Rule 23.1 DERIVATIVE ACTIONS BY SHAREHOLDERS.

• Jurisdiction: Colorado

Rule 23.1. Derivative Actions by Shareholders.

In a derivative action brought by one or more shareholders or members to enforce a right of a corporation or of an unincorporated association, the corporation or association having failed to enforce a right which may properly be asserted by it, the complaint shall be verified and shall allege that the plaintiff was a shareholder or member at the time of the transaction of which he complains or that his share or membership thereafter devolved on him by operation of law. The complaint shall also allege with particularity the efforts, if any, made by the plaintiff to obtain the action he desires from the directors or comparable authority and, if necessary, from the shareholders or members, and the reasons for his failure to obtain the action or for not making the effort. The derivative action may not be maintained if it appears that the plaintiff does not fairly and adequately represent the interests of the shareholders or members similarly situated in enforcing the right of the corporation or association. The action shall not be dismissed or compromised without the approval of the court, and notice of the proposed dismissal or compromise shall be given to shareholders or members in such manner as the court directs.

Cross references: For actions by shareholders, see § 7-107-402, C.R.S.

ANNOTATION

The purpose underlying the requirements of this rule is to avoid the possibility of a multiplicity of lawsuits against corporations by individual stockholders or small groups of stockholders. Bell v. Arnold, 175 Colo. 277, 487 P.2d 545 (1971).

This rule avoids multiple suits by condominium unit owners against the condominium association or against the wrongdoers. Ireland v. Wynkoop, 36 Colo. App. 205, 539 P.2d 1349 (1975).

Courts have generally been careful to regard the derivative suit as an extraordinary remedy, which is available to the shareholder, as the corporation's representative, only when there is no other road to redress. Bell v. Arnold, 175 Colo. 277, 487 P.2d 545 (1971).

The purpose of a derivative action is to recover sums owed the corporation. O'Malley v. Casey, 42 Colo. App. 85, 589 P.2d 1388 (1979).

The fact that a shareholder is a judgment creditor of the corporation does not automatically render such shareholder ineligible to maintain a derivative action. New Crawford Valley, Ltd. v. Benedict, 847 P.2d 642 (Colo. App. 1993).

The requirements of this rule are mandatory. Van Schaack v. Phipps, 38 Colo. App. 140, 558 P.2d 581 (1976).

This rule encourages corporation rather than shareholders to sue. The purpose of this rule is to encourage the corporation itself, rather than the shareholders in its behalf, to sue for redress of corporate claims. Ireland v. Wynkoop, 36 Colo. App. 205, 539 P.2d 1349 (1975).

Stockholder may maintain a personal action only if actions of third party that injure corporation result from a violation of a duty owed to him as a stockholder and cause injury unique to himself and not suffered by other stockholders. Security Nat'l Bank v. Peters, Writer, & Christensen, Inc., 39 Colo. App. 344, 569 P.2d 875 (1977); Nicholson v. Ash, 800 P.2d 1352 (Colo. App. 1990); Kim v. Grover C. Coors Trust, 179 P.3d 86 (Colo. App. 2007).

This rule does not...