Opinion ID: 2622828
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Heading: Corporation Law and Shareholder Litigation: Basic Principles

Text: Before addressing the stock ownership requirements of Delaware and California law, we review several basic principles relating to corporation law and shareholder litigation. It is fundamental that a corporation is a legal entity that is distinct from its shareholders. ( Merco Constr. Engineers, Inc. v. Municipal Court (1978) 21 Cal.3d 724, 729, 147 Cal.Rptr. 631, 581 P.2d 636.) The authority to manage the business and affairs of a corporation is vested in its board of directors, not in its shareholders. (§ 300, subd. (a); Granite Gold Min. Co. v. Maginness (1897) 118 Cal. 131, 138, 50 P. 269.) This includes the authority to commence, defend, and control actions on behalf of the corporation. (See generally 2 Ballantine & Sterling, Cal. Corporation Laws (4th ed.2007) § 290, p. 14-6 (Ballantine & Sterling); e.g., A Paladini, Inc. v. Superior Court (1933) 218 Cal. 114, 121, 21 P.2d 941.) Because a corporation exists as a separate legal entity, the shareholders have no direct cause of action or right of recovery against those who have harmed it. The shareholders may, however, bring a derivative suit to enforce the corporation's rights and redress its injuries when the board of directors fails or refuses to do so. When a derivative suit is brought to litigate the rights of the corporation, the corporation is an indispensable party and must be joined as a nominal defendant. (See generally Friedman, Cal. Practice Guide: Corporations (The Rutter Group 2007) §§ 6:602-6:603, 6:611, pp. 6-131, 6-134; 2 Ballantine & Sterling, supra, § 291.02, pp. 14-7 to 14-8.) An action is deemed derivative `if the gravamen of the complaint is injury to the corporation, or to the whole body of its stock and property without any severance or distribution among individual holders, or it seeks to recover assets for the corporation or to prevent the dissipation of its assets.' ( Jones v. H.F. Ahmanson & Co. (1969) 1 Cal.3d 93, 106, 81 Cal.Rptr. 592, 460 P.2d 464.) [5] When a derivative action is successful, the corporation is the only party that benefits from any recovery; the shareholders derive no benefit `except the indirect benefit resulting from a realization upon the corporation's assets.' ( Jones, at p. 107, 81 Cal. Rptr. 592, 460 P.2d 464.)