Shareholder Derivative Action versus Shareholder Direct Action – A Basic Explanation

Whether an action against a corporation is direct or derivative is one that has been addressed frequently under Florida law.  A derivative action is a cause of action that is brought by a shareholder to enforce a right of action that exists on behalf of the corporation, seeking to redress an injury suffered by the corporation or its shareholders generally. 

On the other hand, an action by a shareholder against a corporation that seeks redress for an injury suffered directly by that shareholder, and where the injury is separate from that sustained by other shareholders, the action is then classified as a “direct action.”  Florida employs the separate and distinct injury test to determine whether a shareholder may bring a direct action.  Under this test, the injury must be sustained directly by the shareholder and the injury must be separate and distinct from any injury sustained by other shareholders.

Florida Statute section 607.07401 governs shareholders’ derivative actions, and sets forth specific requirements for the bringing of such an action.  For example, a complaint in a proceeding brought in the right of a corporation must be verified and alleged 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 the person was notified in writing of a rejection, or unless irreparable injury would result to the corporation by waiting for the 90-day period to expire.  Furthermore, a proceeding that is commenced under section 607.07401 cannot be discontinued or settled without court approval. 

Lastly, it is important to note that subsection (5) of the statute provides that a court can require a plaintiff to pay the defendant’s reasonable expenses, including reasonable attorneys’ fees, if it finds that the proceeding was commenced without reasonable cause.  As a corollary to same, subsection (6) provides that the court can award reasonable expenses and attorneys’ fees to a successful plaintiff or the person commencing the proceeding who receives any relief, whether by judgment, compromise or settlement, provided however, that subsection (6) is inapplicable to any relief rendered for the benefit of injured shareholders only and limited to a recovery of the loss or damage of the injured shareholders.

Shareholders are key players in your corporation. In many instances, they are your primary source of capital and can affect the flow, growth and overall vitality of your business. However, there are many issues that commonly surface between corporations and their shareholders, and when left unresolved can result in costly, time-consuming disputes. The attorneys of Schecter Law have helped numerous corporations in Broward, Palm Beach and Miami-Dade counties find solutions for shareholder disputes. Whether you run a small business or privately held corporation, we can assist you. We fully analyze the issues that exist in your dispute and help you determine the proper course of action.