659 N.E.2d 559 (1995)
Barth, a minority shareholder, brought suit against Michael Barth the majority shareholder. He sued under Indiana Code that M Barth had taken actions to “substantially reduce the value of … shares” in the corporation. He argued M Barth had paid himself an excessive salary; used corporation’s assets for personal gain without compensation to the corporation; lowered payments of common stock via dividend payments; and used the funds of the corporation for personal gain through personal investments. He alleged that M Barth also wrongfully terminated him.
M Barth filed a motion to dismiss for failure to state a claim on the basis that Plaintiff failed to state a “derivative action” for which redress could be sought.
Corporate shareholders can’t bring actions themselves against a corporation as a shareholder. This is the case even when his/her value of stock is significantly diminished.
Whether Plaintiff (Barth) can bring suit against M Barth as a minority shareholder.
No, vacated and remanded for reconsideration. Public policy dictates that the corporation be subject to litigation by a class of shareholders, rather than just one. Allowing otherwise, would be to disregard the corporation’s ability to efficiently operate. This policy protects the corporation’s creditors by allowing the winnings of the suit to go back into the corporation itself. Moreover, one shareholder should not be able to “prejudice the interests of other shareholders.” Compensation for the injured plaintiff(s) should thereafter be put back into the corporation.
This rule does not always apply when closely held business organizations are considered. (1) Members of a closely held business org have a fiduciary duty to one another and must deal fairly and honestly with the corporation itself and with other shareholders. (2) The policy justification for derivative litigation does not as readily apply to closely held business organization – example: partnerships, sole proprietorships, etc.
However, the protection of creditors’ assets principle could be present in closely held business litigation. The ALI’s rule essentially states that one bringing suit in a closely held business org setting can be exempted from derivative status only if the Corp is not “unfairly exposed” to “multiplicity actions” or will not “materially prejudice the interests of creditors of the corporation” or “interfere with a fair distribution of the recovery among all interested persons.”