Standing in shareholder derivative suits must be continuing: BACIGALUPO V. KOHLHEPP (COA 11/16/2007)

BACIGALUPO V. KOHLHEPP
TORTS:  SHAREHOLDER DOUBLE DERIVATIVE SUIT BY MINORITY ALLEGING BREACH OF FIDUCIARY DUTY

2006-CA-001020
PUBLISHED: DISMISSING
PANEL: NICKELL PJ; LAMBERT, MOORE CONCUR
COUNTY: KENTON
DATE RENDERED: 11/16/2007

Appellants  Bacigalupo brought this shareholder’s double derivative action on behalf of FNB Bancorporation, Inc. alleging the appellees, a minority of the officers and directors of FNB, had breached their fiduciary duties to FNB thereby causing FNB and its wholly owned subsidiary, First National Bank of Northern Kentucky (hereinafter “Bank”), to violate laws and suffer long-term financial losses. The trial court granted the appellees’ separate motions to dismiss on April 18, 2006, holding that Bacigalupo had failed to make a demand on FNB’s Board of Directors or to particularize why such a demand would be futile, and had failed to name an indispensable party.  Order entered dismissing appeal.

During the pendency of this appeal, on or about May 18, 2007, FNB completed a merger with The Bank of Kentucky Financial Corporation and BOK Sub. Corp. As a result of the merger Bacigalupo’s shares of stock in FNB were cancelled.  Shortly thereafter, the appellees filed a motion to dismiss this appeal alleging Bacigalupo was no longer a shareholder in FNB and thus had no standing to continue prosecuting the appeal.

Although the shareholders Bacigalupo had standing when the derivative action was commenced, the COA held continuous ownership by a shareholder to be a necessity in order to retain standing to prosecute a derivative action under KRS Chapter 271B in Kentucky and thus no longer had standing to continue prosecuting this appeal. 

KRS 271B.7-400(1) requires derivative actions to be initiated only by persons who were shareholders of the corporation at the time the transaction complained of occurred. Bacigalupo satisfied this requirement prior to commencing the instant action.  However, KRS 271B.7-400(1) further states such actions “shall not be maintained if it appears that the person commencing the proceeding does not fairly and adequately represent the interests of the shareholders in enforcing the right of the corporation.” The question presented then is whether a person must maintain shareholder status throughout the course of the litigation in order to retain standing.  Although there is no Kentucky case on point,  the language of KRS 271B.7-400 is substantially the same as that found in Federal Rules of Civil Procedure (FRCP) 23.1.  Numerous state and federal courts have held continuous stock ownership in a corporation is implicitly required by FRCP 23.1 or state statutes and rules that mirror its language.  COA agreed.

Digested by Michael Stevens

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