Corporations are powerful legal entities, existing as separate entities from their owners, created under state law to conduct business. For shareholders, the benefits can be substantial—profits, dividends, and a voice in corporate governance. However, what happens when the corporation’s leadership veers off course, acting in ways that harm shareholder interests?
This post isn’t about the many perks of owning shares in a corporation, but rather the nightmare scenario of what can happen when corporate leadership runs amok, and the potential remedies available to shareholders under New Mexico law.
When Corporate Leadership Acts Against Shareholder Interests
Imagine the frustration of a corporation refusing to hand over records or books that you, as a shareholder, have the legal right to access. Or worse, what if executive leadership isn’t acting in your best interest, failing to maximize profits or manage the company efficiently?
It’s not uncommon for directors and officers to neglect their responsibilities to shareholders. In these instances, shareholders must act to ensure their rights and investments are protected.
Understanding Corporate Structure
In most U.S. corporations, three key groups govern the company: shareholders, the Board of Directors, and the officers. Shareholders are the owners of the corporation, and their primary role is to elect the Board of Directors. The Board of Directors is tasked with overseeing the company’s management and making key strategic decisions. The board also appoints the company’s officers. Corporate Officers typically handle the day-to-day operations of the company and report to the Board of Directors.
Fiduciary Duties: What Corporate Leaders Owe to Shareholders
Corporate officers and directors owe fiduciary duties to both the corporation and its shareholders. Simply put, they are legally obligated to act in the best interests of the shareholders. This requires directors and officers to place the interests of the shareholders above their own and avoid conflicts of interest.
The power of shareholders should not be underestimated. For example, in a recent case involving Tesla, a Delaware court invalidated a $40 billion compensation package for CEO Elon Musk after a shareholder with just nine shares successfully challenged the package. The value of nine Tesla shares is $2,313.18, at the time of this writing.
Profits and Efficiency
A for-profit corporation exists to generate profits for its shareholders. Therefore, shareholders have every right to expect that the corporation, through its directors and officers, is working to increase the corporation’s profitability and efficiency. Although the lack of profits is not evidence sufficient to prove wrongdoing. However, if the leadership is grossly neglecting their duties or is actively undermining the ability to make a profit, they may be in breach of their fiduciary duties.
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, meeting minutes, and other documentation that sheds light on the corporation’s operations.
Any shareholder holding at least 5% of the corporation’s outstanding shares, upon making a written request with a valid purpose, has the right to examine these records. If the corporation refuses, shareholders can seek legal recourse to enforce this right. The key takeaway is that as a shareholder, you have the right to examine records to determine if the corporation is doing what it should.
Potential Liabilities for Directors and Officers
Directors and officers who fail to uphold their fiduciary duties may face serious legal consequences. Under New Mexico law, they can be held personally liable if found to have acted in bad faith or with reckless disregard for shareholder interests. This could result in compensatory damages, which aim to reimburse shareholders for their financial losses, or punitive damages designed to punish wrongdoers and deter future misconduct.
CONCLUSION
Being a shareholder in a corporation should come with the expectation that leadership is acting in your best interest. When they fail to do so you have the right to hold them accountable.
