ABA Litigation Update Discusses Derivative Claims Standing

Here is an excerpt from a story in the ABA Litigation Update, June 2008 edition, entitled Derivative Claims: They’re Not Just for Shareholders Anymore:

Determining whether a claim for corporate wrongdoing is direct or derivative can be a complicated question. Recent court decisions highlight yet another analytical puzzle: Who has standing to bring derivative claims? Not just shareholders but also former shareholders, board members, and creditors have brought actions as putative corporate champions, achieving mixed results.

This year, the California Supreme Court concluded that a former shareholder lacked standing to bring a derivative action, even though he was disenfranchised during the action by a merger to which he did not consent. Grosset v. Wenaas. The continuous ownership rule requires that derivative plaintiffs own shares at the time of the challenged conduct and for the duration of the litigation, on the ground that the plaintiff should have a personal stake in the potential recovery.

The rule also recognizes that the directors normally manage the company. Shareholders who have been involuntarily disenfranchised commonly enjoy appraisal rights and, thus, can ask the court to determine the fair value of their shares.

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