Richard Grosset v. Eric P. Wenaas, et al
Filed February 14, 2008, Supreme Court of California
Opinion Number: S139285

The Judgement of the Court of Appeals, Affirmed

JNI was a manufacturer, designers and marketers of computer hardware and software products. It was incorporated in Delaware and at all relevant times was based in San Diego, California.

In September of 2001, Richard Grosset initiated a derivative suit in behalf of JNI, based on six securities fraud class actions in federal courts against nine of JNI’s officers and directors. The complaint sought redress solely for injuries sustained by JNI as a result of the defendants’ alleged wrongdoing. No recovery was sought for any direct or individual harm to JNI stockholders.

When Grosset subsequently sold his JNI stock, the trial court permitted Sik-Lin Huang, a JNI stockholder, to intervene and continue this litigation.

Huang's complaint in intervention alleges cause of action against defendants for breach of fiduciary duties, waste of corporate assets, gross mismanagement of JNI, and insider trading in connection with a secondary offering by JNI.

September of 2002, JNI through its board of directors, created a special litigation committee (SLC) to investigate the allegations of the derivative complaint and determine of the same action would further JNI's best interest.

The SLC, in its report, concluded the derivative claims lacked merit and would likely not be successful. The SLC determined, inter alia, that the steep rise and fall of JNI’s stock price was caused by a confluence of events in the marketplace, and not by a contrived scheme of false and misleading statements on the part of the directors and management to promote JNI’s stock solely for personal profit. Thus, pursuing the derivative action would not be in JNI’s best interests.

Based on its finding, the SLC filed a motion to dismiss the derivative complaint in court.

Huang disputed the report filed by SLC challenging the independence, adequacy and reasonableness of the SLC composition, investigation and conclusions.

The district court disposed of the case: granting JNI’s three successive motions to dismiss finding the Osher plaintiffs did not allege sufficient facts establishing that defendants knowingly or recklessly made false or misleading statements.

The trial court dismissed the derivative complaint with prejudice. The trial court rejected Huang's challenges to the SLC and its report.

In the meantime, before Huang's appeal, JNI's stockholders voted to approve a merger. The merger was between JNI and AMCC- wholly owned subsidiary of Applied Micro Circuits Corporation (AMCC) in effect, JNI became a wholly owned subsidiary of AMCC.

Soon thereafter, Huang appealed.

Defendants subsequently moved to dismiss Huang’s appeal on the ground he had no standing to pursue the litigation after selling his JNI stock in the merger.

The Court of Appeal heard defendants’ motion to dismiss in conjunction with the appeal. Upon finding that Huang lacked standing to continue the action, the court dismissed the appeal without addressing its merits.

Thereafter, Huang filed a petition for review with this court.

Issues involved:

1. What law governs with respect to the issue on post-merger legal standing to carry on a derivative suit?


2. Whether Huang’s lost of status as a JNI stockholder deprived him of legal standing to pursue this derivative action on JNI’s behalf.

The court disposed in part, as follows:

The Court of Appeal determined that the law of the state of incorporation governs this issue, because the requirements for standing implicate the internal affairs of a corporation.

JNI was incorporated in Delaware, where the law indisputably requires a plaintiff who brings an action on behalf of a corporation to maintain continuous stock ownership in the corporation throughout the action’s pendency.

Significantly, Delaware views the continuous ownership requirement as “fully applicable to a question of post-merger standing to carry on a derivative suit.”

Applying Delaware law, the court concluded that Huang’s loss of his JNI stock as part of the merger resulted in his loss of standing to maintain the appeal of this action.

The court proceeded to find, in the alternative, that because California law imposes a continuous ownership requirement that parallels Delaware law, Huang lacks standing in any event.

Consequently, when the stockholder relationship is terminated, either voluntarily or involuntarily, a derivative plaintiff loses standing because he or she no longer has even an indirect interest in any recovery pursued for the corporation’s benefit

In sum, we hold that California law, like Delaware law, generally requires a plaintiff in a shareholder’s derivative suit to maintain continuous stock ownership throughout the pendency of the litigation.

Under this rule, a derivative plaintiff who ceases to be a stockholder by reason of a merger ordinarily loses standing to continue the litigation.

Although equitable considerations may warrant an exception to the continuous ownership requirement if the merger itself is used to wrongfully deprive the plaintiff of standing, or if the merger is merely a reorganization that does not affect the plaintiff’s ownership interest, we need not address such matters definitively in this case, where no such circumstances appear.

The judgment of the Court of Appeal is affirmed.