Shareholder Need Not Hold Share Certificates to Have Right to Assert Derivative Claims

On September 5, 2018, Justice Bransten of the New York County Commercial Division issued a decision in Lentini v. 219 W. 20th Str. Corp., 2018 NY Slip Op. 32181(U), holding that a plaintiff need not hold share certificates to have the right to assert derivative claims, explaining:

The mere fact that the corporation did not issue any stock certificates does not preclude a finding that a person has the rights of a shareholder. It is the payment, or the obligation to pay for shares of stock, accepted by the corporation, that creates both the shares and their ownership. Labor or services actually received by or performed for the corporation constitutes consideration for the issue of shares. However, a claimants' failure to allege any basis upon which he might claim an actual, equitable or beneficial interest in any corporate shares will result in dismissal for lack of standing. . . .

Assuming the truth of Joseph Lentini's allegations, he has standing to pursue derivative claims on WCA's behalf. The second amended complaint alleges that Joseph Lentini owns 50% of the interest in WCA and that, as consideration for his ownership interest, he contributed his time and experience to WCA at a reduced salary. This constitutes consideration for the alleged issue of shares and, if true, creates both the shares and their ownership. Whether Joseph Lentini has an ownership interest in WCA is not before the court on the instant, pre-answer motion to dismiss. Joseph Lentini need only allege a basis upon which he may claim an actual, equitable or beneficial interest in any WCA shares, which he has done.

(Internal quotations and citations omitted) (emphasis added).

This decision touches on two areas of commercial litigation that are a significant part of our practice: derivative actions (where a shareholder brings an action on behalf of a corporation) and business divorce (a break-up between the owners of a closely-held business). Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding either of these issues.