You may recall an article I wrote last month regarding derivative actions in North Carolina, setting out when and how a claim could be made by a shareholder on behalf of his company for the wrongs of an officer or director. It is generally well-held that shareholders very rarely have individual standing to sue wrongdoers of the corporation, however there are instances where individual, direct claims are appropriate.
The Barger Rule
The North Carolina Supreme Court held in the case of Barger v. McCoy Hillard & Parks, 346 N.C. 650, 488 S.E.2d 215 (1997), that shareholders cannot pursue individual causes of action against third parties for wrongs or injuries to the corporation that result in the diminution or destruction of the value of their stock. While the individual shareholder may have felt the impact of the wrong in his own wallet, it is the corporation that is actually damaged – the corporation’s value has been diminished, not just the shares held by the shareholder. Generally, in these cases, if a lawsuit was filed against the wrongdoer, any money recovered would go to the corporation, not its individual investors.
In setting out the above rule, the Barger Court also adopted two exceptions. “There are two major, often overlapping, exceptions to the general rule that a shareholder cannot sue for injuries to his corporation: (1) where there is a special duty, such as a contractual duty, between the wrongdoer and the shareholder, and (2) where the shareholder suffered an injury separate and distinct from that suffered by other shareholders.” Id. at 658, 346 S.E.2d at 219. In these instances, the shareholder may maintain a separate, individual cause of action even if the corporation also has a cause of action arising from the same acts or omissions. The Barger Rule and its exceptions apply equally to both corporations and LLCs.
By way of illustration, the North Carolina Business Court recently held that plaintiff shareholders adequately stated a direct cause of action against defendant shareholders of the same corporation where the defendants had made misrepresentations to the plaintiffs in order to obtain their investments in the corporation (See Atkinson v. Lackey, 2015 NCBC 13). Since the injury to the plaintiffs inAtkinson was separate and distinct from any injury to the corporation or the other shareholders, the plaintiffs’ claims fell under the second exception to the Barger Rule. The Business Court has also allowed 50% shareholders to pursue individual claims against each other, equating that relationship to a partnership where a fiduciary duty is owed to one another, satisfying the first exception to the Barger Rule (See Gusinsky v. Flanders Corp., 2013 NCBC 46). Further, where the company’s Operating Agreement sets out the rights and duties of the shareholders, or LLC members, to each other, individual claims to enforce those rights or duties are appropriate.
It is very rare that a shareholder claim will fall under one or both of the Barger Rule exceptions but, as illustrated above, it is possible. Determining whether your claims are individual or derivative is very important, as it will determine whether your claims will survive a motion to dismiss and, if successful, where any money judgment will ultimately go – to you or to your corporation? It is important to consult with a business litigation attorney prior to pursuing any legal claims as an individual shareholder.