It seems straightforward enough – when someone steals from us, they owe us. Right? Well, in the land of Corporations and Limited Liability Companies (LLC), it’s not so straightforward. While such business structures afford its members certain protections from a tax or liability standpoint, when it comes to corporate theft, there are specific formalities that must be adhered to.
Members and shareholders of corporations and LLCs owe specific duties to the company and to other members and shareholders. Stealing from the company in any form, whether direct theft, embezzlement, improper distributions, or any other form of theft, is a breach of those duties.
In Wisconsin, if a shareholder or member steals from the company, the company has a claim against that shareholder or member. This claim is enforced through what is called a derivative action, in which a shareholder brings a claim on behalf of the corporation or LLC.
What Exactly is a Derivative Action?
In the case of a business partner stealing from the company, the company is the party that is injured. A derivative action is actually two causes of action: it is both an action to compel the corporation to sue and an action brought by a shareholder on behalf of the corporation to rectify harm to the corporation. The purpose of a shareholder derivative action is to prevent injustices to the corporation by allowing shareholders to enforce corporate interests when the directors refuse to take corrective action. See Park Bank v. Westburg, 2013 Wisconsin 57, ¶41, 348 Wis. 2d 409, 832 N.W.2d 539.
Derivative Action Requirements
Certain requirements must be met before you may bring a derivative action against the company.
Standing
Plaintiffs must show that they have standing to bring a derivative action. In order to show standing, the law requires the action to be brought by one or more members having 5% or more of the voting power or by 50 members, whichever is less. The plaintiffs must have been members at the time of the act or omission complained of or became a member through transfer by operation of law from a person who was a member at that time. A plaintiff must also be a shareholder at the time the action is filed. Finally, the member must fairly and adequately represent the interests of the corporation in enforcing the right of the corporation.
The Demand
The first step in a derivative action claim is to make a written demand on the corporation to take action. The member must then wait ninety days from the date on which a demand was made, unless the member is notified – before the expiration of the 90 days – that the corporation has rejected the demand, or unless irreparable injury to the corporation would result by waiting for the expiration of the 90-day period.
Filing the Derivative Action Claim
If the board rejects the written demand, the member(s) may then file a lawsuit in the appropriate jurisdiction as an individual and on behalf of the corporation.
Contact Kerkman Wagner & Dunn Today
If you determine that one of your business partners has stolen from the company, it’s best not to resort to playground rules. Wisconsin law makes the corporation the victim of corporate theft, not individual members. Contact an experienced derivative action attorney at Kerkman Wagner & Dunn for more information on making a derivative action claim.
