(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.

Prior to the statute’s 1990 revisions, Florida case law historically recognized a futility exception to the pre-suit demand requirement. In Belcher v. Schilling, 309 So. 2d 32 (Fla. 3d DCA 1975), the Third District Court of Appeal quoted from the 1975 version of the § 607.07401, which stated:

The complaint must set forth with particularity the efforts of the plaintiff to secure the initiation of such actions by the board of directors of such corporation or the reasons for not having made such effort.

Nevertheless, the 1990 revisions removed all exceptions to the demand requirement. Thus, Florida courts when interpreting the post-1990 version of the statute have consistently held that a derivative lawsuit requires demand upon the board of directors prior to being brought by the shareholder. See Ferola v. Blue Reef Holding Corp., 719 So. 2d 389, 390 (Fla. 4th DCA 1997) (citing § 607.07401 (1997)) (“A derivative action…requires service of a demand to take action on the board of directors”).

By persuading the courts in Florida that there is no longer a “futility” exception to the pre-suit demand requirement for corporate derivative suits under Florida law, the Mavrick Law Firm has obtained dismissals of actions where shareholders intentionally fail to make such a demand. However, it is important to be aware that this article only covers derivative lawsuits in the context of corporations. Derivative lawsuits also may be brought by members of limited liability companies pursuant to Florida’s Revised Limited Liability Company Act at § 605.0802, Fla. Stat., but the pre-suit demand requirement in such lawsuits is subject to a “futility” exception under the express wording of subsection (2) of the statute.

The Fort Lauderdale business litigation attorneys at the Mavrick Law Firm have successfully represented many businesses in Florida business litigation cases throughout the Miami-Dade, Broward, and Palm Beach County areas encompassed by the Third and Fourth District Courts of Appeal, as well as Hillsborough, Sarasota, and other counties encompassed by the Second Circuit Court of Appeals. This article is not a substitute for legal advice tailored to a particular situation. Peter T. Mavrick can be reached at: Website: www.mavricklaw.com; Telephone: 954-564-2246; Address: 1620 West Oakland Park Boulevard, Suite 300, Fort Lauderdale, Florida 33311.

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.

As mentioned earlier, a member can only individually sue another member for damages if the two-prong test is met, or if the member can prove the existence of a separate duty owed by the defendant-member(s) to the individual plaintiff-member that is based on a contractual or statutory mandate. Dinuro Investments, LLC v. Camacho, 141 So. 3d at 740. Concerning the first prong, direct harm, a member can only bring a direct suit if the damages are unrelated to the damages that are suffered by the LLC, and if the LLC would have no right to recover in its own action. Strazzulla v. Riverside Banking Co., 175 So. 3d 879, 885–86 (Fla. 4th DCA 2015). Regarding the second prong, the plaintiff-member’s injuries must be separate and distinct from the other members. Id. Moreover, unless explicitly stated, an LLC’s operating agreement will not function to impose individual rights and liabilities to individual members. See Dinuro Investments, LLC v. Camacho, 141 So. 3d at 741 (“[w]hen analyzing a claim for breach of an operating agreement, the precise terms of the agreement are critical”). Therefore, potential plaintiff-members should assess the nature of their harm and any individual contractual rights before suing another member of an LLC. A failure to make a thoughtful and reasoned assessment of the factors discussed in this article will likely result in a waste of resources.

Peter T. Mavrick has successfully represented many businesses in non-competition covenant litigation. This article is not a substitute for legal advice tailored to a particular situation. Peter T. Mavrick can be reached at: Telephone: 954-564-2246; Address: 1620 West Oakland Park Boulevard, Suite 300, Fort Lauderdale, Florida 33311.

• 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
• The terms of corporate buyout agreements, executive salaries and other forms of compensation
• Financial problems arising from capital or operational needs
• Alleged corporate violations of business agreements
• Unauthorized corporate acts

In general, not every dispute that arises will be addressed in the provisions of a shareholder agreement or other type of business contract. While Florida laws are a good starting point in dealing with shareholder disputes, they don’t always speak directly to the issues. As such, it is crucial to work with an attorney to determine your rights and responsibilities and the scope of your legal options. As experienced business litigation attorneys are aware, sometimes litigation can help a troubled business address defects in its management or business model or issues relating to capital and operational needs. Other times, litigation is not recommended under the circumstances. Notwithstanding, an experienced attorney can help you decide what is best for your company.