A director of a California nonprofit corporation has standing to bring derivative lawsuits on behalf of the nonprofit in appropriate circumstances. Corp. Code § 5710. But what happens when a director who began the litigation with standing loses their bid for re-election to the board? In 2021, the California Supreme Court granted certiorari to resolve a split of authority on that very question. Given the Court’s two-year average for civil cases, we expect a ruling on this issue in the coming months.
The case on review is Turner v. Victoria, (2021), 67 Cal. App. 5th 1099, where the California Court of Appeal, Fourth Appellate District, ruled that standing is lost in such circumstances. In reaching its conclusion, the court analogized to cases involving for-profit corporations, which have held that California law “generally requires a plaintiff in a shareholder derivative suit to maintain continuous stock ownership throughout the pendency of the litigation.” Grosset v. Wenaas, 42 Cal. 4th 1100 (2008). The court found no indication that the legislature intended to depart from the ordinary principles requiring a plaintiff to maintain standing throughout litigation.
However, Turner acknowledged that its decision was at odds with Summers v. Colette, 34 Cal. App. 5th 361 (2019), a decision by the California Court of Appeal, Second Appellate District, which held that a director who brought a derivative action against another director alleging self-dealing and misconduct did not lose standing when removed from such position. And there is some sense in that position, as one can imagine a circumstance where a director is removed precisely to defeat standing in the pending derivative action (purportedly brought for the benefit of the non-profit). That might be more likely to happen in the non-profit context than in the context of a publicly traded corporation. For these reasons, it will be fascinating to see what the California Supreme Court decides.
For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, or Joshua Korr.
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