Only an actual shareholder can make a demand that the board investigate alleged wrongdoing and institute litigation for the corporation. Fed. R. Civ. P. 23.1 and scores of state analogs thus require a putative shareholder derivative plaintiff to plead with particularity that “the plaintiff was a shareholder…at the time of the transaction of which the plaintiff complains.” The prevailing view interprets this provision to require that the derivative plaintiff be a beneficial owner of stock at the time of the alleged wrongful acts and retain ownership of the stock for the duration of the lawsuit. The purpose of the “contemporaneous ownership” requirement is to prevent the purchasing of shares in order to maintain a derivative action designed to challenge a transaction that occurred before the purchase of stock.
The “continuous ownership” requirement, a judicially created rule, is animated by concern that to “permit a party to act as a derivative plaintiff when it has emptied itself of any economic interest in the corporation would invite abuse of the representative litigation mechanism, undermining its credibility and its utility in enforcing high standards of fiduciary conduct.”1 Courts generally will not permit a plaintiff to bring a shareholder derivative claim without specific allegations regarding when they purchased the stock and how long they held it. A plaintiff who is not a stockholder at the time of the alleged wrong, or who ceases to be a stockholder while the suit is pending, lacks standing to maintain the derivative suit.
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