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Patrick v. Alacer Corp.

84 Cal. Rptr. 3d 642, 167 Cal. App. 4th 995 (2008)

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Patrick v. Alacer Corp.

California Court of Appeal

84 Cal. Rptr. 3d 642, 167 Cal. App. 4th 995 (2008)

Facts

Ymelda T. Patrick (plaintiff), a stockholder of Alacer Corporation (defendant) (Alacer), filed a shareholder derivative action in superior court against Ronald J. Patrick, James Turner, and Thaddeus Smith (collectively, the directors) (defendants), who were directors of Alacer, for breach of fiduciary duty and mismanagement. Alacer filed a demurrer to dismiss Patrick’s complaint on the ground that the derivative claim was meritless. The directors filed a demurrer to Patrick’s complaint on the same ground. The superior court entered a judgment of dismissal in favor of Alacer. Patrick appealed, arguing that a corporation such as Alacer cannot defend itself in a derivative action. On appeal to the court of appeals, Alacer relied on caselaw raising the exception that corporations may defend against derivative actions if the suit threatens the corporation. However, Alacer did not assert a basis for invoking this exception. Alacer argued a hypothetical concern about requiring a corporation to sit idly by while a shareholder pursues a meritless derivative claim. However, Alacer could not demonstrate the harm that would incur from the hypothetical concern. If Alacer opposed the derivative action, the disinterested directors could assert the special litigation committee defense, and if the defense were not asserted, Alacer could sit idly by with no substantial harm to Alacer and await an outcome in the derivative action.

Rule of Law

Issue

Holding and Reasoning (Ikola, J.)

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