Excessive Fees Can Be the Basis of a Derivative Lawsuit

Excessive management fees charged by a majority owner can potentially be the basis for a derivative lawsuit in certain circumstances. In corporate law, a derivative lawsuit is a legal action brought by shareholders on behalf of a corporation against third parties, often including insiders such as officers, directors, or controlling shareholders. The key issues in such a lawsuit typically involve allegations of breach of fiduciary duty, abuse of control, fraud, or mismanagement.

When a majority owner charges excessive management fees, it may be construed as a breach of fiduciary duty or misuse of their position to the detriment of the corporation and its minority shareholders. In such cases, the following elements are often considered:

  1. Breach of Fiduciary Duty: Majority owners owe a fiduciary duty to the corporation and its shareholders. Charging excessive fees could be seen as a breach of this duty, especially if it harms the corporation’s financial health or is not in the best interest of all shareholders.
  2. Fairness and Reasonableness: The fees must be fair and reasonable. If the fees are exorbitant compared to industry standards or the services rendered, it could be a ground for legal action.
  3. Impact on Minority Shareholders: If the excessive fees adversely affect the minority shareholders or the value of their shares, it can be a strong basis for a derivative suit.
  4. Corporate Governance and Approval Processes: The procedures followed in approving the fees are also important. If the majority owner bypassed normal governance processes or used their influence to approve the fees without proper oversight, it could strengthen the case for a lawsuit.
  5. Jurisdiction and Specific Laws: Laws regarding fiduciary duties and shareholders’ rights vary by jurisdiction. The specific legal standards and precedents in the jurisdiction where the corporation is incorporated will play a critical role.

Past cases, such as Kamen v. Kemper Financial Services, Inc., have seen shareholders initiate a derivative action challenging the fees charged by investment advisors for managing and administering a money market mutual fund. Also, in Daily Income Fund, Inc. v. Fox, it was established that a shareholder does not need to make a demand upon the company’s directors before bringing a derivative suit concerning excessive fees paid by an investment company to its advisor.

However, derivative lawsuits must be brought by the corporation on behalf of shareholders when the alleged injuries are not personal to plaintiffs, but common to all shareholders, as was argued in City of St. Clair Shores General Employees Retirement System v. Inland Western Retail Real Estate Trust, Inc.

Shareholders may also be allowed to initiate a lawsuit when the management declines to take the proper and necessary steps to assert the rights that the corporation has. For example, under Illinois law, unit owners in a condominium association can sue a former board member on behalf of the association itself for the alleged breach of fiduciary duty. It’s worth noting that a shareholder may not bring suit in an individual capacity to redress wrongs done to the corporation, but a shareholder who has a direct and personal interest in a cause of action may bring suit individually. However, the shareholder must allege an injury that is “separate and distinct from that suffered by other shareholders”.

It is crucial for shareholders considering a derivative lawsuit to consult with legal counsel specializing in corporate law. Such counsel can provide guidance on the merits of the case, the likelihood of success, and the procedural requirements to bring a derivative lawsuit. Additionally, derivative lawsuits often require the plaintiff shareholders to prove that they made a demand on the corporation’s board to address the issue or demonstrate that such a demand would have been futile, a nuanced legal requirement that varies by jurisdiction.

Hiring a law firm like Lubin Austermuehle to represent you in a derivative lawsuit can be beneficial for several reasons, assuming they have the relevant expertise and experience in this area. Here are some key considerations when choosing a firm like Lubin Austermuehle for a derivative lawsuit:

  1. Specialization in Derivative Lawsuits and Business Litigation: If Lubin Austermuehle specializes in derivative lawsuits and business litigation, this experience can be invaluable. Firms with a focus on these areas are typically well-versed in the complexities of corporate law, shareholder rights, and fiduciary duties.
  2. Track Record of Success: Look at the firm’s history in handling derivative lawsuits. A strong track record of successful outcomes in similar cases can be a good indicator of their capability to handle your case effectively.
  3. Knowledge of Local and State Laws: The laws governing corporations and derivative lawsuits can vary significantly by jurisdiction. If Lubin Austermuehle is well-acquainted with the local and state laws applicable to your case, this knowledge can be crucial for navigating the legal system and formulating effective strategies.
  4. Resources and Support: Derivative lawsuits can be complex and resource-intensive. A firm like Lubin Austermuehle, if it has adequate resources and a team capable of handling extensive research, document review, and litigation support, can be a strong ally.
  5. Client-Centric Approach: Consider if the firm is known for its client-centric approach. Personalized attention, regular communication, and understanding the client’s objectives are essential qualities in a law firm handling such sensitive and potentially high-stakes litigation.
  6. Peer and Client Reviews: Reviews from peers in the legal profession, testimonials from previous clients and ratings can provide insights into the firm’s reputation, professionalism, and skill.

It’s important to conduct thorough research and possibly consult with multiple firms before making a decision. The choice of a legal representative in a derivative lawsuit is a crucial one and should be made after careful consideration of the firm’s expertise, experience, and alignment with your specific needs and objectives.

For a free consultation call us at 630-710-4990 or contact us online.

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