Still Standing

Abstract

Under California Law, to qualify as a derivative plaintiff and institute an action on behalf of a corporation, the plaintiff must show: 1) status as a shareholder of record, holder of a beneficial interest, or holder or a voting trust certificate, 2) shareholder status at the time of the wrong to the corporation giving rise to the action (the contemporaneous ownership rule), and 3) that reasonable effort was made to inform the corporate directors about the action and induce them to commence suit (a prelitigation demand), unless those efforts would have been “useless” or “futile” (demand futility). Various challenges have been advanced to disqualify plaintiff shareholders in derivative actions in state court. Whether based on the existence of a simultaneous direct claim or action, the lack of contemporaneous ownership, the principles of guardian ad litem, or even Rule 23.1 of the Federal Rules of Civil Procedure, these challenges have met with little success.

Note: © Los Angeles Lawyer, Los Angeles County Bar Association. Reprinted with permission.

Keywords: shareholder derivative actions, California Law, contemporaneous ownership, guardian ad litem, Rule 23.1