Opinion ID: 1097820
Heading Depth: 1
Heading Rank: 1

Heading: derivative action by shareholders

Text: In a derivative action brought by one or more shareholders or members to enforce a right of a corporation or of an unincorporated association, the corporation or association having failed to enforce a right which may properly be asserted by it, the complaint shall be verified and shall allege that the plaintiff was a shareholder or member at the time of the transaction of which he complains or that his share or membership thereafter devolved on him by operation of law. The complaint shall also allege with particularity the efforts, if any, made by the plaintiff to obtain the action he desires from the directors or comparable authority and, if necessary, from the shareholders or members, and the reasons for his failure to obtain the action or for not making the effort. The derivative action may not be maintained if it appears that the plaintiff does not fairly and adequately represent the interests of the shareholders or members similarly situated in enforcing the right of the corporation or association. The action shall not be dismissed or compromised without the approval of the court, and notice of the proposed dismissal or compromise shall be given to shareholders or members in such manner as the court directs. After a review of the record, this court likewise reaches the conclusion that Green's suit was filed under Rule 23.1. Green's complaint alleges fraudulent conversions of corporate assets, which, if the allegations are true, would by law have to be returned to the corporation, as the assets are not solely Green's but belong to the corporation. As noted in 19 Am.Jur.2d, Corporations § 534 (1979): An action brought by a stockholder to recover assets for the corporation or to prevent a dissipation of corporate assets is derivative in nature. Stockholders as such may not maintain actions to recover possession of corporate property. Thus, a stockholder may not bring an action in his own name for an alleged fraudulent transfer of corporate property to another stockholder; such a suit must be by or in behalf of the corporation.  (Emphasis added.) It is only when a stockholder alleges that certain wrongs have been committed by the corporation as a direct fraud upon him, and such wrongs do not affect other stockholders, that one can maintain a direct action in his individual name. It is clear from Green's complaint that the acts complained of would affect all stockholders. In his complaint, Green states that he need not be a stockholder when the suit was commenced as he was a stockholder of record at the time the fraudulent conversions were taking place. However, Rule 23.1 has been interpreted to require that one must be a stockholder at the time of filing the shareholder derivative action. In Wefel v. Kramarsky, 61 F.R.D. 674 (1974), it was held that one bringing a derivative action must not only be a stockholder at the time the alleged wrong was committed, but also a stockholder at the time the suit was commenced. The court in deciding this issue states: Rule 23.1, Federal Rules of Civil Procedure, does not expressly require that a derivative plaintiff be a stockholder at the time of said suit. Such a requirement is implied by the rule, however, since it deals with actions brought by one or more stockholders. The cases under the law clearly establish that one who does not own shares in a corporation at the time a suit is filed is not qualified to bring a derivative action on their behalf. This proposition of law can also be found in de Haas v. Empire Petroleum Company, 435 F.2d 1223 (1970), and in 3B J. Moore, Federal Practice, § 23.17 (2nd Ed.1969). (It should be noted that Rule 23.1, Alabama Rules of Civil Procedure, is derived from Rule 23.1, Federal Rules of Civil Procedure.) The trial court correctly found that Green did not have standing to sue in this cause. Therefore, Green cannot prosecute this action. See Rule 17(a), ARCP. Due to the fact that this issue disposes of the case, the res judicata issue is rendered moot. AFFIRMED. TORBERT, C.J., and ALMON, EMBRY and ADAMS, JJ., concur.