The Supreme Court of California recently clarified the standing requirements for plaintiffs seeking to bring derivative actions. In Grosset v. Wenaas, No. S139285, 2008 WL 383196 (Cal. Feb. 14, 2008), the plaintiff who originally filed the case lost standing to sue when he voluntarily sold his stock in the company at issue. The trial court, however, permitted another shareholder to intervene and assume the prosecution of the action. Relying on the special litigation committee’s determination that the derivative claims lacked merit, the trial court granted the defendants’ motion to dismiss. Thereafter, the defendant company merged with another corporation. All outstanding shares of the company, including those belonging to the second plaintiff, were bought out by the new corporation.
As a result of this merger, the California Supreme Court found that the second plaintiff lost his standing to continue to prosecute the case, including his appeal of the lower court’s ruling, and affirmed the dismissal of the complaint. After acknowledging that the California Code imposed stock ownership requirements on shareholders seeking to bring derivative actions, the Supreme Court noted that the relevant statutory provision had not been construed “as requiring a plaintiff to maintain continuous stock ownership throughout litigation of a derivative action.” Id. at 5-6. However, the Supreme Court found that a continuous ownership requirement would “further the statutory purpose to minimize abuse of the derivative suit ….” Id. at 7. The Supreme Court reasoned that, “once th[e] [shareholder] relationship ceases to exist, the derivative plaintiff lacks standing because he or she ‘no longer has a financial interest in any recovery pursued for the benefit of the corporation.’” Id. (quoting Alabama By-Products Corp. v. Cede & Co., 657 A.2d 254, 265 (Del. 1995)).