MBE Rules · Business Associations
Derivative Security for Expenses
Cal. Corp. Code § 800(c)-(f)
The rule
Defendants may move to require a derivative plaintiff holding under 5% and under $50,000 of shares to post security for defense expenses if the suit lacks reasonable probability of benefiting the corporation.
In plain English
A derivative security for expenses allows defendants in a shareholder derivative suit to ask the court to require a minority shareholder (holding less than 5% or $50,000 worth of shares) to post a bond for defense costs. This can happen if the court finds that the lawsuit is unlikely to benefit the corporation, which is the primary purpose of derivative actions.
Worked example
In a derivative suit, a shareholder owning only 3% of the company's stock and valued at $30,000 sues the board for alleged mismanagement. The defendants argue that the suit has no reasonable chance of success and moves to require the plaintiff to post security for their defense costs. The court agrees and orders the plaintiff to post a bond, effectively dismissing the suit.
Memory hook
Minority shareholders beware: if your suit lacks merit, you might have to pay up front!
The trap
Exams often present scenarios where the percentage of shares is close to the threshold, tricking students into miscalculating eligibility for security posting. Additionally, students may confuse the standard of 'reasonable probability' with other standards of merit.
How examiners test it
This rule typically appears in questions involving derivative lawsuits where the plaintiff's ownership stake and the potential benefit to the corporation are in question, often requiring students to analyze the merits of the case.
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