Editorial: 3rd DCA Clarifies Derivative Lawsuits

The Third District Court of Appeal has issued a landmark opinion setting forth Florida's law to determine the limited circumstances in which a corporate shareholder or limited liability company member has standing to bring a direct claim for damages relating to the company.

In Dinuro Investments v. Camacho, the court on July 9 affirmed Miami-Dade Circuit Judge John Thornton's dismissal of an LLC member's claims. The opinion, however, has far-reaching implications.

A key issue in almost any shareholder litigation is—who gets the money? This issue is presented as whether the claim can be maintained directly on behalf of the shareholder or whether the claim must be asserted derivatively on behalf of the corporation. In a direct claim, the shareholder receives any recovery. In a derivative action, the recovery goes to the company. Given the bottom line nature of the distinction, it is not surprising that this is a hotly contested issue.

The difficulty in litigating the issue stemmed from the fact that the Florida Supreme Court has not weighed in on the issue. In the absence of controlling authority, the various district courts of appeal have applied various tests and standards over the past 50 years. The result was what the Third DCA termed a "lack of clarity" on an already complicated point of law. In turn, the Third DCA set out to—and did—provide the necessary clarity to Florida corporations, shareholders and courts.

After analyzing the law in other jurisdictions and Florida's sparse case law, the Third DCA defined Florida's law as applying a two-prong approach, holding that a shareholder must meet both the "direct harm test" and the "special injury test" before being able to proceed with a direct claim. Under the direct harm test, if the initial injury was to the company and the shareholder's injury flowed from that initial injury, the claim is derivative.

Under the special injury test, the claim is direct only if the plaintiff suffered a special and distinct injury not suffered by other shareholders.

This presents a difficult burden for a shareholder because generally the financial injury alleged is a reduction in stock value. And, if the stock price declines, it almost always is due to an initial injury to the company that caused the price of all shareholders' stock to decline. Neither test would be met.

However, the court identified an exception to the two-prong test where there is a separate contractual or statutory duty owed to the plaintiff. In that case, the claim can be brought directly without further analysis. But such contractual and statutory duties are infrequent, and even statutory duties in the LLC context can be limited in the LLC's operating agreement.

The end result is that, in most circumstances, an aggrieved shareholder or LLC member will have to bring his or her claims derivatively on behalf of the company. This leads to the appropriate result: if the company is injured, it is the company and all its shareholders that will be made whole.

This article is reprinted with permission from the Daily Business Review.

 

Topics:  Derivative Suit, Derivatives, Shareholder Litigation, Shareholders

Published In: Business Organization Updates, Civil Procedure Updates, General Business Updates, Constitutional Law Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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