When Subsidiaries Run Wild: A Guide for Corporate Shareholders
Corporations, which are legal entities that exist as separate entities to their owners and were created by state law for the purpose of conducting business, are powerful legal entities. For shareholders, the benefits can be substantial–profits, dividends, and a voice in corporate governance. What happens, however, when the corporation’s leaders act in ways that are detrimental to shareholder interests? This post isn’t a list of the many benefits of owning shares of a corporation. Instead, it’s a nightmare scenario of what could happen when corporate leaders run amok and the remedies that shareholders may be able to pursue under New Mexico law. When Corporate Leadership Acts against Shareholder Interests
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Imagine your frustration if a corporation refused to give you the records or books which you have a legal right to. What if the executive leadership fails to act in your best interests, failing to maximize profit or manage the company efficiently, and is not acting in your interest? It’s not uncommon for directors or officers to ignore their responsibilities towards shareholders. In such cases, shareholders are responsible for protecting their rights and investments. Understanding Corporate Structure
In most U.S. corporations, three key groups govern the company: shareholders, the Board of Directors, and the officers. The shareholders are the owners of a corporation and their primary responsibility is to elect the board of directors. The Board of Directors has the responsibility of overseeing management and making strategic decisions for the company. The board also appoints company officers. Corporate Officers are typically responsible for the day-today operations of a company and report directly to the Board of Directors.
Fiduciary Duty: What Corporate Leaders owe to Shareholders–
Corporate directors and officers owe fiduciary duty to the corporation as well as its shareholders. They are legally required to act in the shareholders’ best interest. Directors and officers are required to put the interests of shareholders ahead of their own, and avoid conflicts of interests. The power of shareholders is not to be underestimated. In a recent case with Tesla, a Delaware Court invalidated a $40 Billion compensation package for CEO Elon Mots after a shareholder who owned only nine shares successfully challenged it. Nine Tesla shares are worth $2,313.18 at the time this article was written. Profits and Efficiency
Shareholders have every right to expect the corporation to work to increase its profitability and efficiency through its directors and officer. The lack of profits does not prove wrongdoing. If the leadership is grossly ignoring their duties or actively undermining their ability to make profit, then they may be breaching their fiduciary duty. Shareholders’ Right to Access Corporate Books and Records
New Mexico law, like many states, grants shareholders the right to inspect a corporation’s books and records. This includes financial records and meeting minutes as well as other documentation that sheds some light on a corporation’s operation.
Any shareholder who holds at least 5% in the outstanding shares of the corporation has the right to inspect these records upon submitting a written request for a valid reason. If the corporation refuses to comply, shareholders may take legal action to enforce their right. As a shareholder, it is your right to examine the records of the corporation to determine whether or not they are doing what they should. Potential Liabilities of Directors and Officers New Mexico law allows them to be held personally responsible if they are found to have acted with bad faith or reckless disregard for the interests of shareholders. It could lead to compensatory damages that reimburse shareholders for financial losses or punitive damage designed to punish wrongdoers.
CONCLUSION
Being a shareholder in a corporation should come with the expectation that leadership is acting in your best interest. You have the right to hold these people accountable if they do not.
