Shareholders Denied Award Of Attorney’s Fees In Derivative Action Because Results Only Personally Benefited the Shareholders

Third District Find That Common Fund/Substantial Benefit Doctrines Were Inapplicable.

            Under the equitable “common fund” or “substantial benefit” doctrines, a shareholder who successfully pursues a derivative action that establishes a common fund or a substantial benefit to the corporation may look to the corporation to reimburse the shareholder for the costs of the litigation benefiting the corporation.  (See, e.g., Cziraki v. Thunder Cats, Inc., 111 Cal.App.4^th 552, 557-558 (2003).)  These principles were explored in the unpublished decision we next examine.

            In Wood v. Hock, Case No. C055122 (3d Dist. Sept. 24, 2008) (unpublished), the trial court denied attorney’s fees to two minority shareholders who successfully established that the president of a closely held development company breached his fiduciary duties to the plaintiffs by usurping for himself a land acquisition/development opportunity and certain construction management work.  The lower court reasoned that the lawsuit resulted entirely in personal benefit to the minority shareholders rather than in derivative benefit to the closely held corporation.

            That determination was affirmed on appeal, in a 3-0 Third District decision authored by Justice Davis.

            In affirming, the Court of Appeal examined the facts of Baker v. Pratt, 176 Cal.App.3d 370, 376-379 (1986), where one shareholder’s successful result against the co-shareholder only furthered the suing shareholder’s interests, and contrasted it against Cziraki, supra, 111 Cal.App.4^th at 554-555, 560-561, 565, where a patent manufacturer-shareholder successfully sued two exploitative shareholders so as to garner acquisition of the patents and royalties that would be split between all three shareholders.  Justice Davis found that “[t]he facts before us fall on the Baker side of the ledger,” given that the outcome benefited the personal adverse interests of the winning minority shareholders.  (Slip Opn., at p. 10.)  Thus, the common fund and substantial benefit equitable doctrines were not triggered, and the fee denial was correct.  (Accord, Avikian v. WTC Financial Corp., 98 Cal.App.4^th 1108, 1118 (2002) [“Baker makes clear that if corporate shareholders are seeking to advance their individual interests, rather than the interests of the corporation generally, no [attorney’s] fees should be awarded on a common fund or substantial benefit theory”].)