Wife Had Standing to Bring Shareholder Derivative Suit to Claim an Interest in Deceased Husband’s Business

The Husband formed Alacer in mid-1970’s to manufacture vitamin supplements (Emergen-C). Husband was the sole record owner of Alacer stock. Husband married the Wife in 1988, and together they created vitamin supplement formulas, served as corporate officers, and financially supported Alacer during their marriage. Alacer flourished under their care, attaining market value of $70M. In 2000, the Husband transferred all of the shares to his revocable trust, which then became Alacer’s only shareholder of record.

Shortly before the Husband died, while he was deathly ill, the trustees of the Husband’s trust met with the Wife and convinced her to name them to Alacer’s board of directors. The Husband died 3 weeks later, and the Trust continued to hold 100% of stock without distributing any shares to the Wife. One month later, the board completely ousted the Wife from the company. Wife filed a shareholder’s derivative suit against three of the directors and Alacer. In her complaint, she alleged a community property interest in the Alacer stock. However, the trial court sustained a demurrer to her complaint, holding that she had no standing to bring a shareholder derivative suit.

The Court of Appeal reversed, reasoning that “even if Alacer was initially her husband’s separate property, she may have acquired a community property interest in it through their alleged joint devotion of time and effort to it during the marriage.” Wife’s alleged community property interest in company rendered her a beneficial shareholder with standing. While the Trust was the only record shareholder, the Wife’s alleged community property interest in Alacer, if true, essentially made her an unregistered shareholder. While no Court had yet adjudicated her community property complaint, that was not required: “’The respective interests of the husband and wife in community property during continuance of the marriage relation are present, existing, and equal interests.’” “[Wife’s] alleged community property interest was created during their marriage. She allegedly has a present and existing interest in Alacer stock already – she does not need to do anything to trigger her interest. And while a court may confirm her community property interest, it cannot create it.”

Patrick v. Alacer Corp. [Patrick I] (2008) 167 Cal.App.4th 99