FORT LAUDERDALE BUSINESS LITIGATION: RESOLVING CORPORATE DEADLOCK WITH A PROVISIONAL DIRECTOR

Many Florida corporations are owned or controlled by two individuals who have equal authority. While 50/50 control over a corporation can sometimes work for a time, it is often not sustainable. When a conflict arises between two equal owners of a corporation, there is usually not an easy solution to fix the deadlock. A co-owner of a corporation in deadlock can take action in Court to resolve the deadlock. 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 as well as in arbitration.

If the board of directors for a Florida corporation is deadlocked, a co-owner of that corporation can request that the court appoint a provisional director to resolve the deadlock. Under Florida law, 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(1). “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). Where corporate deadlock exists, the court may exercise this discretion “in a proceeding by a shareholder,” and is not otherwise limited by the nature of the action. Fla. Stat. § 607.0749(1). Even if there is not a vacancy on the Florida businesses’ board of directors, the court can appoint this 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.” Id. The court’s chosen 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.” Id.

The courts do not automatically appoint provisional directors in every circumstance when there is a corporate deadlock. In business litigation over whether to intervene in a Florida corporation’s internal governance, courts often evaluate how significant is the management dysfunction. See Fernandez v. Yates, 145 So. 3d 141 (Fla. 3d DCA 2014) (“With half of the shareholder/partners refusing to even meet with the remaining shareholder/partners to consider how to address the needs of the property so that its purpose may continue to be realized and with the entrenched manager/son of one of the recalcitrant shareholder/partners taking direction from less than a majority of the shareholder/partners, it is impossible to see how ‘irreparable injury’ to [the corporation] has not been suffered, much less been threatened”). In Yates, Florida’s Third District Court of Appeal dissolved a corporate entity as a result of dysfunctional management and irreconcilable shareholder deadlock. Id. (finding the company’s shareholders “unable to break a corporate deadlock” which “irreparably frustrate[d] the very purpose of [the] corporation”). Because the “shareholders/partners [were] hopelessly deadlocked on every issue,” Yates held that dissolving the corporation was the best option to avoid irreparable injury. Id. The appointment of a provisional director is a tool that can be utilized by the court to remedy this dysfunctional structure before the Florida corporation reaches the point where the only remaining option is dissolution.

If the court grants the corporation co-owner’s request to appoint a provisional director, the provisional director will be paid by the corporation. See Fla. Stat. 607.0749(3) (“In any proceeding under this section, the court shall allow reasonable compensation to the provisional director for services rendered and reimbursement or direct payment of reasonable costs and expenses, which amounts shall be paid by the corporation”). The retention of a provisional director can be expensive. The court determines the necessary qualifications for a provisional director. See Fla. Stat. § 607.0749(1). A qualified person will likely be a legal or business professional that expects to be paid a significant hourly rate for his or her services. In order to ensure that the provisional director makes the well-informed decisions, the provisional director may need to research or investigate the matters presented.

A provisional director can be an effective, but expensive, method to resolve a corporate deadlock. Peter Mavrick is a Fort Lauderdale business litigation attorney who also practices business litigation in Palm Beach, Boca Raton, and Miami-Dade. This article does not serve as a substitute for legal advice tailored to a particular situation.