The California Supreme Court finally decided Grosset v. Wenaas (HT Pileggi).
The boring issue in the case was whether a derivative suit plaintiff has to continuously own his shares through the suit and not just at the time of the wrong. The California courts of appeal have split: Heckmann v. Ahmanson says yes, Gaillard v. Natomas Co. says no. And that's what the relevant statute, Section 800(b)(1) of the California Corporation Code, seems to say:
No action may be instituted or maintained in right of any domestic or foreign corporation by any holder of shares ... unless ...:[¶] (1) The plaintiff alleges in the complaint that plaintiff was a shareholder, of record or beneficially ... at the time of the transaction or any part thereof of which plaintiff complains or that plaintiff's shares ... 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....
Note that the statute says "instituted or maintained."
The California Supreme Court decided that neither the text nor the language of the statute required either reading. On policy, it held that the continuous ownership requirement was necessary to ensure that the shareholder had the requisite interest in the litigation.
I think the real reason for the decision related to the interesting issue in the case: whether the California court should apply the California statute or that of Delaware, where the firm was incorporated, where the courts have imposed a continuous ownership requirement. The Court of Appeal in Grosset applied Delaware law on the ground that standing requirements were an "internal affairs" issue. The Supreme Court said simply: "Because dismissal of Huang's appeal is required under either California law or Delaware law, we end the analysis here." In other words, it got to avoid this knotty issue.
Erin O'Hara and I address that issue in our Corporations and the Market for Law, forthcoming soon from the Illinois Law Review. As we discuss, there is no clear line between what is, and isn't, "internal affairs." In deciding when to apply the incorporating state law, the courts need to understand, as we argue throughout our article, that the IAD is simply a rule for enforcing the parties' choice-of-law contract – that is, the contract to apply the law of the state of incorporation.
The issue in this case, then, is the same as that regarding enforcement of any choice-of-law clause: should the forum or other court's policy override the contract. It's easy to see why California was eager to avoid this issue, even if that meant deferring to Delaware's resolution on the narrower corporate law issue: invading internal governance sets up a confrontation over the constitutional status of the internal affairs doctrine. See this post about another California/Delaware duel.
It follows from our analysis that this is not appropriately viewed as a constitutional issue. However, if Delaware and California can't settle their differences, some court might decide otherwise, or Congress might intervene in state corporation law. So the court might have thought it was better to save the fight for a more important issue.
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