Disagreement between shareholders and those in control of corporate entities is unfortunately a common problem. In some cases, entities are haphazardly formed and controlled by individuals who lack the skills necessary to properly run them. In particularly egregious circumstances, those in control of an entity may disregard their duties entirely in favor of personal interests. In other cases, a disgruntled shareholder may file meritless claims against the entity. In any of those situations, an aggrieved shareholder may resort to the filing of a shareholder derivative lawsuit, which is, in effect, a lawsuit filed on behalf of the corporation.
Derivative lawsuits are governed by a statutory framework which features a few specialized rules, one of which allows the corporation’s leadership to request that the plaintiff post bond as a precondition of maintaining the lawsuit. The authority for such a request is codified in section 800, subdivision (c) of the California Corporations Code (sometimes referred to herein as “Section 800”), which provides in pertinent part:
“… at any time within 30 days after service of summons upon the corporation or upon any defendant who is an officer or director of the corporation, or held such office at the time of the acts complained of, the corporation or such defendant may move the court for an order, upon notice and hearing, requiring the plaintiff to furnish a bond as hereinafter provided.”
Importantly, a corporation’s request for such relief must be based on one or more of the following grounds:
(1) That there is no reasonable possibility that the prosecution of the cause of action alleged in the complaint against the moving party will benefit the corporation or its shareholders.
(2) That the moving party, if other than the corporation, did not participate in the transaction complained of in any capacity.
(Cal. Corp. Code § 800, subd. (c); see also, Cal. Corp. Code § 5700, subd. (c) [substantially identical statute which applies to nonprofit corporations].)
Whether requesting bond or opposing such a request, there are a few things that litigants and their counsel should keep in mind.
- Timing is Key.
The corporation must move for bond within 30 days of service of summons, which can be extended by the court for up to 60 days upon a showing of good cause. (Cal. Corp. Code § 800, subd. (c).)
- The Maximum Bond Amount is $50,000.00.
The maximum aggregate amount of security that a plaintiff may be required to provide is $50,000.00, even if parties other than the corporation have also been sued. (Hale v. Southern California IPA Medical Group (2001) 86 Cal.App.4th 919, 927–928 [examining legislative history of Section 800 and concluding that trial court erred in ordering plaintiff in derivative action against corporation and five directors to post six bonds for total of $250,000.00].)
- The Plaintiff May Voluntarily Post Bond.
The plaintiff may avoid the inconvenience and delay associated with a motion proceeding under Section 800 by voluntarily posting bond in the aggregate amount of $50,000.00. The plaintiff may do so either before or after a defendant has filed a motion for security. (Cal. Corp. Code § 800, subds. (e), (f).)
- Section 800 Does Not Authorize the Recovery of Attorney Fees Beyond the Bond Amount.
Courts interpret Section 800 as an independent basis for the recovery of attorney fees by the prevailing party, but only up to the amount of the bond posted. (See West Hills Farms, Inc. v. RCO Ag Credit, Inc. (2009) 170 Cal.App.4th 710, 716; Donner Management Co. v. Schaffer (2006) 142 Cal.App.4th 1296, 1309.) Accordingly, courts have flatly rejected attempts by prevailing corporations to recover attorney fees in excess of the bond amount. (See Ibid [“The plain language of section 800 expressly limits a prevailing defendant's recovery of fees and costs to the amount of the posted security, in this case $50,000.”]; see also Alcott v. M. E. V. Corp. (1987) 193 Cal.App.3d 797, 800 [in the absence of a posted bond, Section 800 does not provide any basis to recover attorney fees or costs].)
Benjamin Johnson is a partner in the litigation department at Berliner Cohen, LLP. He can be reached at email@example.com.