Can a minority shareholder proceed with a derivative suit as a class of one? Angel Inv. v. Garrity Explained

In Angel Investors, LLC v. Garrity, the Utah Supreme Court addressed whether a minority shareholder can bring a derivative suit when all other shareholders oppose the action. The case involved Angel Investors, which owned just 1% of XanGo, LLC, attempting to bring a derivative suit against the company’s majority owners for alleged corporate malfeasance.

Background and Facts

Angel Investors owned 1% of XanGo while the majority owners controlled 86% of the company. Angel Investors filed both a direct suit against XanGo seeking dissolution and a derivative suit against the majority owners alleging they had taken millions in personal loans from the company, purchased minority interests with those funds, and paid themselves excessive compensation. All other minority shareholders filed affidavits opposing Angel Investors as a representative in the derivative suit. The district court dismissed the derivative action, finding Angel Investors could not fairly and adequately represent similarly situated shareholders under Utah Rule of Civil Procedure 23A.

Key Legal Issues

The primary issues were whether Angel Investors was similarly situated to other XanGo shareholders and whether it could adequately represent the corporation’s interests despite having a concurrent direct suit against the company.

Court’s Analysis and Holding

The Utah Supreme Court reversed, establishing that a sole dissenting shareholder in a closely held corporation qualifies as a “class of one” for derivative standing purposes. The court held that shareholders’ motivations for opposing a derivative suit are relevant to determining whether they are similarly situated to the plaintiff. Here, Angel Investors alleged that all other shareholders stood to benefit from the majority owners’ continued malfeasance, making Angel Investors uniquely situated.

The court also rejected the argument that Angel Investors’ concurrent direct suit created a disqualifying conflict of interest, finding the relief sought in both actions was compatible and based on the same nucleus of facts.

Practice Implications

This decision significantly expands derivative suit opportunities in closely held corporations. Practitioners should carefully analyze whether their client shareholders have unique motivations or positions that distinguish them from other shareholders. The ruling emphasizes that opposition from other shareholders alone does not bar derivative standing if those shareholders have conflicting interests with the corporation’s welfare.