BUSINESS LITIGATION: THE PRE-SUIT DEMAND REQUIREMENT FOR CORPORATE DERIVATIVE ACTIONS IN FLORIDA

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.

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.