Shareholder Lawsuits: Direct versus Derivative
One of the most common types of commercial litigation is the shareholder lawsuit. In shareholder lawsuits a shareholder sues either based on a harm that they suffered themselves or based on a harm suffered by the corporation itself, which indirectly hurts them by lowering their investment’s value. The type of harm is important because it affects whether the shareholder’s suit is direct or derivative. A direct suit is a suit by the shareholder on behalf of themselves, while a derivative suit is based on harm to the corporation as a whole. The difference matters because derivative lawsuits often face extra procedural hurdles.
Direct lawsuits are the more straightforward type of shareholder litigation. They involve a shareholder suing the company for harm they suffered. In Florida, a shareholder’s ability to bring a direct action rests on the “separate and distinct injury” test. If the shareholder’s injury was separate and distinct from harm suffered by other shareholders then they can bring a direct lawsuit to address their own personal grievance. One of the most common ways that these sorts of lawsuits appear is in relation to a shareholder’s stock rights. For instance, if the shareholder has been prevented from exercising their share’s voting rights, or they were not paid properly based on their shares’ priority rights, then a direct action may allow them to recover for their injuries. If the corporation as a whole suffers the harm, then a derivative lawsuit would be more appropriate.
Derivative lawsuits are appropriate when the shareholder sues on behalf of the company as a whole because of harm that the corporation has suffered. These suits are unusual because the decision about whether the company is going to sue someone is ordinarily one made by the officers or the board rather than by the shareholders themselves. This means that derivative actions are most often used when the harm to the corporation was caused by one of the people ordinarily responsible for making the decision to sue on behalf of the corporation.
The unusual nature of these lawsuits means that there are special procedural hurdles to bringing them, which are laid out in Florida Statute §607.07401. One of the most important of these hurdles is the requirement that the shareholder make a demand of the board to obtain action on the issue. The board then has 90 days to act on the demand, and a failure to make a demand can result in the dismissal of the suit, unless the shareholder can show that the demand would have been “futile.” The futility exception waives the need for demand in cases where the demand would be pointless, like in cases where the members of the board are alleged to have participated in the harmful acts. Additionally, even if the shareholder makes it past the demand issue, the corporation can move to dismiss the suit based on the recommendation of a variety of disinterested groups within the organization.
Shareholder litigations are complex, and require experienced legal counsel. If you are a shareholder who was recently harmed by a corporation or one of its officers, contact a West Palm Beach shareholder litigation attorney at Pike & Lustig, LLP to learn more about your rights and your options.