Direct & Derivative Actions
The Tufts Law Firm is prepared to assist owners with questions that they may have with regard to rights that they may have to bring derivative actions on behalf of the entity, or alternatively, even direct actions.
The law in Florida with regard to these actions has not been clear, with a recent case suggesting that “under Florida law, …if a claim can be characterized as both derivative and direct, it must be brought as a derivative action.” Lewis v. CNL Restaurant Properties, Inc., 223 S.W.3d 784, 787 (Tex. App. 2007)(applying the “separate and distinct injury test” from Alario v. Miller, 354 So.2d 925 (Fla.Dist.Ct.App. 1978)); see also, Lewis and Sutter Capital Management, LLC v. Seneff, Bourne, et.al., Case No. 6:07-cv-01245 (M.D.Fla. 7/10/09)(magistrate recommends dismissal of second amended complaints, on multiple grounds including, inter alia, issue preclusion, and reasserting that Florida law adheres to separate and distinct injury test, and that accordingly, even as to claims of a breach of the duty of disclosure for the circulation of a misleading proxy, the alleged harm would be one suffered by all pre-merger limited partners). To be sure, other courts have suggested that shareholders can suffer injuries distinct from those caused to the entity alone, and have even gone so far as to suggest that the “separate and distinct injury test” is unworkable, Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004)(abandoning “separate and distinct injury test”, by mandating that the direct vs. derivative issue turns solely on determining who suffered the alleged harm and who would receive the benefit of any recovery or other remedy), but, in Lewis, the magistrate rejected an invitation to adopt the Tooley test, noting that courts in Florida continue to apply the separate and distinct test from Alario. Id, at 23 (citing to Angelina v. Santa Barbara Enterprises, LLC, 2 So.3d 1100 (Fla 3d DCA 2009). The magistrate in Lewis also found that even if RE-FRULPA statute signals a desire to create a new test for standing as to limited partners wanting to bring direct actions, since the limited partnerships ceased to exist before the effective date of RE-FRULPA and did not elect to be subject to the new law. The magistrate in Lewis also took note of Florida's continuous ownership rule and did not feel it appropriate to carve out a "quasi-direct standing" exception, recognized in other jurisdictions. He further found that the plaintiffs could not rely on a savings clause in the new law, to assert standing, because the plaintiffs could have brought a derivative action, rather than a direct action, or taken other steps (as opposed to the filing in Texas of a direct action on behalf of a class of limited partners). Practitioners and clients will want to monitor this area of the law for further developments.
By comparison, under Florida’s LLC Act, Florida Statutes, Section 608.601, the statutes enacted as part of the 1999 Amendments to the LLC Act, clarified that members in a LLC, like shareholders in a corporation, could bring forth derivative actions. The statutes aimed to model the derivative rights of a member in a LLC after those contained in Florida’s Business Corporation Act (e.g., F.S. § 607.07401). However, the law states how a person may not commence a proceeding in the right of a domestic or foreign LLC unless the person was a member of the LLC when the transaction complained of occurred or unless the person became a member through transfer by operation of law from one who was a member at that time. Even then, any such derivative action must be verified and allege with particularity the demand made to obtain action by the managing members of a member-managed LLC or the managers of a manager-managed LLC and show that the demand was refused or ignored. If the LLC commences an investigation of the charges made in the demand or complaint, the court may stay any proceeding until the investigation is completed. There are specific provisions in the statute that speak to how the LLC, after conducting a reasonable investigation, is to make a good faith determination as to whether maintenance of the derivative suit is in the best interests of the LLC. The LLC has the burden of proving the independence and good faith of the group making the determination, and prove the reasonableness of its investigation.
If you are an owner and have questions about a possible derivative or direct action when dealing with a closely-held LLC, LLP, or LLLP, please contact us.