Boards exist to protect shareholders based on the fiduciary duties of care, loyalty, and good faith. If shareholders feel that those duties have not been met by a board or board member, they can take legal action against them.
The “business judgment rule” protects boards and board members from lawsuits for simply making bad choices. As LegalMatch shares, “The business judgment rule requires that courts defer to the board of directors in business matters.
The only exception to the business judgment rule is if shareholders can show that the board of directors engaged in fraud, illegal activities, or were grossly negligent while managing the corporation.”
In other words, boards are afforded the right to make bad business choices as long as there is evidence they were acting in good faith. If there is a belief that the board or a board member has engaged in one of those wrongful practices, there are two options for types of shareholder lawsuits: a direct lawsuit (also called shareholder class action lawsuit) or a derivative lawsuit.