Standing of Shareholder Plaintiffs in a Derivative Action
As a general rule, a shareholder who initiates a lawsuit derivatively on behalf of a corporation must maintain his ownership in the corporation throughout the life of the litigation. See Denver Area Meat Cutters and Employers Pension Plan ex rel. Clayton Homes, Inc. v. Clayton, 120 S.W.3d 841, 850 (Tenn.Ct.App.,2003) (applying Delaware law). Accordingly, if a derivative plaintiff ceases to own stock in the corportation, his standing to continue pursuing the claim or to appeal the claim on behalf of the corporation usually dissolves.
However, courts have recognized exceptions to the general rule. For example, a merger which terminates stock ownership has been held not to destroy the standing of a derivative plaintiff (1) where the merger itself is the subject of a claim of fraud, or (2) where the merger is in reality a reorganization which does not affect plaintiff's ownership of the business enterprise. Id. (citing Lewis v. Anderson, 477 A.2d 1040, 1046, n. 10 (Del.1982)).
Similarly, in Schilling v. Belcher, 582 F.2d 995, 1003 (5th Cir. 1978), the Fifth Circuit held that former derivative plaintiffs could defend a judgment on appeal supporting an award of attorney’s fees in their favor, but that the plaintiffs, who had ceased to be shareholders, had lost their right to initiate a cross-appeal on behalf of the corporation.
Parties to a derivative action should consult the case law of the relevant jurisdiction to see how those Courts have treated this issue of derivative standing.