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In a corporate derivative lawsuit, the shareholder does not have a “direct” injury that is particular to the specific shareholder.  Therefore, a shareholder must turn to a derivative lawsuit. In these lawsuits, the shareholder sues to enforce rights belonging to the corporation for which the corporation itself could have sued for redress. Medkser v. Feingold, 307 Fed. Appx. 262 (11th Cir. 2008). The derivative lawsuit is an exception to the general rule requiring a company to sue on its own behalf. Daily Income Fund, Inc. v. Fox, 464 U.S. 523 (1984). Damages recovered in derivative lawsuits are paid to the corporation rather than shareholder that commenced suit because the shareholder stepped into the shoes of the corporation.  The derivative lawsuit is intended to benefit the corporation and all of its shareholders.  Peter Mavrick is a Fort Lauderdale business litigation attorney.  The Mavrick Law Firm represents businesses and their owners in breach of contract litigation and related claims of fraud, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, employment law, and other legal disputes in federal and state courts and in arbitration.

The “standing” requirement usually prevents a shareholder from suing the corporation it owns a part of (along with the corporation’s officers and directors) for mismanagement because the corporation is usually the party injured by the mismanagement. See Braun v. Buyers Choice Mortgage Corp., 851 So.2d 199 (Fla. 4th DCA 2003) (“The fact that [the shareholder ] may have lost the value of his investment because [the corporation] went out of business is, at best, an indirect injury.”). Standing is a legal concept that ensures a litigant is entitled to have a court decide the merits of his or her dispute. Warth v. Seldin, 422 U.S. 490, (1975). A plaintiff is required to prove its standing as a perquisite to recovering from the defendant. Id. A plaintiff must demonstrate that it suffered an injury that is concrete, particularized, and fairly traceable to the defendant’s action to satisfy the standing requirement. See Koziara v. City of Casselberry, 392 F.3d 1302 (11th Cir. 2004).

Limited circumstances can allow shareholders to sue their own corporation directly. But these circumstances vary state to state. Some states apply a “direct harm” test that examines whether the harm flows to the company first or to the shareholder first.  For example, the California appellate court decision in Shuster v. Gardner, 127 Cal.App.4th 305 (2005), stated in pertinent part that, “a shareholder cannot bring a direct action for damages against management on the theory their alleged wrongdoing decreased the value of his or her stock (e.g., by reducing corporate assets and net worth).” (emphasis in original)). Other states employ a “special injury” test that requires a comparison of plaintiff’s injuries to those suffered by the other shareholders, such as the Alaska court decision in Hanson v. Kake Tribal Corp., 939 P.2d 1320 (Alaska 1997).  Hanson stated in pertinent part that, “[a] plaintiff alleges a special injury and may maintain an individual action if the shareholder complains of an injury distinct from that suffered by other shareholders, or a wrong involving one of the shareholder’s contractual rights as a shareholder.”  A third group of states use a “duty owed” test that examines the statutory and contractual terms to determine whether the duty at issue was owed to the individual shareholder or to the company generally. See, e.g., G&N Aircraft, Inc. v. Boelm, 743 N.E.2d 227 (Ind. 2001), explaining that that (“a direct action may be brought when: it is based upon a primary or personal right belonging to the plaintiff—stockholder…. It is derivative when the action is based upon a primary right of the corporation….”).  And a fourth group of states allow a shareholder to sue directly if the corporation or its directors/officers owe a separate duty to the shareholder under some contractual or statutory right. See Dinuro Investments, LLC v. Camacho, 141 So. 3d 731 (Fla. 3d DCA 2014); Patel v. 2602 Deerfield, LLC, 819 S.E.2d 527 (Ga. Ct. App. 2018) (The shareholder must allege “a wrong involving a contractual right that is independent of any right of the corporation.”). Florida courts apply a combination of tests in the form of the direct harm test, special injury test, and contract test. See Dinuro Investments, LLC, 141 So. 3d 731.

Peter Mavrick is a Fort Lauderdale business litigation lawyer, and represents clients in Miami, Boca Raton, and Palm Beach. This article does not serve as a substitute for legal advice tailored to a particular situation.

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