California Supreme Court Affirms "Continuous Stock Ownership Requirement" for Plaintiffs in Derivative Shareholder Litigation

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The California Supreme Court ruled today in Grosset v. Wenaas, No. S139285 (February 14, 2008), that California law includes a “continuous stock ownership requirement” for plaintiffs in derivative shareholder actions. The Court

held that a plaintiff’s loss of shareholder status at any point in the litigation deprives that plaintiff of

standing to further pursue the derivative action. Grosset also holds that this requirement applies even where the plaintiff’s shareholder status is terminated involuntarily, including where the plaintiff lost his shares as a result of the corporation’s merger with another corporation.

The plaintiff in Grosset filed a derivative shareholder action on behalf of JNI Corporation (JNI), a company incorporated in Delaware and headquartered in California, against certain JNI directors and officers. On the defendants’ motion, the trial court dismissed the plaintiff’s complaint with prejudice.

After the dismissal, JNI merged with a wholly owned subsidiary of Applied Micro Circuits Corporation (AMCC). As part of the merger, AMCC bought all outstanding shares of JNI stock, including the plaintiff’s shares. The plaintiff then appealed the dismissal of his complaint, but the defendants moved to dismiss the appeal, contending that the plaintiff lacked standing to pursue the litigation after selling his JNI stock as part of the merger.

The California Court of Appeal agreed and dismissed the plaintiff’s appeal for lack of standing. That court concluded that the requirements for standing implicate a corporation’s “internal affairs” and, therefore, the law of the state of incorporation, here Delaware, applies. Because Delaware law has a continuous stock ownership requirement, the court concluded that the plaintiff was deprived of

standing when he sold his JNI stock. The court held in the alternative that California law also imposes a continuous stock ownership requirement.

The California Supreme Court granted discretionary review and affirmed....

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Published In: Civil Remedies Updates, General Business Updates, Constitutional Law Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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