Direct & Derivative Actions
Mr. Tufts 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.
It has been suggested that, in the past, Florida’s statutes governing partnerships were silent as to whether a limited partner could bring a direct action (as opposed to the bringing of an action in the right of a limited partnership). Now, under Florida’s RE-FRULPA of 2005, the issue appears to have been clarified, as direct actions may be brought by any partner (general or limited) under Florida Statutes, Section 620.2001, but any partner commencing such an action is required to plead and prove an actual or threatened injury that is not solely the result of an injury suffered or threatened to be suffered by the limited partnership.
As for derivative actions under RE-FRULPA, under Florida Statutes, Section 620.2002, a partner (general or limited) may maintain a derivative action to enforce a right of a limited partnership if, the partner first makes a demand on the general partners requesting that they cause the limited partnership to bring an action to enforce the right and the general partners do not bring the action within a reasonable time, or a demand (to do so) would be futile.
By comparison, under Florida’s Revised LLC Act, Florida Statutes, Section 605.0802, a member may maintain a derivative action to enforce a right of a LLC if (1) the member first makes a demand on the other members in a member-managed LLC or the managers of a manager-managed LLC requesting that the managers or other members cause the LLCto take suitable action to enforce the right, and the mangers or other members do not take the action with a reasonable time, not to exceed 90 days; or (2) such demand under (1) would be futile, or irreparable injury would result to the LLC by waiting for the other members or the managers to take action to enforce the right. This provision derives from the Revised Uniform LLC Act Section 802, except it does not provide for the 90-day outside limit and instead relies soley on the reasonable time limitation. See Cohn & Ames, Florida Business Laws Annotated (2016-2017), at 321 (discussing Florida Bar Drafting Committee Comments). Prior LLC law in Florida did not provide for futility as a basis for excusing the demand requirement. Id (Author Commentary). As Cohn & Ames point out, there is considerable case law in Delaware construing the futility requirement, where a shareholder or member must alleged particularized facts creating a reasonable doubt that the directors are disinterested and independent or that the challenged transaction was a valid exercise of a business judgment, with the leading case in Delaware being Aronson v. Lewis, 473 A.2d 805 (Del. 1984). Id.
The new Florida LLC law provides for a direct action as well. That is found in F.S. Section 605.0801, where the member must plead and prove an actual or threatened injury that is not solely the result of an injury suffered or threatened to be suffered by the LLC. This direct action provision is taken from the Revised Uniform LLC Act Section 801. Prior Florida LLC law did not contain a comprehensive provision governing direct actions.
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.
- General Overview
- Direct & Derivative Actions
- Effective Assessing Fidiciary Duties
- Piercing the Veil & Charging Order Issues
- Evaluating Developments in Single-Member LLCs
- Successor Liability & Continuation of Business
- Workouts & Bankruptcy