Shareholder derivative litigation is a powerful tool for holding corporate officers and directors accountable for breaches of fiduciary duty. Before a stockholder can pursue such a claim, however, California law imposes threshold ownership requirements that courts rigorously enforce. Under California Corporations Code § 800(b)(1) and the case law interpreting it, a derivative plaintiff generally must own stock in the corporation: (1) when the challenged transaction or conduct occurred; (2) at the time the lawsuit is filed; and (3) during the pendency of the lawsuit. See Grosset v. Wenaas, 42 Cal. 4th 1100, 1110-19 (2008).
These requirements—the “contemporaneous ownership” and “continuous ownership” rules—reflect two conceptually distinct doctrines, each with its own purpose, exceptions, and developing case law. Understanding both is essential for any stockholder contemplating derivative litigation in California.
The Contemporaneous Ownership Requirement
The contemporaneous ownership requirement mandates that a derivative plaintiff was a stockholder at the time of the alleged misconduct—or that the ownership interest devolved upon the plaintiff by operation of law from a holder who owned shares at that time. California Corporations Code § 800(b)(1) codifies this requirement, providing that no derivative action may be instituted unless “plaintiff was a shareholder, of record or beneficially … at the time of the transaction or any part thereof of which plaintiff complains or that plaintiff’s shares … thereafter devolved upon plaintiff by operation of law from a holder who was a holder at the time of the transaction or any part thereof complained of.”
The purpose of the contemporaneous ownership rule is to prevent “strike suits”—situations where an opportunistic investor purchases stock after learning of reported misconduct in order to manufacture standing to sue. Grosset, 42 Cal. 4th at 1109. By requiring that the plaintiff have held shares during the conduct at issue, the rule ensures that the derivative plaintiff has a genuine and pre-existing stake in the corporation whose rights are being vindicated.
The Continuous Ownership Requirement and Its Two Elements
While the contemporaneous ownership requirement concerns the plaintiff’s stockholding at the inception of the alleged wrong, the continuous ownership requirement addresses the plaintiff’s ongoing stake in the litigation. As the California Supreme Court confirmed in Grosset, Cal. Corp. Code § 800(b)(1)’s language that no derivative action may be “instituted or maintained” without an ownership interest imposes a continuous ownership requirement: the plaintiff must hold shares both at the time of filing and throughout the pendency of the derivative action. (emphasis in original). Id. at 1111.
The continuous ownership requirement serves a distinct purpose from the contemporaneous rule. Its intent is to ensure that the derivative plaintiff continues to have “skin in the game” by maintaining an ownership interest throughout the pendency of the litigation. Grosset made this principle concrete by holding that a derivative plaintiff lost standing when he lost his stockholding as a result of a merger—even though he had properly held shares when the suit was filed. In doing so, the Supreme Court disapproved Gaillard v. Natomas Co., 173 Cal. App. 3d 410 (1985) which had previously rejected a continuous ownership requirement under California law.
The continuous ownership requirement thus comprises two distinct elements: (1) the plaintiff must own stock when the suit is filed; and (2) the plaintiff must maintain that ownership interest throughout the litigation. Both elements must be satisfied to maintain derivative standing.
Exceptions to the Contemporaneous Ownership Requirement
Unlike Delaware law, California provides a statutory mechanism permitting courts to allow a derivative plaintiff who does not meet the contemporaneous ownership requirement to nonetheless maintain the action. Under California Corporations Code § 800(b)(1), a court may grant such an exception when the plaintiff demonstrates all five of the following elements:
(1) There is a strong prima facie case in favor of the claim asserted on behalf of the corporation;
(2) No other similar action has been or is likely to be instituted;
(3) The plaintiff acquired the shares before there was disclosure to the public or to the plaintiff of the wrongdoing of which the plaintiff complains;
(4) Unless the action can be maintained, the defendant may retain a gain derived from the defendant’s willful breach of a fiduciary duty; and
(5) The requested relief will not result in unjust enrichment of the corporation or any shareholder of the corporation.
This statutory exception reflects a careful balancing of competing policy concerns. On one hand, the five-factor test maintains a meaningful barrier to opportunistic litigation. On the other hand, it recognizes that there may be circumstances—particularly where a plaintiff acquired shares before any public disclosure of wrongdoing, and where the wrongdoer stands to retain ill-gotten gains absent litigation—where equity demands flexibility. A similar exception applies to derivative actions brought on behalf of limited liability companies under California Corporations Code § 17709.02.
Equitable Exception to Continuous Ownership Rule
A critical question in derivative practice is whether the five-factor statutory exception described above can also excuse a plaintiff’s failure to meet the continuous ownership requirement. Under California law, the answer is no. The statutory exception under § 800(b)(1) addresses only the contemporaneous ownership requirement and does not extend to excuse a loss of standing caused by a plaintiff’s failure to maintain ownership throughout the litigation.
This distinction flows directly from Grosset. The California Supreme Court recognized the continuous ownership requirement as independently grounded in the statutory text’s requirement that an action be “maintained” with an ownership interest—a requirement separate from the “instituted” language that governs the contemporaneous ownership requirement. By treating continuous ownership as a freestanding and independently derived requirement, the Court’s analysis confirms that the statutory carve-outs applicable to the contemporaneous requirement do not automatically carry over to cure a mid-litigation loss of standing.
While the statutory exception is unavailable to cure a loss of continuous standing, Grosset acknowledged that equitable considerations may warrant an exception to the continuous ownership requirement. The Supreme Court identified two circumstances in which equity might intervene to preserve standing: (1) where a merger or similar transaction is used to wrongfully deprive the plaintiff of standing; or (2) where the transaction is merely a reorganization that does not meaningfully affect the plaintiff’s underlying ownership interest. Grosset, 42 Cal. 4th at 1119.
Subsequent California appellate decisions have elaborated on the contours of this equitable exception. In Haro v. Ibarra, 180 Cal. App. 4th 823, 836-37 (2009), the court reversed a trial court’s order sustaining a demurrer, holding that derivative plaintiffs should be permitted to allege that their shares were forfeited as a result of a fraudulent conversion. The Haro decision confirmed that equity can intervene to preserve derivative standing where the plaintiff’s loss of shares was itself the product of the wrongdoing at the heart of the case—effectively preventing defendants from weaponizing their own misconduct as a procedural shield against derivative claims. But see J.B.B. Inv. Partners, Ltd. v. Fair, No. A160098, 2022 WL 2071012 (Cal. Ct. App. June 9, 2022) (unpublished) (equitable considerations did not directly implicate plaintiffs’ ownership interests so as to trigger exception contemplated by Grosset and applied in Haro).
EBO Properties North v. Sirott: A Significant New Development
A particularly important recent development comes from EBO Properties North v. Sirott, No. A169638, 2026 WL 205519, at *19 (Cal. Ct. App. Jan. 27, 2026) (unpublished). In EBO, the court addressed the equitable exception in the context of a limited liability company derivative action and reached a notable holding regarding the standard for invoking Grosset’s equitable exception: unlike Delaware law, California’s equitable exception to the continuous ownership requirement does not require proof of fraud in connection with the transaction that deprived the plaintiff of standing. Instead, it requires only that the reorganization was used “wrongfully” to remove standing.
This is a meaningful distinction with real practical consequences. Under Delaware’s continuous ownership framework, plaintiffs seeking to avoid dismissal on loss-of-standing grounds typically must show that the transaction was fraudulent or specifically designed to eliminate derivative claims. EBO signals that California courts may apply a more plaintiff-friendly standard—one that is satisfied by showing a transaction was used “wrongfully” (a broader concept than fraud) to strip the plaintiff of standing. While the decision concerned a limited liability company, the analysis of Grosset should apply equally to corporations.
Although EBO is unpublished and therefore not directly citable as binding precedent under California Rules of Court, it offers a valuable window into how California courts are developing the equitable exception to the continuous ownership requirement. The decision suggests that California’s approach may diverge meaningfully from Delaware’s in this area—and that the equitable exception, once viewed as narrow, may have more room to breathe than previously understood. Practitioners advising derivative plaintiffs who have lost (or are at risk of losing) their ownership stake mid-litigation should take careful note of this development.