Pennsylvania § 1782 - Eligible shareholder plaintiffs and security for costs.

§ 1782. Eligible shareholder plaintiffs and security for costs.

(a) General rule.--Except as provided in subsection (b), in any action or proceeding brought by one or more shareholders of a business corporation to enforce rights that the plaintiff claims could be, but have not been, asserted by the corporation, each plaintiff has standing to commence and maintain the derivative action only if the plaintiff:

(1) was a shareholder of the corporation or owner of a beneficial interest in the shares at the time of the transaction or conduct of which the plaintiff complains, or that the plaintiff's shares or beneficial interest in the shares devolved upon the plaintiff by operation of law from a person who was a shareholder or owner of a beneficial interest in the shares at that time; and

(2) continues to hold the shares until the time of judgment, unless the failure to do so is the result of corporate action that:

(i) was done merely to eliminate derivative claims; or

(ii) has the effect of a reorganization that does not affect the plaintiff's ownership of the business enterprise.

(b) Exception.--Any shareholder or person beneficially interested in shares of the corporation who, except for the provisions of subsection (a), would be entitled to maintain the action or proceeding and who does not meet such requirements may, nevertheless in the discretion of the court, be allowed to maintain the action or proceeding on preliminary showing to the court, by application and upon such verified statements and depositions as may be required by the court, that there is a strong prima facie case in favor of the claim asserted on behalf of the corporation and that without the action serious injustice will result.

(c) Security for costs.--In any action or proceeding instituted or maintained by holders or owners of less than 5% of the outstanding shares of any class of the corporation, unless the shares held or owned by the holders or owners have an aggregate fair market value in excess of $200,000, the corporation in whose right the action or proceeding is brought shall be entitled at any stage of the proceedings to require the plaintiffs to give security for the reasonable expenses, including attorneys' fees, that may be incurred by the corporation in connection therewith or for which it may become liable pursuant to section 1743 (relating to mandatory indemnification) (but only insofar as relates to actions by or in the right of the corporation) to which security the corporation shall have recourse in such amount as the court determines upon the termination of the action or proceeding. The amount of security may, from time to time, be increased or decreased in the discretion of the court upon showing that the security provided has or is likely to become inadequate or excessive. The security may be denied or limited by the court if the court finds after an evidentiary hearing that undue hardship on plaintiffs and serious injustice would result.

(d) Failure to maintain ownership.--If a plaintiff loses the right to maintain a derivative action under subsection (a)(2), the court may entertain a motion by the corporation to substitute the corporation as the named plaintiff.

(e) Cross reference.--See section 4146 (relating to provisions applicable to all foreign corporations).

(Nov. 21, 2016, P.L.1328, No.170, eff. 90 days; Nov. 3, 2022, P.L.1791, No.122, eff. 60 days)

2022 Amendment. Act 122 amended subsec. (a), relettered former subsec. (d) to subsec. (e) and added present subsec. (d).

2016 Amendment. Act 170 amended the section heading and subsec. (c).

Suspension by Court Rule. Section 1782(a) and (b) were suspended by Pennsylvania Rule of Civil Procedure No. 1506(e), amended April 12, 1999, insofar as inconsistent with Rule No. 1506 relating to stockholder's derivative action. Rule No. 1506(e) further provided that section 1782(c) and (d) shall not be deemed suspended or affected by Rule No. 1506.

Cross References. Section 1782 is referred to in sections 1781, 4146 of this title.