Business litigation often involves disputes between a corporate entity and its equity owners. A shareholder of a corporation can bring a lawsuit against the corporation in two circumstances: (1) when the shareholder has been personally harmed or (2) when the corporation as a whole has been harmed. The first type of lawsuit is a direct action. A direct action “seeks redress for an injury suffered directly by the shareholder which is separate from any injury sustained by the other stockholders.” Fox v. Professional Wrecker Operators of Florida, Inc., 801 So. 2d 175 (Fla. 5th DCA 2001). The second type of lawsuit is a derivative action. A derivative action “seeks redress for an injury suffered by the corporation or the stockholders generally.” Fox v. Professional Wrecker Operators of Florida, Inc., 801 So. 2d 175 (Fla. 5th DCA 2001). Peter Mavrick is a Miami business litigation attorney, and represents clients in business litigation in Fort Lauderdale, Boca Raton, and Palm Beach. The Mavrick Law Firm represents clients in breach of contract litigation, 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 substance of the allegations made, and not what they are labeled, determines” what type of lawsuit a shareholder should file against the corporation. Iezzi Fam. Ltd. P’ship v. Edgewater Beach Owners Ass’n, Inc., 254 So. 3d 584 (Fla. 1st DCA 2018). In Dinuro Investments, LLC v. Camacho, 141 So. 3d 731 (Fla. 3d DCA 2014), Florida’s Third District Court of Appeals adopted the following two-prong test for determining a shareholder’s standing to bring a direct suit:
[A]n action may be brought directly only if (1) there is a direct harm to the shareholder or member such that the alleged injury does not flow subsequently from an initial harm to the company and (2) there is a special injury to the shareholder or member that is separate and distinct from those sustained by the other shareholders or members.
Under the direct harm prong, the court examines “whether the harm from the alleged wrongdoing flows first to the company and only damages the shareholders or members due to the loss in value of their respective ownership interest in the company, or whether the harm flows ‘directly’ to the shareholder or member in a way that is not secondary to the company’s loss.” Strazzulla v. Riverside Banking Co., 175 So. 3d 879 (Fla. 4th DCA 2015). The court must first look “at the injury alleged by the individual shareholder and determine whether that injury flows from some damage to the company itself.” Strazzulla v. Riverside Banking Co., 175 So. 3d 879 (Fla. 4th DCA 2015). The court then “compare[s] the individual’s harm to the company’s harm.” Strazzulla v. Riverside Banking Co., 175 So. 3d 879 (Fla. 4th DCA 2015).
For example, in Leppert v. Lakebreeze Homeowners Ass’n, Inc., 500 So. 2d 250 (Fla. 1st DCA 1986), a homeowner sued her homeowner’s association alleging “corporate mismanagement, invalidity of the bylaws, and a need for court supervision of all corporate expenditures.” The homeowner argued her action was a direct action because she brought it individually and sought redress for injuries she directly sustained. Florida’s First District Court of Appeal reviewed the substance of the allegations and noted that “the character of the suit is to be determined from the gravamen of the complaint.” Leppert held the claim was derivative, not direct, because the homeowner’s claims were all “predicated upon rights of action existing in the corporation.”
Under the special injury prong, courts must “compare the individual plaintiff’s alleged injury to those injuries suffered by the other members or shareholders . . . and then determine whether the plaintiff’s injury is separate and distinct from” those suffered by the other members or shareholders. Dinuro Investments, LLC v. Camacho, 141 So. 3d 731 (Fla. 3d DCA 2014). To constitute a special injury, the individual shareholder’s loss must be “substantially different from those losses sustained by other shareholders.” Dinuro Investments, LLC v. Camacho, 141 So. 3d 731 (Fla. 3d DCA 2014). It is also relevant whether the purported wrongdoer profited from the wrongdoing, “or at least suffered an injury less substantial” than that of the complaining shareholders. Dinuro Investments, LLC v. Camacho, 141 So. 3d 731 (Fla. 3d DCA 2014). Florida courts have recognized that “this test can be difficult to apply, as the ‘special’ nature of the injury can be a nebulous inquiry that is often not readily apparent,” and the analysis is incredibly fact specific. Dinuro Investments, LLC v. Camacho, 141 So. 3d 731 (Fla. 3d DCA 2014).
For example, in Fox v. Professional Wrecker Operators of Florida, Inc., the plaintiff was expelled from her membership of a nonprofit corporation. 801 So. 2d 175 (Fla. 5th DCA 2001). Following her expulsion, the plaintiff filed a petition alleging five claims against individual directors of the nonprofit corporation on behalf of all members and five counts on her own behalf for alleged breaches of fiduciary duty. The Fifth District noted that although the plaintiff attempted to state causes of action on her own behalf against the individual directors for breaches of fiduciary duty, she had really stated causes of action for defamation, libel, and/or slander. Fox ultimately concluded that the plaintiff properly alleged a direct action seeking redress for injuries suffered directly by her that were separate from injuries sustained by the other members.
By contrast, in Karten v. Woltin, a minority shareholder filed a direct action against the majority shareholders of a closely held corporation alleging that the majority shareholders breached their fiduciary duty to her by voting to pay an excessive salary to one of the majority shareholders, thereby depriving her of profits. 23 So. 3d 839 (Fla. 4th DCA 2009). The Fourth District held that the minority shareholder’s allegations did not constitute the type of individualized harm necessary to allow the filing of a direct action because “[a]ny of the allegations would affect the relative value of all the shares owned by all of the shareholders, of which the appellant is only a 25% owner.”
Peter Mavrick is a Miami business litigation lawyer, and represents clients in Fort Lauderdale, Boca Raton, and Palm Beach. This article does not serve as a substitute for legal advice tailored to a particular situation.