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Conflict Waiver Does Not A Shareholder Make

Section 800(b)(1) of the California Corporations Code imposes the following standing requirement for derivative lawsuits:

"The plaintiff alleges in the complaint that plaintiff was a shareholder, of record or beneficially, or the holder of voting trust certificates at the time of the transaction or any part thereof of which plaintiff complains or that plaintiff's shares or voting trust certificates thereafter devolved upon plaintiff by operation of law from a holder who was a holder at the time of the transaction or any part thereof complained of . . . .”

If the plaintiff has no share certificate, how might she show that she is indeed a shareholder entitled to maintain a derivative action?  In a recent case, the plaintiffs relied on a conflict waiver letter prepared by an attorney engaged by the parties.  The letter included the parties' warranty: "there are no other shareholders, other than the signatories."

The Court of Appeal, however, found the letter to be insufficient to establish the plaintiffs' status as shareholders:

"The wording of that sentence makes sense in the context in which it was made — the outset of Lovett's [the attorney] joint representation of MGK [the corporation] and its future shareholders. The signatories' warranty that there are no other shareholders shields Lovett against claims by other potential equity holders.

Pasco v. MGK Consulting, 2019 Cal. App. Unpub. LEXIS 2135.  

The corporation in this case is a Nevada corporation.  Section 800 expressly applies to foreign as well as domestic corporations.

The decision is unpublished.  As such, Rule 8.1115 of the California Rules of Court prohibits courts and parties from citing or relying on it except as specified in that rule.

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