Florida Is Now a “Demand Futility” State for Shareholder Derivative Actions

Carlton Fields

Carlton Fields

On January 1, 2020, the new Florida Business Corporation Act took effect. It includes a provision that settles in the affirmative whether Florida is a “demand futility” state for shareholder derivative litigation. To succeed under this new rule, the shareholder must adequately demonstrate the reason or reasons “it did not make the effort to obtain the desired action from the board of directors or comparable authority.” Fla. Stat. § 607.0742 (2020). This article reviews the prior regime, explains the new statutory language, and evaluates how Florida courts may assess allegations of futility. It then concludes with a brief discussion about what this all means for shareholder derivative litigation going forward for Florida corporations.

The Prior Regime

Under the immediately preceding statutory regime, there was a general consensus that Florida law required presuit demand and a 90-day waiting period before a shareholder could commence derivative litigation. That is, absent express rejection by the board or risk of irreparable injury, a shareholder plaintiff had to wait 90 days from its first demand to the board before bringing its lawsuit in the company’s name. The most recent iteration of the statute read as follows:

  • A complaint in a proceeding brought in the right of a corporation must be verified and 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 for a period of at least 90 days from the first demand unless, prior to the expiration of the 90 days, the person was notified in writing that the corporation rejected the demand, or unless irreparable injury to the corporation would result by waiting for the expiration of the 90-day period. If the corporation commences an investigation of the charges made in the demand or complaint, the court may stay any proceeding until the investigation is completed.

Fla. Stat. § 607.07401(2) (2019) (emphasis added).

It is worth noting that despite the statute’s apparent clarity, some Florida courts had held there to be a futility exception, based on some older cases relying on an earlier version of that statute. See, e.g., Etan Mark & Steven D. Weber, Resistance Is Futile: The Myth of Demand Futility, 88 Fla. B. J. 10 (May 2014) (citing cases and explaining the “disconnect between Florida courts and the Florida statute as to whether there [was] a futility exception to any demand requirement”).

The New Language

The Florida Business Corporation Act clarifies whatever ambiguity there was by repealing the Florida statutory section cited above and replacing it with an adjacent section that allows a shareholder to pursue a derivative action provided the complaint alleges “with particularity” the “reason or reasons the shareholder did not make the effort to obtain the desired action from the board of directors or comparable authority.” Fla. Stat. § 607.0742 (2020). The new statutory language reads as follows:

A complaint in a proceeding brought in the right of a corporation must be verified and allege with particularity:

  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.

Fla. Stat. § 607.0742 (emphasis added). The staff analysis of the proposed bill explained this change in express terms of demand futility, namely, that the change would “[a]llow a shareholder to initiate a derivative action without waiting 90 days for the corporation to respond to his or demand, if the shareholder is able to prove that such a demand is futile.” Staff of Fla. H.R. Comm. on Judiciary, CS/CS/HB 1009 (2020) Staff Analysis 9 (Apr. 18, 2019).

Evaluating Allegations of Demand Futility in Florida

Given that demand futility is now accepted under Florida law, the next question is how Florida courts will weigh motions to dismiss challenging “particularized” allegations of demand futility. While “demand futility” is a legal term of art that varies by jurisdiction, Delaware law offers insight. The Delaware Supreme Court has stated:

  • Our view is that in determining demand futility the Court of Chancery in the proper exercise of its discretion must decide whether, under the particularized facts alleged, a reasonable doubt is created that: (1) the directors are disinterested and independent and (2) the challenged transaction was otherwise the product of a valid exercise of business judgment. Hence, the Court of Chancery must make two inquiries, one into the independence and disinterestedness of the directors and the other into the substantive nature of the challenged transaction and the board's approval thereof.

Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984). The Aronson standard is not an insignificant hurdle for a plaintiff, which is appropriate, as such a lawsuit reflects a shareholder’s attempt to wrest from the company control over important corporate decisions — whether the company should bring a lawsuit, typically against a current or former officer or director, and, if so, how to prosecute that action.

Notably, the Florida Business Corporation Act’s new language allowing demand-futility pleading is substantially consistent, but not word for word, with the Delaware Court of Chancery’s Rule 23.1, which states that the “complaint shall also allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors or comparable authority and the reasons for the plaintiff's failure to obtain the action or for not making the effort” (emphasis added).

It may be expected that Florida courts will follow the Aronson scheme for two reasons. First, Florida courts often refer to Delaware law as persuasive authority when Florida does not have law on the subject. See Int’l Ins. Co. v. Johns, 874 F.2d 1447, 1459 n.22 (11th Cir. 1989) (noting that Florida courts have relied on Delaware law to establish their own corporate law doctrines); Griffith v. Quality Distribution, Inc., No. 2D17-3160, 2018 WL 3403537, at *6 (Fla. 2d DCA July 13, 2018) (adopting the “well-reasoned” standard set forth in Delaware’s Trulia decision for evaluating so-called disclosure settlements of a class action merger lawsuit).

Second, the Aronson test has been well developed over 35 years and provides relatively clear rules of decision where it applies. As an example, Florida federal courts have long applied Aronson with comfort when Delaware law applies. See, e.g., McDowell v. Bracken, No. 18-12762, 2019 WL 6998638, at *6 (11th Cir. Dec. 20, 2019) (applying Aronson and Delaware law to affirm a motion to dismiss for the corporation: “To excuse his failure to make a demand on the Board before filing suit, McDowell was required to show that demand was futile. He has failed to do so.”).

There may be complications, though, to applying Delaware’s doctrine in its entirety. A court’s review of a motion to dismiss that attacks a shareholder’s allegations of demand futility often turns on the court’s assessment of director independence. That is, the shareholder must allege with particularity that these directors cannot be trusted to adjudge fairly whether bringing the subject lawsuit (or taking the other corporate action demanded) is in the corporation’s best interest because of conflicts or other infirmity of independence. But Florida’s recent amendments to the Florida Business Corporation Act made several changes to the concepts of director independence, in ways that are not entirely in lockstep with Delaware. For example, the act itself incorporates substantially revised language as to “director conflicts of interest,” Fla. Stat. § 607.0832 (2020), and introduces the term of “qualified director,” Fla. Stat. § 607.0143 (2020), that are both new to Florida and not word for word with Delaware. Florida courts have not yet developed these new concepts, and their resolution will likely be more important to the substantive outcome of futility litigation than will whether Florida follows the Aronson framework.

Practical Considerations for Florida Corporations

Looking ahead, Florida corporations and their boards must consider how the formal introduction of demand futility to the Florida Business Corporation Act might increase the filing of shareholder derivative litigation. As an initial matter, a Florida corporation would be wise to review its director independence, particularly if it is planning significant corporate events, such as a merger, or if it is a public company and has particularly active shareholders.

A Florida corporation, particularly a public company, should also discuss with its in-house and outside counsel its plan for derivative demands to move more quickly to court or for demands to head to court in the first instance. Florida corporations had previously been given, in most cases, 90 days’ warning before any lawsuit was filed in court and, often, an opportunity to work with the shareholder’s counsel before the matter was made public. In that time, the board could investigate the demand, set up a special committee to review the demand if warranted, and otherwise confer with the shareholder or the shareholder’s attorney on options short of litigation. Building demand futility into the statute means that many putative plaintiffs will skip this initial outreach to the board, eliminating entirely the opportunity for the company’s presuit shareholder engagement and shifting what was boardroom dialogue to an immediate courtroom fight.

Consequently, corporations should review their policies and procedures around receipt and response to shareholder demands on the board, and work with their inside and outside counsel to prepare for immediate litigation, particularly after corporate action that may spur derivative litigation. Such high-risk events that can prompt derivative litigation include the filing of securities fraud litigation, announcing a government investigation, reporting the abrupt departure of an executive, corporate governance changes, and out-of-the-ordinary compensation disclosures.

The addition of demand futility to the Florida Business Corporation Act is a significant change to how companies and shareholders will move forward with shareholder demands and will require careful thought for boards of Florida companies and for those who advise them.

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.

© Carlton Fields | Attorney Advertising

Written by:

Carlton Fields

Carlton Fields on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide

JD Supra Privacy Policy

Updated: May 25, 2018:

JD Supra is a legal publishing service that connects experts and their content with broader audiences of professionals, journalists and associations.

This Privacy Policy describes how JD Supra, LLC ("JD Supra" or "we," "us," or "our") collects, uses and shares personal data collected from visitors to our website (located at www.jdsupra.com) (our "Website") who view only publicly-available content as well as subscribers to our services (such as our email digests or author tools)(our "Services"). By using our Website and registering for one of our Services, you are agreeing to the terms of this Privacy Policy.

Please note that if you subscribe to one of our Services, you can make choices about how we collect, use and share your information through our Privacy Center under the "My Account" dashboard (available if you are logged into your JD Supra account).

Collection of Information

Registration Information. When you register with JD Supra for our Website and Services, either as an author or as a subscriber, you will be asked to provide identifying information to create your JD Supra account ("Registration Data"), such as your:

  • Email
  • First Name
  • Last Name
  • Company Name
  • Company Industry
  • Title
  • Country

Other Information: We also collect other information you may voluntarily provide. This may include content you provide for publication. We may also receive your communications with others through our Website and Services (such as contacting an author through our Website) or communications directly with us (such as through email, feedback or other forms or social media). If you are a subscribed user, we will also collect your user preferences, such as the types of articles you would like to read.

Information from third parties (such as, from your employer or LinkedIn): We may also receive information about you from third party sources. For example, your employer may provide your information to us, such as in connection with an article submitted by your employer for publication. If you choose to use LinkedIn to subscribe to our Website and Services, we also collect information related to your LinkedIn account and profile.

Your interactions with our Website and Services: As is true of most websites, we gather certain information automatically. This information includes IP addresses, browser type, Internet service provider (ISP), referring/exit pages, operating system, date/time stamp and clickstream data. We use this information to analyze trends, to administer the Website and our Services, to improve the content and performance of our Website and Services, and to track users' movements around the site. We may also link this automatically-collected data to personal information, for example, to inform authors about who has read their articles. Some of this data is collected through information sent by your web browser. We also use cookies and other tracking technologies to collect this information. To learn more about cookies and other tracking technologies that JD Supra may use on our Website and Services please see our "Cookies Guide" page.

How do we use this information?

We use the information and data we collect principally in order to provide our Website and Services. More specifically, we may use your personal information to:

  • Operate our Website and Services and publish content;
  • Distribute content to you in accordance with your preferences as well as to provide other notifications to you (for example, updates about our policies and terms);
  • Measure readership and usage of the Website and Services;
  • Communicate with you regarding your questions and requests;
  • Authenticate users and to provide for the safety and security of our Website and Services;
  • Conduct research and similar activities to improve our Website and Services; and
  • Comply with our legal and regulatory responsibilities and to enforce our rights.

How is your information shared?

  • Content and other public information (such as an author profile) is shared on our Website and Services, including via email digests and social media feeds, and is accessible to the general public.
  • If you choose to use our Website and Services to communicate directly with a company or individual, such communication may be shared accordingly.
  • Readership information is provided to publishing law firms and authors of content to give them insight into their readership and to help them to improve their content.
  • Our Website may offer you the opportunity to share information through our Website, such as through Facebook's "Like" or Twitter's "Tweet" button. We offer this functionality to help generate interest in our Website and content and to permit you to recommend content to your contacts. You should be aware that sharing through such functionality may result in information being collected by the applicable social media network and possibly being made publicly available (for example, through a search engine). Any such information collection would be subject to such third party social media network's privacy policy.
  • Your information may also be shared to parties who support our business, such as professional advisors as well as web-hosting providers, analytics providers and other information technology providers.
  • Any court, governmental authority, law enforcement agency or other third party where we believe disclosure is necessary to comply with a legal or regulatory obligation, or otherwise to protect our rights, the rights of any third party or individuals' personal safety, or to detect, prevent, or otherwise address fraud, security or safety issues.
  • To our affiliated entities and in connection with the sale, assignment or other transfer of our company or our business.

How We Protect Your Information

JD Supra takes reasonable and appropriate precautions to insure that user information is protected from loss, misuse and unauthorized access, disclosure, alteration and destruction. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. You should keep in mind that no Internet transmission is ever 100% secure or error-free. Where you use log-in credentials (usernames, passwords) on our Website, please remember that it is your responsibility to safeguard them. If you believe that your log-in credentials have been compromised, please contact us at privacy@jdsupra.com.

Children's Information

Our Website and Services are not directed at children under the age of 16 and we do not knowingly collect personal information from children under the age of 16 through our Website and/or Services. If you have reason to believe that a child under the age of 16 has provided personal information to us, please contact us, and we will endeavor to delete that information from our databases.

Links to Other Websites

Our Website and Services may contain links to other websites. The operators of such other websites may collect information about you, including through cookies or other technologies. If you are using our Website or Services and click a link to another site, you will leave our Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We are not responsible for the data collection and use practices of such other sites. This Policy applies solely to the information collected in connection with your use of our Website and Services and does not apply to any practices conducted offline or in connection with any other websites.

Information for EU and Swiss Residents

JD Supra's principal place of business is in the United States. By subscribing to our website, you expressly consent to your information being processed in the United States.

  • Our Legal Basis for Processing: Generally, we rely on our legitimate interests in order to process your personal information. For example, we rely on this legal ground if we use your personal information to manage your Registration Data and administer our relationship with you; to deliver our Website and Services; understand and improve our Website and Services; report reader analytics to our authors; to personalize your experience on our Website and Services; and where necessary to protect or defend our or another's rights or property, or to detect, prevent, or otherwise address fraud, security, safety or privacy issues. Please see Article 6(1)(f) of the E.U. General Data Protection Regulation ("GDPR") In addition, there may be other situations where other grounds for processing may exist, such as where processing is a result of legal requirements (GDPR Article 6(1)(c)) or for reasons of public interest (GDPR Article 6(1)(e)). Please see the "Your Rights" section of this Privacy Policy immediately below for more information about how you may request that we limit or refrain from processing your personal information.
  • Your Rights
    • Right of Access/Portability: You can ask to review details about the information we hold about you and how that information has been used and disclosed. Note that we may request to verify your identification before fulfilling your request. You can also request that your personal information is provided to you in a commonly used electronic format so that you can share it with other organizations.
    • Right to Correct Information: You may ask that we make corrections to any information we hold, if you believe such correction to be necessary.
    • Right to Restrict Our Processing or Erasure of Information: You also have the right in certain circumstances to ask us to restrict processing of your personal information or to erase your personal information. Where you have consented to our use of your personal information, you can withdraw your consent at any time.

You can make a request to exercise any of these rights by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

You can also manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard.

We will make all practical efforts to respect your wishes. There may be times, however, where we are not able to fulfill your request, for example, if applicable law prohibits our compliance. Please note that JD Supra does not use "automatic decision making" or "profiling" as those terms are defined in the GDPR.

  • Timeframe for retaining your personal information: We will retain your personal information in a form that identifies you only for as long as it serves the purpose(s) for which it was initially collected as stated in this Privacy Policy, or subsequently authorized. We may continue processing your personal information for longer periods, but only for the time and to the extent such processing reasonably serves the purposes of archiving in the public interest, journalism, literature and art, scientific or historical research and statistical analysis, and subject to the protection of this Privacy Policy. For example, if you are an author, your personal information may continue to be published in connection with your article indefinitely. When we have no ongoing legitimate business need to process your personal information, we will either delete or anonymize it, or, if this is not possible (for example, because your personal information has been stored in backup archives), then we will securely store your personal information and isolate it from any further processing until deletion is possible.
  • Onward Transfer to Third Parties: As noted in the "How We Share Your Data" Section above, JD Supra may share your information with third parties. When JD Supra discloses your personal information to third parties, we have ensured that such third parties have either certified under the EU-U.S. or Swiss Privacy Shield Framework and will process all personal data received from EU member states/Switzerland in reliance on the applicable Privacy Shield Framework or that they have been subjected to strict contractual provisions in their contract with us to guarantee an adequate level of data protection for your data.

California Privacy Rights

Pursuant to Section 1798.83 of the California Civil Code, our customers who are California residents have the right to request certain information regarding our disclosure of personal information to third parties for their direct marketing purposes.

You can make a request for this information by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

Some browsers have incorporated a Do Not Track (DNT) feature. These features, when turned on, send a signal that you prefer that the website you are visiting not collect and use data regarding your online searching and browsing activities. As there is not yet a common understanding on how to interpret the DNT signal, we currently do not respond to DNT signals on our site.

Access/Correct/Update/Delete Personal Information

For non-EU/Swiss residents, if you would like to know what personal information we have about you, you can send an e-mail to privacy@jdsupra.com. We will be in contact with you (by mail or otherwise) to verify your identity and provide you the information you request. We will respond within 30 days to your request for access to your personal information. In some cases, we may not be able to remove your personal information, in which case we will let you know if we are unable to do so and why. If you would like to correct or update your personal information, you can manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard. If you would like to delete your account or remove your information from our Website and Services, send an e-mail to privacy@jdsupra.com.

Changes in Our Privacy Policy

We reserve the right to change this Privacy Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our Privacy Policy will become effective upon posting of the revised policy on the Website. By continuing to use our Website and Services following such changes, you will be deemed to have agreed to such changes.

Contacting JD Supra

If you have any questions about this Privacy Policy, the practices of this site, your dealings with our Website or Services, or if you would like to change any of the information you have provided to us, please contact us at: privacy@jdsupra.com.

JD Supra Cookie Guide

As with many websites, JD Supra's website (located at www.jdsupra.com) (our "Website") and our services (such as our email article digests)(our "Services") use a standard technology called a "cookie" and other similar technologies (such as, pixels and web beacons), which are small data files that are transferred to your computer when you use our Website and Services. These technologies automatically identify your browser whenever you interact with our Website and Services.

How We Use Cookies and Other Tracking Technologies

We use cookies and other tracking technologies to:

  1. Improve the user experience on our Website and Services;
  2. Store the authorization token that users receive when they login to the private areas of our Website. This token is specific to a user's login session and requires a valid username and password to obtain. It is required to access the user's profile information, subscriptions, and analytics;
  3. Track anonymous site usage; and
  4. Permit connectivity with social media networks to permit content sharing.

There are different types of cookies and other technologies used our Website, notably:

  • "Session cookies" - These cookies only last as long as your online session, and disappear from your computer or device when you close your browser (like Internet Explorer, Google Chrome or Safari).
  • "Persistent cookies" - These cookies stay on your computer or device after your browser has been closed and last for a time specified in the cookie. We use persistent cookies when we need to know who you are for more than one browsing session. For example, we use them to remember your preferences for the next time you visit.
  • "Web Beacons/Pixels" - Some of our web pages and emails may also contain small electronic images known as web beacons, clear GIFs or single-pixel GIFs. These images are placed on a web page or email and typically work in conjunction with cookies to collect data. We use these images to identify our users and user behavior, such as counting the number of users who have visited a web page or acted upon one of our email digests.

JD Supra Cookies. We place our own cookies on your computer to track certain information about you while you are using our Website and Services. For example, we place a session cookie on your computer each time you visit our Website. We use these cookies to allow you to log-in to your subscriber account. In addition, through these cookies we are able to collect information about how you use the Website, including what browser you may be using, your IP address, and the URL address you came from upon visiting our Website and the URL you next visit (even if those URLs are not on our Website). We also utilize email web beacons to monitor whether our emails are being delivered and read. We also use these tools to help deliver reader analytics to our authors to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

Analytics/Performance Cookies. JD Supra also uses the following analytic tools to help us analyze the performance of our Website and Services as well as how visitors use our Website and Services:

  • HubSpot - For more information about HubSpot cookies, please visit legal.hubspot.com/privacy-policy.
  • New Relic - For more information on New Relic cookies, please visit www.newrelic.com/privacy.
  • Google Analytics - For more information on Google Analytics cookies, visit www.google.com/policies. To opt-out of being tracked by Google Analytics across all websites visit http://tools.google.com/dlpage/gaoptout. This will allow you to download and install a Google Analytics cookie-free web browser.

Facebook, Twitter and other Social Network Cookies. Our content pages allow you to share content appearing on our Website and Services to your social media accounts through the "Like," "Tweet," or similar buttons displayed on such pages. To accomplish this Service, we embed code that such third party social networks provide and that we do not control. These buttons know that you are logged in to your social network account and therefore such social networks could also know that you are viewing the JD Supra Website.

Controlling and Deleting Cookies

If you would like to change how a browser uses cookies, including blocking or deleting cookies from the JD Supra Website and Services you can do so by changing the settings in your web browser. To control cookies, most browsers allow you to either accept or reject all cookies, only accept certain types of cookies, or prompt you every time a site wishes to save a cookie. It's also easy to delete cookies that are already saved on your device by a browser.

The processes for controlling and deleting cookies vary depending on which browser you use. To find out how to do so with a particular browser, you can use your browser's "Help" function or alternatively, you can visit http://www.aboutcookies.org which explains, step-by-step, how to control and delete cookies in most browsers.

Updates to This Policy

We may update this cookie policy and our Privacy Policy from time-to-time, particularly as technology changes. You can always check this page for the latest version. We may also notify you of changes to our privacy policy by email.

Contacting JD Supra

If you have any questions about how we use cookies and other tracking technologies, please contact us at: privacy@jdsupra.com.

- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.