## Facts

- Ymelda T. Patrick and her late husband, James Patrick, founded Alacer Corporation, a closely held company that manufactured vitamin supplements, including Emergen-C.
- James was the sole record owner of Alacer stock and later transferred all shares to the James W. Patrick Revocable Trust, which became Alacer’s only shareholder of record.
- The trust documents allegedly contemplated distributing up to 46% of Alacer stock to Ymelda upon James’s death to satisfy any community property interest.
- Ymelda alleged she held a community property interest in the shares (and thus a beneficial ownership interest) and that directors/trustees engaged in self-dealing and mismanagement harming Alacer (e.g., excessive compensation and improper related-party transactions).
- Ymelda filed a third amended complaint asserting shareholder derivative claims on Alacer’s behalf and a direct fraud claim based on her vote for certain directors allegedly induced by misrepresentations.
- The trial court sustained Alacer’s demurrer to all causes of action without leave to amend and entered a judgment of dismissal.

## Issues

1. Whether a corporation that is the real party in interest and a nominal defendant in a derivative action may demur to derivative causes of action beyond limited threshold grounds.
2. Whether allegations of a spouse’s community property interest in stock held of record by a revocable trust sufficiently plead “shareholder” or “beneficial shareholder” standing to sue derivatively.
3. Whether a fraud claim based on reliance in casting a vote for directors adequately pleads causation when the plaintiff’s vote was not necessary to the election outcome.

## Decision

- The Court of Appeal affirmed in part, reversed in part, and remanded.
- The court reversed the dismissal of the derivative causes of action as to Alacer, holding Alacer could not demur to the derivative claims on the merits and that Ymelda adequately pleaded derivative standing as a beneficial shareholder.
- The court affirmed dismissal of the direct fraud cause of action for failure to plead causation because Ymelda did not allege her vote was necessary to elect the directors.

## Legal Principles

- In a shareholder derivative action, the corporation is the real party in interest and is ordinarily only a nominal defendant; it generally may not demur to derivative claims on their merits.
- A corporation may challenge a derivative complaint only on limited grounds, including the shareholder plaintiff’s lack of standing to sue on the corporation’s behalf.
- Allegations that a spouse holds a community property interest in shares, though held of record by a trust, can be sufficient at the pleading stage to allege beneficial-shareholder status for derivative standing.
- A fraud claim requires causation; when the alleged reliance concerns a shareholder vote, the plaintiff must plead facts showing the misrepresentation affected a legally cognizable result (including that the vote mattered to the outcome).

## Conclusion

The court reinstated the derivative claims because Alacer, as a nominal defendant, could not demur to defeat claims asserted in its own right and because the complaint sufficiently alleged Ymelda’s beneficial-shareholder standing; it upheld dismissal of the direct fraud claim because the pleading did not allege that her vote caused the election result or any resulting injury.


Patrick v. Alacer Corp., 167 Cal. App. 4th 995, 84 Cal. Rptr. 3d 642 (Ct. App. 2008)