Corporations: Derivative Actions (Professor D)

Question 1

Under Florida law, before a shareholder may file a derivative suit, what must they show relative to the failure of the corporation to sue on its own behalf?

Answer 1

1. They made a demand on the organization to sue on its own behalf and the demand was refused, rejected, or ignored by the board of directors prior to the expiration of 90 days from the date the demand was made, or
2. They made a demand on the organization to sue on its own behalf and there would be irreparable and material injury to the corporation or misapplication or waste of corporate assets to wait for the expiration of a 90-day period from the date the demand was made, or
3. No demand was made and the reason they did not make the effort.

Question 2

Fl. Stat. § 607.0742A complaint in a proceeding brought in the right of a corporation must be verified and allege with particularity:

Answer 2

(1) The demand, if any, made to obtain the action desired by the shareholder from the board of directors; and
(2) Either: (a) If such a demand was made, that the demand was refused, rejected, or ignored by the board of directors prior to the expiration of 90 days from the date the demand was made;
(b) If such a demand was made, why irreparable injury to the corporation or misapplication or waste of corporate assets causing material injury to the corporation would result by waiting for the expiration of a 90-day period from the date the demand was made; or
(c) The reason or reasons the shareholder did not make the effort to obtain the desired action from the board of directors or comparable authority.

Question 3

What does it mean to say that a complaint is “brought in the right of a corporation?”

Answer 3

That is the legally operative phrase that means, in Florida, that the suit must be brought on behalf of the corporation. See definition of “Derivative proceeding” as “a civil suit in the right of a domestic corporation . . .” Fl. Stat § 607.01401(17)

Question 4

Fl. Stat. § 607.0741(1)A shareholder may not commence a derivative proceeding unless

Answer 4

the shareholder is a shareholder at the time the action is commenced and:

(a) Was a shareholder when the conduct giving rise to the action occurred; or
(b) Whose status as a shareholder devolved on the person through transfer or by operation of law from one who was a shareholder when the conduct giving rise to the action occurred.

Question 5

What is the difference between a shareholder’s direct action and a shareholder’s derivative action?

Answer 5

a direct action is one where a shareholder is harmed him/herself and the suit is filed to compensate the shareholder for that personal/direct injury.
A direct action can arise even though the corporation is itself harmed/suffers a legally cognizable injury by the same conduct.
A derivative action is one where the corporation is harmed and the shareholder is suing on the corporation’s behalf.

Question 6

Fl. Stat. § 607.0750
(1) Subject to subsection (2), a shareholder may maintain a direct action against another shareholder, officer, director, or the company,

Answer 6

to enforce the shareholder’s rights and otherwise protect the shareholder’s interests, including rights and interests under the articles of incorporation, the bylaws or this chapter or arising independently of the shareholder relationship.
(2) A shareholder maintaining a direct action under this section must plead and prove either:
(a) An actual or threatened injury that is not solely the result of an injury suffered or threatened to be suffered by the corporation; or
(b )An actual or threatened injury resulting from a violation of a separate statutory or contractual duty owed by the alleged wrongdoer to the shareholder, even if the injury is in whole or in part the same as the injury suffered or threatened to be suffered by the corporation.

Question 7

Delaware requires that a plaintiff in a derivative action affirmatively plead futility if no demand was made on the board. What is the initial test of futility arising out of Aronson v. Lewis?

Answer 7

Plaintiff must
1.Plead facts with particularity
2.Creating a reasonable doubt that
•The directors are disinterested and independent, and
•The challenged transaction was otherwise the product of a valid exercise of business judgment
Notice that the definition of futility includes the requirement that you provide evidence that overcomes the presumption of the business judgment rule.

Question 8

What does it mean to plead with particularity?

Answer 8

Plaintiff must provide specific facts that satisfy the elements of the legal rule at issue.Plaintiff cannot rely on conclusory allegations or allegations based on information and belief.

Question 9

How does normally one show that a stockholder was justified in not having made an effort to obtain board action before filing a derivative suit?

Answer 9

Prove that:

1. A majority of the board has a material financial or familial interest;
2. A majority of the board is incapable of acting independently for some other reasons such as domination or control;3.The underlying transaction is not the product of a valid exercise of business judgment.

Question 10

What three purposes does the demand requirement serve?

Answer 10

1. By requiring exhaustion of intra-corporate remedies, the demand requirement invokes a species of alternative dispute resolution procedure which might avoid litigation altogether (decreases litigation)
2. If litigation is beneficial, the corporation can control the proceedings (helps corporate management), and
3. If demand is excused or wrongfully refused, the stockholder will normally control the proceedings (does not prevent legitimate litigation

Question 11

(Grimes v. DonaldIf)
Plaintiff cannot now argue that the demand is excused, what must plaintiff do if Plaintiff believes the board wrongfully refused the demand?

Answer 11

At this point we are back in the business judgment rule.
The plaintiff will have to now follow the Aronson rule:
Plaintiff must
1. Plead facts with particularity
2. Creating a reasonable doubt that
• The directors are disinterest and independent, and
• The challenged transaction was otherwise the product of a valid exercise of business judgment

Question 12

Under the MBCA approach, must plaintiffs make a demand on the board or may they argue for futility?

Answer 12

Under MBCA § 7.42, Plaintiff must make a written demand and wait 90 days before filing suit, unless demand is earlier rejected, or the corporation would be irreparably injured by the wait.

Question 13

Fl. Stat. § 607.0742

Under Florida Law, must plaintiffs make a demand on the board or may they argue for futility?

Answer 13

No, Florida Law includes a futility approach.

Question 14

Fl. Stat. § 607.0742A complaint in a proceeding brought in the right of a corporation must be verified and allege with particularity

Answer 14

(1) The demand, if any, made to obtain the action desired by the shareholder from the board of directors; and
(2) Either:
(a) If such a demand was made, that the demand was refused, rejected, or ignored by the board of directors prior to the expiration of 90 days from the date the demand was made;
(b) If such a demand was made, why irreparable injury to the corporation or misapplication or waste of corporate assets causing material injury to the corporation would result by waiting for the expiration of a 90-day period from the date the demand was made; or
(c) The reason or reasons the shareholder did not make the effort to obtain the desired action from the board of directors or comparable authority.

Question 15

What is an interlocutory appeal?

Answer 15

It is an appeal from a ruling of the trial court while the proceeding is ongoing. (So there has been no final disposition to the case.) When an interlocutory appeal is permitted it is a matter of state law.

Question 16

Fl. Stat. § 607.0744(1)

A derivative proceeding may be dismissed,

Answer 16

in whole or in part, by the court on motion by the corporation if
• a majority of qualified directors or committee members or
• a court appointed panel of disinterested and independent individuals has determined in good faith,
• after conducting a reasonable inquiry upon which its conclusions are based,
• that the maintenance of the derivative proceeding is not in the best interests of the corporation.

In all such cases, the corporation has the burden of proof regarding the qualifications, good faith, and reasonable inquiry of the group making the determination.

Question 17

Fl. Stat. § 607.0744 (1) A derivative proceeding may be dismissed, in whole or in part,

Answer 17

by the court on motion by the corporation if a group specified in subsection (2) or subsection (3) has determined in good faith, after conducting a reasonable inquiry upon which its conclusions are based, that the maintenance of the derivative proceeding is not in the best interests of the corporation. In all such cases, the corporation has the burden of proof regarding the qualifications, good faith, and reasonable inquiry of the group making the determination.

Question 18

Fl. Stat. § 607.0744(2),(3)(2)
A derivative proceeding may be dismissed, in whole or in part,
Unless a panel is appointed pursuant to subsection (3), the determination required in subsection (1) shall be made by:

Answer 18

(a) A majority of qualified directors present at a meeting of the board of directors if the qualified directors constitute a quorum; or
(b) A majority vote of a committee consisting of two or more qualified directors appointed by majority vote of qualified directors present at a meeting of the board of directors, regardless of whether such qualified directors constitute a quorum.
(3) Upon motion by the corporation, the court may appoint a panel consisting of one or more disinterested and independent individuals to make a determination required in subsection (1).