Shareholder derivative litigation involves a corporate shareholder bringing a lawsuit on behalf of the company for harm suffered by the company. This type of litigation was impacted significantly with the passage in 2020 of the revised Florida Business Corporation Act (FBCA), Chapter 607 of the Florida Statutes, in several ways. Perhaps the most significant impact of the FBCA on shareholder derivative litigation has to do with the requirements to initiate and sustain a derivative action. Essentially, the new FBCA includes language that expressly allows a shareholder plaintiff to invoke “demand futility” to avoid a presuit demand when initiating a derivative action.
In this post, we will look at the historical treatment of the concept, the new language under the revised FBCA, and then consider how courts will likely evaluate demand futility as the law around the new FBCA is developed.
The Concept of Demand Futility
The prior version of the FBCA provided that shareholder derivative lawsuits could proceed as long as one of three conditions was present: (1) 90 days expired after a presuit demand to the board of directors (i.e. 90 day “waiting period”); (2) the board expressly rejected the presuit demand: or (3) the shareholder risked irreparable injury if the 90 day waiting period was abided.
Generally, demand futility refers to a situation in which a shareholder doesn’t make a presuit demand for board approval to initiate a derivative action because doing so would be “futile.” Although the prior statutory language didn’t reference it expressly, Florida courts routinely enforced demand futility as an exception to the derivative action prerequisites. A shareholder may argue that a demand would have been futile for numerous reasons; one reason might be that the directors of the company are disinterested in the allegedly injurious outcome, or because board members may be participating in the complained-of wrongdoing. Whatever the reason, demand futility was essentially a viable “back door” exception to the old statute.
Demand Futility under the new FBCA
Under the statutory language of the new FBCA, demand futility is a clearly expressed avenue for a shareholder to pursue a derivative lawsuit without presuit notice, provided that the shareholder pleads futility with sufficient particularity. In the language of the new FBCA, a complaint in a derivative proceeding brought on behalf of a corporation must state with particularity “… [t]he reason or reasons the shareholder did not make the effort to obtain the desired action from the board of directors or comparable authority.” Florida Statutes § 607.0742(c).
How Florida Courts will Evaluate the New Statutory Language
Only one Florida court has cited to Section 607.0742, while reiterating that the old statute requires presuit notice, but noting the new FBCA language permits a plaintiff to allege futility to excuse meeting the presuit notice requirements. In Rappaport v. Scherr, the Third District Court of Appeal noted that the plaintiff’s case was properly dismissed by the trial court because no presuit notice was served on the board of directors since the plaintiff filed its derivative action under the old FBCA which does not contain an express demand futility provision. The Rappaport court noted that only after the plaintiff initiated its derivative action, was the new FBCA enacted which provides for a plaintiff to be excused from making a presuit demand if it expressly alleges that it would be futile.
Since little legal authority exists on demand futility under the new FBCA, we can also look to other jurisdictions for guidance on analysis of the futility demand provisions. For example, Florida court have historically looked to Delaware law as persuasive authority on corporate matters given its longstanding corporate law jurisprudence. The Delaware case of Aron v. Lewis sonsets out a two-prong approach for assessing demand futility allegations: reasonable doubt must be present that (1) the directors are “independent” and disinterested, and (2) whatever transaction is being challenged was the product of a valid exercise of business judgment. Both of these hurdles must be met in order for a demand futility allegation to survive a motion to dismiss. More legal authority will certainly come from the new, express demand futility provisions in the new FBCA.
Contact The Frazer Firm to Discuss Your Shareholder Derivative Claims
If you have potential shareholder derivative claims or need guidance evaluating whether you may have derivative or other corporate claims, reach out to the experienced business litigation attorneys at The Frazer Firm today. Schedule a consultation today or call us at 561-295-1551.
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