FORT LAUDERDALE BUSINESS LITIGATION: PROVISIONAL DIRECTORS CAN BE APPOINTED TO BREAK CORPORATION DEADLOCKS

Court appointment of a provisional director to a corporate entity is a remedy that recently became available in business litigation. Where corporate deadlock exists, a court has discretion to appoint a provisional director to a corporate entity “if it appears that such action by the court will remedy a situation in which the directors are deadlocked in the management of the corporate affairs and the shareholders are unable to break the deadlock.” Fla. Stat. § 607.0749. Peter Mavrick is a Fort Lauderdale business litigation lawyer, and also represents clients in business litigation in Miami, 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 litigation, and other legal disputes in federal and state courts and in arbitration.

“A ‘deadlock’ . . . is a standstill—a state of inaction or of neutralization caused by the opposition of persons or of factions.” Kertesz v. Spa Floral, LLC, 994 So. 2d 473 (Fla. 3d DCA 2008). In other words, a deadlock occurs when a company’s board of directors cannot move forward in its business operations because it does not have the necessary number of directors break a tie vote. Corporate bylaws often have remedies for breaking a deadlock, however, the deadlock remains when those remedies are ineffective. Even without a vacancy on the company’s board of directors, the court can appoint a provisional director, who will have all the rights and powers of a duly elected director, including the right to notice of and to vote at meetings of directors. The court appointed provisional director “shall be an impartial person who is neither a shareholder nor a creditor of the corporation or of any subsidiary or affiliate of the corporation, and whose further qualifications, if any, may be determined by the court.” Kertesz v. Spa Floral, LLC. Companies in business litigation often cannot overcome a deadlock because its board members are acting out of self-interest rather than for the best interest of the company.

While the provisional director is appointed to help the company break the deadlock, he or she is an officer of the court and will report to the court from time to time concerning the matter complained of, or the status of the deadlock, if any, and of the status of the corporation’s business, as the court shall direct. Section 607.0749, Florida Statutes, is relatively new legislation. Its underlying concept, however, has longstanding ties in courts of equity. The inherent authority granted to the Court by this new section is, on many levels, similar to a court’s ability to appoint a receiver over a corporate entity in business litigation when certain criteria are satisfied. A receiver generally takes control of the company that is in distress for purposes of winding up business operations, collecting debts owed to the company, liquidating property and assets, paying creditors, and distributing the remaining proceedings to the shareholders.

In the case of Ins. Mgm’t, Inc. v. McLeod, 194 So. 2d 16 (Fla. 3d DCA 1966, the court appointed an impartial receiver over the corporation when:

It [was] conceded that there was disharmony between the corporations’ two equal stockholders; that these two fifty per cent stockholders were deadlocked over the operation of their insurance agency business, and that they could not agree on the election of a board of directors. McLeod alleged that the other stockholder, Ryan, had drawn $90,000 more from the business than he, and that certain persons were also receiving unearned salaries from the business.

In business litigation involving corporate deadlocks, the threshold that must be satisfied for a court-appointed director is lower than that for a court-appointed receivership. For a receivership to be appointed, good cause must be proven. Good cause is a legal term signifying adequate or substantial grounds or reason to take a certain action, or to fail to take an action prescribed by law. There is no good cause requirement for the court appointment of a provisional director, rather it is a remedy that is within the court’s discretion. Section 607.0749 provides a straightforward and pragmatic solution to an otherwise unworkable problem that could lead to further destructive consequences for a company if left unchecked.

By appointing a provisional director, courts can assist a company in breaking a corporate deadlock and allowing the board of directors to take any action which the board is authorized to take, such as adding or removing officers, adding or removing directors, and amending the corporate bylaws. Peter Mavrick is a Fort Lauderdale business litigation attorney who also practices business litigation in Miami, Boca Raton, and Palm Beach. This article does not serve as a substitute for legal advice tailored to a particular situation.