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Articles Tagged with Shareholder Disputes

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A derivative lawsuit is a lawsuit whereby a shareholder of a corporation sues a third party on behalf of the corporation. Any recovery from such lawsuits are the property of the corporation, not the shareholder who brought the lawsuit. Often times, the defendant of a derivative lawsuit will be someone close to the corporation, such as a director or corporate officer, who has allegedly engaged in, or continues to engage in, improper conduct to the detriment of the corporation. However, a shareholder cannot bring a derivative lawsuit whenever he, she, or it wishes. In Florida, derivative lawsuits are governed by § 607.07401, Florida Statutes, stating in pertinent part:

(2) A complaint in a proceeding brought in the right of a corporation must…allege with particularity the demand made to obtain action by the board of directors and that the demand was refused or ignored by the board of directors…

As such, under Florida law, a shareholder must first make a demand to the board of directors to bring the lawsuit. It is only when the board of directors refuses to bring such an action that the shareholder may file the derivative suit. In some cases, however, a shareholder may attempt to circumvent the pre-suit demand requirement by alleging it would be “futile” to bring such a demand to the board of directors. The Fort Lauderdale business litigation attorneys at the Mavrick Law Firm have successfully defended corporate officers and directors in corporate derivative actions.

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Under Florida law, if a member of an LLC wishes to individually sue another member for damages arising out of the membership, the plaintiff-member must prove: “(1) a direct harm to the … member such that the alleged injury does not flow subsequently from an initial harm to the company and (2) a special injury to the … member that is separate and distinct from those sustained by the other … members.” Dinuro Investments, LLC v. Camacho, 141 So. 3d 731, 739-740 (Fla. 3d DCA 2014). Alternatively, a plaintiff-member may prove that the defendant-member owes a separate duty to the plaintiff member that is distinct from the duties owed by the members to the LLC. See Dinuro Investments, LLC v. Camacho at 740. The Mavrick Law Firm regularly represents businesses and their owners in business litigation in Miami, Fort Lauderdale, and Palm Beach.

To initiate a lawsuit, a plaintiff must have standing, otherwise described as the right to sue. Accordingly, the right to sue varies depending on the particular context of the plaintiff’s alleged harm. § 605.0802, Fla. Stat. allows for a member to “maintain a derivative action to enforce a right of a limited liability company,” but the statute does not provide the right to sue individually. A derivative action seeks to “enforce a corporate right or to prevent or remedy a wrong to the corporation,” when “the corporation, because it is controlled by the wrongdoers or for other reasons, fails and refuses to take appropriate action for its own protection.” Salit v. Ruden, McClosky, Smith, Schuster & Russell, P.A., 742 So. 2d 381, 388 (Fla. 4th DCA 1999). Whereas, an individual suit seeks to recover damages that the plaintiff suffered as a result of a wrong done to the corporation. Thus, the right to sue individually as a member of an LLC presents special considerations that were confusing and opaque in Florida until recently.

In Dinuro Investments, LLC v. Camacho, the Third District Court of Appeal used a two-prong test that has been adopted throughout Florida to resolve the issue of individual standing in actions for individual damages in LLC disputes. See Strazzulla v. Riverside Banking Co., 175 So. 3d 879, 884 (Fla. 4th DCA 2015) (“we agree with the Third District[‘s decision in Dinuro Investments,  LLC v. Camacho] and adopt a two-prong test”). The South Florida offices of The Mavrick Law Firm represents plaintiff-members and defendant-members in disputes throughout the judicial circuits that are bound by Third and Fourth DCA decisions. In Dinuro Investments, LLC v. Camacho, the court thoroughly examined the three tests routinely are routinely applied to resolve the direct versus derivative claim question: The Direct Harm Test, The Special Injury Test, and The Duty Owed Test. After addressing the pros and cons of each of the tests, and in an attempt to “reconcile nearly fifty years of apparently divergent case law” the court reasoned that a two-prong test was appropriate. See 141 So. 3d at 740.

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Disputes among shareholders happen for a wide variety of reasons and if not properly addressed, can result in serious financial and legal problems.  In general, the specific rights and responsibilities of shareholders vary according to the particular corporate form as well as the procedures used in implementing and enforcing them.  Corporations, partnerships and other business entities also can alter the default provisions of Florida law through drafting bylaws and agreements tailored to the form of the business entity, and develop other agreements that specifically anticipate and address the kinds of situations that shareholders might need to resolve.Regardless of the preventative measures that businesses can implement to avoid shareholder disputes, there is no foolproof way to prevent these types of issues.  Typically, both minority and majority shareholders tend to raise disputes over the following:

  • Decisions made by owners or managers of the company
  • The alleged breach of fiduciary duties by corporate officers and owners due to disloyalty, self-dealing, or not acting in the best interests of the company
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