[dkarl]

I once worked for a guy who was considering incorporating his two-person company. His investors were mostly family and professional contacts. One day he was talking about how it would limit his decision-making because of his obligation to always do what was most profitable for the shareholders. He was potentially facing a choice between selling out to a much larger company or staying independent so he could develop the company into the kind of business he always wanted to run. He and his partner had a controlling stake, but theoretically, if their investors wanted him to sell but he refused, they could sue him for damages, breach of fiduciary trust or what-not. Or so he said. I asked him, "If there was a perfectly legal, but morally reprehensible way to make a lot of money for your shareholders, and you were aware of it but didn't take advantage of it, could they sue you for damages?" He didn't think so, but he couldn't explain to me the legal difference between his moral judgment and his lifestyle preference for one kind of business over another. I'm still intrigued by the question.

To make the situation more dramatic, suppose a company disposed of a thousand barrels of toxic waste every month, and the board of directors found out that the perfectly legal method by which they were disposing of the waste was horrifically environmentally damaging but exposed the company to no possible liability. Could they choose to dispose of the waste in a much more expensive way? What if it meant cancelling a dividend? What if it meant bankrupting the company -- could they be sued then?

[guelo]

I think the whole "fiduciary duty" argument is mostly used by assholes as an excuse for being assholes. Managers of corporations have wide latitude to do as they see fit. Successful shareholder lawsuits of this type are extremely rare.

[dkarl]

It was enough to scare him away from incorporation while there was talk of an offer to buy the company. The customer that was going to make the offer would have replaced him in his business role, limited him to research, and shut down all the work that wasn't relevant to the one product of ours that they used, but they were going to give all the investors a very significant profit. He didn't care because he thought the company could be much bigger than the buyer wanted it to be, and also possibly because he was already wealthy and enjoyed being the boss much more than he needed the money. When I ponder that last part I guess it's possible that his worries about getting sued reflected a guilty conscience more than a real legal risk.

[Ryan_Shmotkin]

Would love to know that to

Any lawyers here with knowlege on responsibilities of the management team to the shareholders ?