Shareholder derivative action us a lawsuit filed by a shareholder. The shareholder files an action on behalf of the corporation that refuses to use a valid cause of action. The defendant in a derivative lawsuit is usually a person or persons close to the company, such as an officer, director or board of directors.
To handle a shareholder dispute, your attorney must follow strict shareholder derivative lawsuit standards. They must also comply with the Florida Rules of Civil Procedure. If this is too much legal gibberish for your brain to absorb, you are not alone.
Keep reading to learn what derivative actions are, understand demand futility, and the requirements to bring a lawsuit.
How Florida Classifies Shareholder Disputes
Florida defines a shareholder dispute as to any disagreement over the way the business is managed or its finances handled. Typical disagreements include:
- Perceived or real disparities in contributions or pay
- Perceived or real violations of fiduciary duties
- Oppressing minority shareholders
- Conflicts between the minority and majority shareholders
- Different opinions regarding expenditures, personnel, relocation, etc.
- Shareholder agreement violations, such as prohibited selling of shares to a competitor
The ability to file a lawsuit and available remedies depend on the type of dispute you experience.
What Is a Derivative Action?
You file a derivative action in Florida state court. You may also file in Federal court according to the Federal Rules of Civil Procedure.
The plaintiff is a shareholder taking action against a third party. The third party is on the company’s board of directors or holds some other executive position.
The lawsuit claims may include conflict of interest, fraud, or poor accounting practices. They may also allege deceptive financial statements, breach of fiduciary duty, or other actions.
Prior to filing a lawsuit you have the right to issue a demand for specific information. The demand purpose must be for “proper purpose” and in good faith. The information you may request is:
- Records regarding actions taken without holding a meeting
- Minutes from the specific committee, shareholder, and board meetings
- Specific accounting records
- Shareholder records
- Specific information regarding the current officers and directors of the company
- Corporate bylaws
- Information regarding any other lawsuits filed against the corporation
- Relevant books and records associated with or belonging to the corporation
Because of the complicated nature of this legal action, it is best to consult with a Florida business attorney who specializes in this area of law.
Who Can File a Derivative Claim?
Anyone who is a shareholder at the time of the alleged offense may file a derivative claim. You may also file if your shares were received because of a legal stock transfer from someone holding the stocks during the offense.
Before filing the lawsuit, you must send a written demand to the board of directors. The notice must tell them of the violations and request they take corrective action. You must then wait 90 days for them to correct any errors.
The only exception to this waiting period is if the board sends you notice they are rejecting your demand. You may also file without waiting if irreparable damage will come to the business during the waiting period.
What Is the Purpose of a Derivative Action?
Shareholders have little power over the management of a corporation. They elect a board of directors to oversee their interests.
The board of directors is responsible for appointing officers to run the company. The board and officers are responsible for protecting the company and its shareholders.
If the board or officers are causing harm to the company they must comply with shareholder demands to remedy the problem. If they do not correct the error, the law allows for filing a lawsuit against the people causing harm.
The shareholder represents the company and “derives” their right to file a lawsuit from the company. Actions resulting in a possible deviation lawsuit include:
- Unlawful activity, including breach
- Breach of fiduciary duties
- Greed or self-dealing
- Conflict of interest
- Wasting corporate assets
- Wrongdoing in accounting
- Misleading, inflated, or false financial statements
- Executive compensation that is inflated
- Decisions of the management or board that expose the company to harm, violate consumer protection or other laws
The laws regarding this action are very complicated. Consult with a knowledgeable business law attorney if you are considering whether to file a lawsuit.
What Are the Requirements of a Derivative Suit?
The Florida Business Corporation Act, Florida Stat § 607.0742 (2020) became effective January 1, 2020, and made Florida a “demand futility” state. The law sets forth the requirements of the shareholder filing the deviation lawsuit:
- The shareholder made a demand for action but the board either ignored or denied their request, resulting in the remedy being fully exhausted
- Demand has been made and the response is pending, but immediate relief is necessary to prevent irreparable harm
- Demand has not been made to the board because the shareholder has good reason for proceeding directly to the court
If pleadings do not meet these requirements the court will dismiss the case without it being heard.
What Is a Demand Futility?
Demand futility is a standard allowing shareholders to bring a derivative action if no reasonable options remain for reaching a resolution. The state requires shareholders to take problems to the board or other corporate authorities prior to filing a lawsuit.
The shareholder must prove they have completed this step without success. Alternatively, they must show they have a good reason for not waiting to receive an answer, or not going before the board prior to filing their action.
The law adding the demand facility to the Act may result in an increase in shareholder derivative lawsuits. Prior to this change most corporations in Florida had a 90-day warning prior to action being taken.
Shareholders may try to sidestep the requirement to issue a demand and wait 90 days before filing a complaint. Corporations need to retain counsel in preparation for a possible lawsuit without warning.
What Remedies Are Possible for a Derivative Action?
The court must approve any settlement or dismissal of the shareholder derivative lawsuit. They may require written notification sent to all shareholders regarding the lawsuit outcome.
The plaintiff may receive reasonable attorney fees if the court issues a judgment in their favor. This is also possible with a settlement favoring the plaintiff.
If the defendant prevails they may be able to recover their attorney fees. This usually happens if the court determines the lawsuit was without reasonable cause.
Reasons a Derivative Action May Result in Dismissal
A company’s investigation into allegations made may result in a delay or dismissal of the shareholder derivative suit. Most courts have the authority to put a proceeding on hold pending a company’s investigation claims.
The court may dismiss the lawsuit if the board of directors or committee investigating finds the allegations lack merit.
Other reasons for dismissal include failing to follow the rules and requirements for filing a deviation complaint or failure to comply with standard court procedures.
Prepare for Derivative Action
Maybe you are a shareholder looking to file a derivative action. Perhaps you serve on a board of directors or are an officer of a corporation in Florida who may find yourself the defendant of a derivative lawsuit.
Your best course of action is to have Boyer Law Firm, P.L. on retainer to represent your business needs. Contact us to schedule a consultation by sending an email to [email protected] or completing our secure online form.
