October 18, 2021

Volume XI, Number 291

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October 18, 2021

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Court Of Appeal Imposes Continuous Directorship Requirement For Standing

Several provisions of California's Nonprofit Public Benefit Corporation Law confer standing on an officer, director, or member.   See Sections 5142,  5223, 5233, and/or 5710.   In an opinion issued yesterday, the Court of Appeal addressed the question of what happens when a plaintiff under these statutes fails to maintain his or her status as an officer, director, or member.   Turner v. Victoria, 2021 Cal. App. LEXIS 680.   

Finding the statutory language to be inconclusive, the Court turned to the legislative history and  found "a clear intention to hew as closely to the law used for general corporations as possible–despite any ambiguities or inconsistencies in the language of the GCL [General Corporation Law] statues [sic]–while providing for the unique circumstances of internal governance of nonprofit public benefit corporations".    The Court noted that the Supreme Court in Grosset v. Wenaas, 42 Cal.4th 1100  2008) had held that California law “generally requires a plaintiff in a shareholder’s derivative suit to maintain continuous stock ownership throughout the pendency of the litigation".   The Court also noted its determination that a director who was not reelected to serve on the board of directors lost standing to assert a statutory right to inspect corporate documents.  Wolf v. CDS Devco, 185 Cal.App.4th 903 (2010).

Based on this analysis, the Court concluded:

[T]he statutory scheme and public policy considerations require a continuous relationship with the public benefit corporation that is special and definite to ensure the litigation is pursued in good faith for the benefit of the corporation.  If a plaintiff does not maintain such a relationship, the statutory scheme provides the nonprofit public benefit corporation with protection through the Attorney General, who may pursue any necessary action either directly or by granting an individual relator status.

Although the Court found that the erstwhile officer/director/member lacked standing because she was no longer an officer, director or member of the corporation, it left open a path by which she may remain in the lawsuit.  The Court remanded the action to the lower courts with directions to grant 60 days leave to amend, limited to the issue of whether a proper plaintiff may be substituted to pursue the existing claims.  The Attorney General may consider during that 60-day period whether granting relator status to the former officer/director/member, or another individual, for these claims is appropriate.

Some readers of today's post may share an anamnesis of this post from two years ago discussing Summers v. Colette, 34 Cal. App. 5th 361 (2019), a case in which the Second District Court of Appeal reached a different conclusion regarding the need for a plaintiff to maintain standing.  

© 2010-2021 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume XI, Number 230
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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm
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Keith Bishop works with privately held and publicly traded companies on federal and state corporate and securities transactions, compliance, and governance matters. He is highly-regarded for his in-depth knowledge of the distinctive corporate and regulatory requirements faced by corporations in the state of California.

While many law firms have a great deal of expertise in federal or Delaware corporate law, Keith’s specific focus on California corporate and securities law is uncommon. A former California state regulator of securities and financial institutions, Keith has decades of...

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