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Shareholder derivative lawsuits in California

On Behalf of | Sep 10, 2023 | Business Litigation

In California, shareholder derivative lawsuits are governed by Section 800 of of the California Corporations Code. Generally, shareholder derivative actions involve one or more shareholders filing an action on a corporation’s behalf. Under Section 800, these plaintiffs must have been shareholders during the illicit conduct or had their shares devalued as a result. California law also requires that the plaintiff has already submitted a cause of action to the board or corporation alongside a copy of the complaint.

Shareholder derivative action in California

If the case has been filed on behalf of the corporation, no similar action has been instituted and the shares were acquired before any public disclosure of wrongdoing, the case may still proceed after filing a motion. The courts also consider whether the action is the only way to prevent defendants’ gains from breaches in fiduciary duty or if the requested relief would result in any unjust enrichment of the corporation or shareholders.

Shareholder lawsuits in California

Ultimately, this business litigation is designed to protect the rights of the corporate entity and the interests of fellow shareholders. Under subdivision (c) of Section 800, the defendants, board, or corporation have 30 to 60 days to file a motion for dismissal because the action does not benefit the corporation or shareholders or that the corporation didn’t participate in any of the alleged conduct. The maximum bond amount is $50,000.

Section 800 outlines a process for the prevailing party to recover up to $50,000 in legal fees. Plaintiffs may volunteer to preemptively post this bond to mitigate delays from filed motions. Common causes for shareholder derivative lawsuits include fraud, gross mismanagement, illegal conduct, self-dealing and operating in the interest of third parties. Courts determine whether the corporation’s initial refusal was rational, than consider the weight of the plaintiff’s evidence before determining the best interest of the corporation and shareholders.