On March 9, 2022, Justice Borrok of the New York County Commercial Division issued a decision in Matter of Renren, Inc. Derivative Litig. v. XXX, 2022 NY Slip Op. 22069, holding that to have standing to bring a derivative action, plaintiff must be a shareholder when the company was injured, explaining:
The defendants move pursuant to BCL § 626 and argue that any shareholders who were not shareholders as of the record date and who currently are not shareholders should be dismissed from this lawsuit. This is the date they argue taking the plaintiffs allegations as true as the Court must at this stage of the proceeding, any fraud on the minority occurred (i.e., the date of the alleged transaction), and anyone who is not currently a shareholder also lacks standing. Stated differently, the defendants argue that BCL § 626 encompasses a dual requirement as to the ownership of stock — i.e., contemporaneous ownership and continuing ownership. Anyone who cannot satisfy these requirements lacks standing to bring this action.
BCL § 626 provides:
(a) An action may be brought in the right of a domestic or foreign corporation to procure a judgment in its favor, by a holder of shares or of voting trust certificates of the corporation or of a beneficial interest in such shares or certificates.
(b) In any such action, it shall be made to appear that the plaintiff is such a holder at the time of bringing the action and that he was such a holder at the time of the transaction of which he complains, or that his shares or his interest therein devolved upon him by operation of law.Indeed, it is well settled that to satisfy BCL § 626 (b) in a derivative action, the plaintiff must demonstrate that she was a shareholder at the time of the transaction, at the time of trial and at the time of entry of judgment.
As the Independent Inv. Protective League Court observed, the contemporaneous ownership requirement originated in the Federal courts to preclude a shareholder from transferring stock to a non-resident to manufacture diversity jurisdiction after a cause of action has accrued. The rule was later adopted by the legislature
to prevent litigious persons from buying stock for the purpose of bringing suit as to alleged past mismanagement’ (e.g., Myer v. Myer, 271 App Div 465, 473, aff’d 296 NY 979; accord Henn, Corporations [2d ed], §362, p 766). Because it seeks to foster public policy by inhibiting speculation in litigation, the contemporaneous ownership rule must, as a general matter, be rigorously enforced
As the Court of Appeals further observed, the continuing ownership requirement is
rooted in practical considerations. Although in a theoretical sense a derivative action is brought for the benefit of the corporation, In a very real sense the standing of the shareholder is based on the fact that he is defending his own interests as well as those of the corporation. Where the plaintiff voluntarily disposes of the stock, his rights as a shareholder cease, and his interest in the litigation is terminated. Being a stranger to the corporation, the former stockowner lacks standing to institute or continue the suit.
Put another way, standing requires both a sufficient legal interest and injury.
Two sets of opposition papers were submitted in connection with the instant motion. The first set of opposition papers were submitted by Heng Ren Silk Road Investments LLC (Heng Ren), Oasis Investment II Master Fund Ltd. (Oasis) and Jodi Arama (Heng Ren and Oasis, together with Ms. Arama, hereinafter, collectively, the HROA Plaintiffs). Ms. Arama was a shareholder since July 2011 and continues to be a shareholder. As such, she has standing regardless of whether the record date is April 29, 2018 or June 21, 2018. Heng Ren and Oasis, however, were not shareholders until May 2018, which is after the date the Court initially indicated should be set as the record date.
(Internal quotations and citations omitted) (emphasis added).