Derivative or Direct Action Against a Shareholder? December 22, 2016 | Business Litigation
What is appropriate…a derivative or direct action against a shareholder?
Many people are not aware of the difference between a derivative vs. direct action against a shareholder and which is appropriate for their lawsuit. A derivative action is a lawsuit brought by a shareholder on behalf of the corporation or company. A derivative action allows shareholders to redress harm to the corporation caused by management where it is unlikely that management will redress the harm itself. A derivative action needs to allege two distinct wrongs: the act where the corporation suffered damages and a wrongful refusal by the corporation to redress the act. See Kaplus v. First Cont’l Corp., 711 So. 2d 108, 110 (Fla. 3d DCA 1998). If the shareholder wins the lawsuit, the corporation will receive the damages from the case.
On the other hand, a direct action is where a shareholder brings forth a claim asserting that the defendants harmed the shareholder himself. The shareholder is seeking a legal remedy for his own benefit and not for the corporation. An action may be brought directly only if it meets a two prong test: (1) there is a direct harm to the shareholder or member of a company such that the alleged injury does not flow subsequently from an initial harm to the company; and (2) there is a special injury to the shareholder or member that is separate and distinct from those sustained by the other shareholders or members. See Dinuro Invs, LLC v. Camacho, 141 So.3d 731 (Fla. 4th DCA 2014).
If a plaintiff cannot satisfy the two-prong test or demonstrate a contractual or statutory exception, the plaintiff will have to bring his claim derivatively on behalf of the corporation or company. The classification of claims as direct or derivative is significant because special procedures apply to derivative claims, such as requiring shareholders to make a pre-suit demand on the board to take certain action with particularity or show that a demand would be futile. Chapter §605.0802, Florida Statutes (2015 as amended). For more information on business organizations see Florida Statute Chapters §§605-623.
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