As pointed out in a recent Chicago Daily Law Bulletin article, in SDF Funding v. Fry, No. 2017-0732 (May 13, 2022), a Delaware Chancellor rejected a claim of equitable standing. There the plaintiff alleged misconduct of officers and directors and asked to sue as the only owner of two LLCs who owned stock in the company.

Delaware requires derivative lawsuits to be brought by someone who is a stockholder of the corporation at the time of the transaction of which such stockholder complains or that such stockholder’s stock was obtained thereafter by operation of law:

In any derivative suit instituted by a stockholder of a corporation, it shall be averred in the complaint that the plaintiff was a stockholder of the corporation at the time of the transaction of which such stockholder complains or that such stockholder’s stock thereafter devolved upon such stockholder by operation of law. Sec. 327, DGC.

Illinois has a similar statute. (Sec. 7.80(a) of the Illinois BCA.).

The Chancellor discussed Schoon v. Smith, 953 A.2d 196 (2008), which noted that equitable standing may be extended to new circumstances, but generally applies only to prevent a complete failure of justice. 

In SDF, other shareholders would have had standing to bring the claims. The Chancellor therefore ruled that section 327 barred the claim.

The issues of standing and direct versus derivative claims are important in many shareholder disputes. If you have questions about your rights or duties as a shareholder, officer, or director of a corporation. For information about this, contact Thomas E. Patterson at tpatterson@pattersonlawfirm.com.