## Facts

- Several minority shareholders of American Network, Inc. (AmNet) sued AmNet and its directors, Pacific Telecom, Inc. (PTI) and its directors, and Price Waterhouse & Co., Inc. and an individual accountant.
- The complaint asserted both (a) shareholder derivative claims and (b) direct claims, each framed as breaches of fiduciary duty tied to transactions and conduct affecting AmNet and the minority shareholders.
- After the lawsuit began, the minority shareholders agreed to exchange all of their AmNet shares for the right to receive payment in the challenged transaction.
- Because the plaintiffs no longer owned AmNet stock after the exchange, the corporate and director defendants moved to dismiss the fiduciary-duty claims, arguing the plaintiffs lacked standing—especially to continue any derivative claims brought on AmNet’s behalf.

## Issues

1. Whether plaintiffs who exchanged all of their AmNet shares for the right to receive payment after filing suit could continue to maintain shareholder derivative claims under Federal Rule of Civil Procedure 23.1.
2. Whether the plaintiffs’ loss of shareholder status required dismissal of fiduciary-duty claims that sought relief for harm allegedly suffered by the minority shareholders in their own right, as opposed to harm to AmNet.

## Decision

- The court dismissed the derivative fiduciary-duty claims because the plaintiffs were no longer AmNet shareholders and therefore could not satisfy Rule 23.1’s requirement that a derivative plaintiff maintain shareholder status through the litigation.
- The court allowed the case to proceed only to the extent the pleaded fiduciary-duty theories stated direct claims for injury allegedly suffered by the minority shareholders personally (rather than injury suffered by AmNet).

## Legal Principles

- A Rule 23.1 derivative action is prosecuted on the corporation’s behalf; the plaintiff must be a shareholder with a continuing ownership interest sufficient to justify acting in a representative capacity.
- When a derivative plaintiff ceases to be a shareholder—such as by exchanging all shares for cash or cash rights—the plaintiff generally loses standing to continue derivative claims because the representative relationship ends.
- Loss of shareholder status also bears on Rule 23.1’s adequacy requirement: a former shareholder ordinarily cannot fairly represent current shareholders’ and the corporation’s interests in a derivative suit.
- The end of shareholder status does not automatically bar properly pleaded direct claims; a former shareholder may continue claims that seek recovery for personal harm arising from the transaction in which the shares were acquired or cashed out, rather than recovery for harm to the corporation.

## Conclusion

In *Guenther v. Pacific Telecom, Inc.*, the District of Oregon held that minority shareholders who exchanged all of their AmNet shares for the right to receive payment lost standing to maintain derivative fiduciary-duty claims under Rule 23.1 because they were no longer shareholders during the case. The court, however, did not treat the exchange as a complete bar to litigation: claims seeking relief for harm allegedly suffered by the minority shareholders individually—properly characterized as direct rather than derivative—could proceed.


Guenther v. Pacific Telecom, Inc., 123 F.R.D. 341 (1988)