This Plaintiff Dreamed Of Shares That Never Were

It’s hard for me to imagine being the owner of something that doesn’t exist.  It’s even harder to imagine being the owner of something that doesn’t exist.  Hardest of all is imagining being the equitable owner of something that doesn’t exist.  However, some people dream bigger dreams as was the case in White v. Demaray, 2014 U.S. Dist. LEXIS 10505 (N.D. Cal. Jan. 27, 2014).

The case was filed as a derivative action, but the plaintiff had a standing issue – he wasn’t a stockholder.  U.S. Magistrate Judge Elizabeth D. Laporte didn’t see that as a game stopper because she found that under Delaware law the term “stockholder” for purposes of a derivative action includes an equitable owner.  The plaintiff claimed equitable ownership based on minutes authorizing the amendment of the corporation’s certificate of incorporation to authorize additional shares – the shares plaintiff alleged to claim ownership in. As they say, however, multa cadunt inter calicem supremaque labra (there can be many a slip between the cup and the lip).  In this case, the amendment was never filed causing the Court to conclude that the plaintiff could not be the equitable owner of shares that did not exist.

The Court applied Delaware law and I’ll leave it to Delaware lawyers to say whether the Court got it right. However, I question whether the Court should have applied California law.  Corporations Code Section 800(b) expressly applies to both domestic corporations (defined in Section 167 as a corporation formed under the laws of California) and foreign corporations (defined in Section 171 as any corporation other than a domestic corporation).  Thus, there can be no doubt that the California legislature intended to apply Section 800(b) to corporations not formed under California law.  See Court Applies California Demand Requirement To Scottish Company (Again).