Individual Standing of a Shareholder in California
In Jones v. H. F. Ahmanson & Co. (1969) 1 Cal.3d 93, a minority shareholder in a closely held savings and loan association sued for breach of the fiduciary interest owed by majority or controlling shareholders to minority shareholders.
She alleged that the defendants used their control of the association for their own advantage to the detriment of the minority shareholders. The defendants demurred on the ground that plaintiff could not sue in an individual capacity because the cause of action was derivative in nature. (Jones, supra, 1 Cal.3d at p. 105.)
The Supreme Court began its analysis with an examination of the nature of a derivative action. "A shareholder's derivative suit seeks to recover for the benefit of the corporation and its whole body of shareholders when injury is caused to the corporation that may not otherwise be redressed because of failure of the corporation to act. Thus, 'the action is derivative, i.e., in the corporate right, if the gravamen of the complaint is injury to the corporation, or to the whole body of its stock and property without any severance or distribution among individual holders, or it seeks to recover assets for the corporation or to prevent the dissipation of its assets.' " (Jones, supra, 1 Cal.3d at p. 106.)
The Jones court explained that a shareholder's derivative suit is brought to enforce a cause of action which the corporation itself possesses against some third party to recompense the corporation for injury suffered as a result of the acts of third parties. (Id. at pp. 106-107.) The corporation alone benefits from a derivative action, the individual shareholders derive no direct benefit. (Id. at p. 107.)
In contrast, a shareholder's individual suit is to enforce a right against the corporation that the shareholder possesses as an individual. (Jones, supra, 1 Cal.3d at p. 107.) In Jones, the Supreme Court concluded that the plaintiff did not seek to recover on behalf of the corporation for injury done by the defendants. While she alleged the value of her stock had been diminished, "she does not contend that the diminished value reflects an injury to the corporation and resultant depreciation in the value of the stock." (Ibid.) Thus, plaintiff's cause of action was based on injury to herself and other minority shareholders. (Ibid.)
In Jara v. Suprema Meats, Inc. (2004) 121 Cal.App.4th 1238, the Court examined the cases following Jones. It found that they require a derivative suit to assert injury to the corporation resulting from mismanagement of corporate business. (Id. at pp. 1254-1255.)
But other post-Jones decisions upheld "the individual standing of a minority shareholder to bring suit against majority shareholders alleging a breach of a fiduciary duty that deprives the minority shareholder of a proportionate share of the corporation's value." (Id. at p. 1255, and cases collected therein.)
After reviewing the case law, the Court of Appeal in Jara read Jones as "'allowing a minority shareholder to bring a personal action alleging 'a majority stockholder's breach of a fiduciary duty to minority stockholders, which resulted in the majority stockholders retaining a disproportionate share of the corporation's ongoing value.'" (Id. at pp. 1257-1258, quoting Pareto v. F.D.I.C. (9th Cir. 1998) 139 F.3d 696, 699-700.)
The Jara court concluded that the case before it came within the scope of allowable individual actions because the gravamen of the plaintiff's complaint was that he was deprived of a fair share of corporate profits as a result of defendants' over compensation. (Jara, supra, 121 Cal.App.4th at p. 1258.)
It found support for its conclusion in "the absence of any policy considerations favoring derivative actions in the procedural context" of the case. "As explained in a leading treatise, the traditional justification for requiring a derivative action is that 'it is designed to prevent a multiplicity of actions by each individual shareholder and a preference of some more diligent shareholders over others, and to protect the creditors who have first call on the corporate assets . . . .'" (Jara, supra, 121 Cal.App.4th at p. 1258.)
The Court of Appeal concluded that a shareholder who held 30,000 shares in a closely held corporation (two other shareholders held 35,000 shares each) had individual standing to sue the corporation and the other two shareholders for excessive compensation paid to the two defendants.
The plaintiff's theory was breach of the fiduciary duty owed by majority shareholders to minority shareholders. (Id. at pp. 1252-1253.)
Following an extensive review of the cases distinguishing between derivative and individual actions, the Jara court concluded that Jones v. H.F. Ahmanson & Co., supra, 1 Cal.3d 93 (Jones) provides the authoritative analysis. (Jara, supra, at pp. 1253, 1257.)