Does A Lawyer Who Files A Derivative Action Have An Attorney-Client Relationship With The Corporation?

Because the California Corporations Code requires that the business and affairs of a corporation be managed by or under the direction of its board of directors, any decision of whether a corporation should bring suit on behalf of the corporation is ultimately vested in the corporation’s board. Cal. Corp. Code § 300(a). Derivative actions are an exception to this general principle. If a shareholder can satisfy the pleading requirements of Corporations Code Section 800, then the shareholder may bring the action in the “right of” the corporation. Does this mean that an attorney who represents a shareholder in filing a derivative action may be disqualified from simultaneously representing that shareholder in an action against the corporation?

This week, the Second District Court of Appeal said “no”. In Shen v. Miller, 2012 Cal. App. LEXIS 1279 (Dec. 18, 2012), the court found that disqualification depends on whether the attorney has an attorney-client relationship with the corporation. After reviewing the basics of derivative actions, the court found that defendant had presented no facts suggesting the formation of an attorney-client relationship between the plaintiff’s attorney and the corporation. In particular, there was no showing that the corporation sought or obtained legal advice from the plaintiff’s attorney. The court, in an opinion written by Justice Victoria M. Chavez, also found that the plaintiff’s attorney was not subject to disqualification based on a duty of fidelity or confidentiality.

A question for another day is what happens when a shareholder is successful in pleading either demand futility or wrongful refusal under Section 800. Then, the shareholder and her attorney will have the ability to prosecute the action on behalf of the corporation. At that point, the corporation will have moved from the “nominal defendant” side to the “plaintiff” side. Will that result in disqualification of the shareholder-plaintiff’s attorney (assuming the attorney is also representing the shareholder in a direct action against the corporation)?


Topics:  Attorney-Client Privilege, Board of Directors, Derivative Suit, Shareholder Litigation

Published In: Business Organization Updates, Civil Procedure 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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