Hedge fund managers have also been known to defraud investors.


Hedge funds are a type of investment fund. Like mutual funds, hedge funds pool the money of many investors and follow a specific investment strategy. But that is about as far as the similarities go.

Unlike mutual funds, hedge funds are not regulated by the Securities and Exchange Commission (SEC), and therefore do not offer many of the investor protections that mutual funds and other registered investment products do.


Hedge fund investment is usually limited to wealthy individuals and institutional investors. But funds of hedge funds—an indirect way of investing in hedge funds—typically require lower minimum investments that make them accessible to a broader investor class.

While funds of hedge funds may be registered SEC products, the underlying hedge funds are not. Funds of hedge funds thus carry the same investment risks that hedge funds do.


The risks of investing in hedge funds and funds of hedge funds include:

  • Not SEC Registered: Because hedge funds are not required to be SEC registered, they are not subject to mandatory reporting rules. As a result, it can be very difficult for investors to gauge a hedge fund’s performance. This can make it easier for a hedge fund manager to commit fraud.
  • Speculative Investing: Hedge fund managers are paid based on the fund’s performance, which gives them an incentive to maximize positive performance. This can lead to sophisticated (read: risky) investment strategies such as short selling, derivatives investment, leveraging, and hedging.
  • Illiquidity: Hedge fund investors may be unable to recoup their investment money if they want to opt out of the fund.
  • Expensive: Hedge funds usually have numerous fee layers and impose higher investor costs than mutual funds.
  • Tax Complexity: Hedge funds’ complex tax structure can present delays and difficulties during tax season.


Hedge fund misconduct commonly occurs in the context of how the fund was sold.

Unless you are a wealthy, financially sophisticated investor, a hedge fund is mostly likely an unsuitable investment. And even if you are an accredited investor, an adviser must accurately present important information about the hedge fund. Any misrepresentations or omissions of material facts could constitute misconduct.

For non-accredited investors, funds of hedge funds may be suitable investments—however, their growth forecasts, risks, and drawbacks must be accurately presented.

Absent any misconduct in the sales stage, hedge fund managers and operators can commit investment fraud. Examples of fraudulent hedge fund conduct include providing phony account statements, not disclosing conflicts of interest, misappropriating investor funds, and operating Ponzi schemes.

Free Consultation with a Utah Securities Attorney

When you need legal help about business or securities issues, call Ascent Law and get your free consultation (801) 676-5506. We want to help you.

Michael R. Anderson, JD

Ascent Law LLC
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States

Telephone: (801) 676-5506

Ascent Law LLC

4.9 stars – based on 67 reviews

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