Litigation pertaining to corporations and other entities can be some of the most hard fought and high stakes that someone may ever encounter. The nature of disputes among business people is limited only by their imagination. Some disagreements that occur often can be traced back to simple misunderstandings by the parties about their relationships and roles within the corporate entity. Usually, the participants have failed to plan to address the inevitable differences of opinion among themselves, business cycles, and certain contingencies that can occur in any business. Many disagreements may be avoided through proper business planning. Another source of discord among shareholders is the result of “bare bones” business formation. Corporations and entities can be started online without any legal assistance. The result of such instant formations and lack of planning can be ticking time bombs waiting to explode once disagreements arise.
Litigation often arises in situations where there is no written agreement defining the remedies and rights of the corporation and its shareholder. The lack of shareholder and operating agreements is major problem. Lay people who start business entities “online” and falsely assume that all they must to do to carry on their business successfully is to file articles of incorporation or articles of organization fail to understand that disagreements or complete fallouts are a genuine risk the future. This carefree attitude may spell disaster, often resulting in the dissolution of the entity because of deadlocks and the inability to transfer stock or membership interests.
A common theme to all business entity litigation is the extent to which the entity members owe fiduciary obligations of due care and loyalty to the other members. Both the law on the books and the courts must balance the principle of “majority rule” against inequitable unfairness and overreaching by members of the entity. As discussed above, these issues can be typically addressed in the operating agreements created at the time the entity is formed. Shareholder Derivative actions and Direct Actions are two common types of lawsuits that may arise among shareholders and corporations.
Shareholder Derivative Actions vs. Direct Actions
A derivative action is a lawsuit filed by a shareholder on behalf of the corporation in order to rectify the corporation’s rights which have been injured by acts of corporate officers and directors. In order to have the standing necessary to bring a derivative action, a shareholder must have continuous ownership of stock in the business. Derivative actions are distinguishable from direct actions. A derivative action is one in which a shareholder seeks to maintain in his own name a right of action existing in the corporation of which he or she is a shareholder, with the corporation as the real party in interest and the shareholder as a nominal plaintiff, whereas a direct action is one in which an individual shareholder asserts a claim or a cause of action that exists on his or her behalf as an individual. In other words, derivative actions are appropriate where the corporation itself is injured, as opposed to a direct injury to a shareholder. Florida courts looks to the language of a shareholder’s complaint to determine whether the injury is direct to the shareholder or to the corporation so as to determine if the claim may be brought in a shareholder derivative action.
Requirements for Bringing Shareholder Derivative Actions
Before a court will allow minority shareholders to file suit into an alleged breach of trust by the officers or directors of the corporation, the shareholders must demonstrate that they have tried all remedies within the corporation and that there is no other means of redress. Therefore, a complaint in a 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 ninety days from the first demand unless, prior to the expiration of the ninety days, the individual was given written notice that the corporation rejected the demand or unless irreparable injury to the corporation would result by waiting for the expiration of the ninety-day period. If the corporation opens an investigation of the charges made in the demand or complaint, the court may stay any proceeding until the investigation is over.
If the corporation’s property is being mismanaged or is in danger of being destroyed by the shareholders through collusion, mismanagement or fraud of by its officers, the court can require the corporation’s officers to make an accounting, and may impose a constructive trust on assets improperly diverted, and may accord to minority shareholders their legal rights and interests in the corporate affairs and property, or may require rescission of an improper agreement made on behalf of the corporation. For example, if the President of the corporation let’s his spouse use the company car for her own corporation, it may warrant an accounting and a constructive trust against the spouse and/or her corporation. The court can even appoint someone to manage the affairs of the company if necessary to wind up, liquidate and distribute its assets if necessary. There is typically no right to a jury trial in a derivative action.
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