Derivative Action and the Continuous Ownership Requirment: Quinn v. Anvil Corp.

In Quinn v. Anvil Corp., No. 09-35101, 2010 WL 3307486 (9th Cir. Aug. 24, 2010), the Ninth Circuit Court of Appeals affirmed the district court’s holding that a shareholder did not have standing to sue the corporation for failing to meet the continuous ownership requirement.  The court declined to create an exception that would have allowed the shareholder to maintain standing to bring a derivative suit. 

Defendants, Anvil Corporation (“Anvil”) and its board of directors, were a privately held Washington company that provided engineering services to petroleum companies in the Northwest.  Plaintiff, Forrest Quinn (“Quinn”), was a shareholder in Anvil and nephew of its founder.

Quinn appealed the district court’s dismissal of his diversity derivative action for lack of standing, and sought damages from Anvil for breach of fiduciary duty, breach of contract, and negligence.  During Quinn’s suit, Anvil proposed an amendment to its articles of incorporation, which effected a reverse stock split, divesting Quinn of his fifty shares of Anvil stock.  The district court denied Quinn’s motion to enjoin the amendment.  After the amendment passed, the court denied Quinn’s request for further discovery, and dismissed the derivative action because Quinn was no longer a shareholder and thus did not have standing to assert claims derivatively. 

Quinn challenged the court’s ruling that he did not meet FRCP 23.1’s derivative action standing requirement.  Rule 23.1 states that a derivative action brought by “one or more shareholders… to enforce a right” of a corporation “may not be maintained if it appears that the plaintiff does not fairly represent the interests of shareholders or members who are similarly situated in enforcing the right of the corporation or association.”  From this language, the court inferred the plaintiff must retain ownership of the stock for the duration of the lawsuit.  Consequently, by operation of the reverse stock split, Quinn’s fifty shares were cancelled, and he no longer held Anvil stock.  The court thus held that Quinn did not meet the standard of Rule 23.1 and did not have standing to bring a derivative action against Anvil.

Quinn essentially sought an equitable exception to the continuous ownership requirement, arguing that the reverse stock split had been employed "only to terminate his pending lawsuit".  The court, however, declined. 

• courts have suggested that equitable standing may be appropriate where there is no business justification for a transaction other than to terminate a lawsuit. Anvil's Resolution and proxy materials explicitly related the Amendment's legitimate business purpose of consolidating ownership of Anvil within its employees for the benefit of Anvil's employees, its culture, and its relationship with clients and suppliers. "Quinn, however, has not offered credible evidence, but rather only his self-serving assertions that the purpose of Anvil's Amendment was to terminate his lawsuit. Because evidence showed a legitimate reason for the transaction, this exception is therefore likewise inapplicable.
  

The court noted that Quinn had available the potential recourse of appraisal rights and to the extent that Quinn personally aggrieved, could possibly "bring a direct action against Anvil."  

The court also affirmed the lower court's decision not to enjoin the reverse stock split and to dismiss the claim for false disclosure.

The primary materials in this case can be found at the DU Corporate Governance Web Site.