Chicago Business Litigation Lawyer Blog
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:
- 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.
- 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.
- 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.
- 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.
- 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.