January 10, 2020
Derivative Actions Under Fla.’s Revised Corporate Statute—New 2020 Rules
By Bernard Lebedeker
Bernard Lebedeker, Partner,
Reid Burman Lebedeker Xenick,
West Palm Beach
In January 2020 the “futility exception” will return. Florida law has long followed the rule that the law will not require a futile act. The rule has been applied in a wide variety of circumstances: to excuse a party to a contract from performing conditions precedent, to excuse a party from exhausting his or her administrative remedies, or even to excuse the state from proffering evidence showing that an accused qualifies as a prison releasee reoffender. In each of these situations the futile act is unlikely to resolve the dispute or change its outcome. The rule exists because the law desires a just, speedy, and inexpensive resolution of disputes, and not byzantine exercises where form dominates function. The use of the rule in actions which arise in equity is particularly appropriate, and this would include derivative actions—suits in which a shareholder brings a lawsuit on behalf of a corporation for wrongs done to the corporation.
In derivative actions the plaintiff must first demand that the directors of the corporation pursue the claims on the corporation’s behalf. That requirement makes sense because the claims belong to the corporation and corporate management is best positioned to protect the corporation’s interests. However, the requirement of a pre-suit demand to the corporate board is illogical when the plaintiff seeks, on behalf of the corporation, to pursue claims that arise from illegal or unfair conduct of corporate management itself. In that scenario the corporate hen house is being guarded by foxes in management; foxes who are unlikely to pursue claims based upon their own misdeeds.
As a consequence, Florida law excused a shareholder from demanding that corporate management pursue such claims on behalf of the corporation. However in 1989 Florida passed the Florida Business Corporation Act. Section 67 of the act required a plaintiff to allege that he had demanded that the corporation’s board take action regarding the allegations made in the complaint and that the board either ignored the demand or affirmatively refused to take action. The absence of any language excusing the demand on the grounds of futility led some legal commentators to conclude that there was no “futility” exception to the demand requirement. The opinion of those commentators gained weight in 2013 when Florida’s Revised Limited Liability Act was passed. In that act the Florida Legislature expressly included a futility exception and so, the argument went, intended for the exception to apply in derivative claims involving limited liability companies but not in claims involving corporations.
As a result of considerable work by the Florida Bar’s Business Law Section new amendments to the Florida Business Corporation Act expressly provide that a plaintiff can allege, “The reason or reasons the shareholder did not make the effort to obtain the desired action from the board of directors or comparable authority.” The commentary by the Florida Bar’s business law section makes it clear that the amendment allows a plaintiff to plead futility as “a reason” why a demand was not made, but that it will ultimately be up to the courts to determine when, and under what circumstances, the futility of a demand will excuse the failure to make one.
Although the committee’s comments to the new statute focus on the issue of futility, the language used in the new provision—“The reason or reasons the shareholder did not make the effort to obtain the desired action from the board of directors or comparable authority”—leaves the door open for courts to allow litigants to fail to provide the required notice for reasons which have nothing to do with the futility of the notice. Whether subsequent judicial decisions excuse the provision of the notice for reasons other than futility remains to be seen.
What is clear at this point is that persons serving on boards of corporate entities can no longer assert the failure to give a futile notice as a defense to a derivative action.
