Resistance is futile: the myth of demand futility.

• Author: Mark, Etan

Despite practice to the contrary, there is no Florida statutory basis for a shareholder of a corporation to bring a lawsuit "on behalf" of a corporate entity without first making a demand on the management of that corporation, regardless of how conflicted or intransigent that management is. Based on the language of the applicable Florida statutes, failure to make a demand should result in dismissal of the action. Courts in Florida, however, continue to apply the "futility exception" to the demand requirement, despite clear statutory language to the contrary. (1)

This article first discusses the history of Florida's demand rule for corporations. Next, this article examines whether a futility exception to the demand requirement exists under Florida law. Then, this article explores how courts outside of Florida interpret Florida's demand rule. Finally, this article explores how certain jurisdictions outside Florida interpret their own demand rules. This article concludes that the Florida Legislature should clarify whether Florida's statutory law allows an exception to the requirement that a demand must be made prior to instituting a derivative action against a corporation. Indeed, the legislature did just that with Florida's limited liability company statute, which, effective January 1, expressly does contain a futility exception to the demand requirement.

In a growing number of jurisdictions in the United States, prior to instituting a derivative lawsuit, a shareholder must make a demand on the corporation to induce remedial action. (2) Failure to do so will lead to dismissal of the lawsuit unless the shareholder is in a jurisdiction that permits an exception to the rule, such as pleading that a demand would be unavailing, unreasonable, impracticable, or that the alleged wrongdoers are the same as those on whom the demand would be made--in other words, that demand would be futile.

In Florida, the statute governing a corporate derivative action, F.S. [section] 607.07401, as amended in 2003, does not contain a futility exception. Nonetheless, Florida courts continue to recognize such an exception, (3) even though courts from other states have found that it does not exist under Florida law, (4) and even though the text of Florida's demand rule appears to be consistent with the demand rules of those states that do not recognize such an exception. (5) Old habits die hard, however, and, in a tip of the hat to the vestiges of Delaware corporate law, Florida practitioners routinely plead futility to escape the necessity of a demand prior to instituting a derivative action. (6)

Florida's Demand Requirement

The purpose of a presuit demand is to allow a board of directors to either support or oppose a course of action that the shareholder deems necessary in order to preserve or protect corporate integrity. (7) The law of the state of incorporation generally determines the requirements related to any demand. (8)

A number of states have modeled their rules governing the making of a demand after the Model Business Corporation Act, or the Revised Model Business Corporation Act (revised act), which was last updated in 1984. (9) The revised act provides that prior to commencing a derivative action a shareholder must make a written demand:

No shareholder may commence a derivative proceeding until:

(1) a written demand has been made upon the corporation to take suitable action; and

(2) 90 days have expired from the date the demand was made unless the shareholder has earlier been notified that the demand has been rejected by the corporation or unless irreparable injury to the corporation would result by waiting for the expiration of the 90-day period. (10)

Florida's demand rule, F.S. [section] 607.07401, was last amended in October 2003. Although Florida's demand rule did not incorporate the entirety of the revised act's language, it nonetheless requires a litigant to allege that he or she made a demand and incorporates the post-demand time frames that must expire before a party may commence an action:

A complaint in a proceeding 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 90 days from the first demand unless, prior to the expiration of the 90 days, the person was notified in writing that the corporation rejected the demand, or unless irreparable injury to the corporation would result by waiting for the expiration of the 90-day period. If the corporation commences an investigation of the charges made in the demand or complaint, the court may stay any proceeding until the investigation is completed. (11)

The prior version of Florida's demand rule, enacted in 1990, similarly provided that a party must plead in their complaint that a demand was made prior to commencing a derivative action:

(2) A complaint in a proceeding 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. If the corporation commences an investigation of the charges made in the demand or complaint, the court may stay any proceeding until the investigation is completed. (12)

Notably, the 1990 and 2003 statutes stand in stark contrast to an earlier version of Florida's demand rule, F.S. [section] 607.147, because that earlier demand rule did not reference the making of a demand at all. (13) The absence of any reference to a demand in that earlier version, which was enacted in 1975, was a departure from an even earlier iteration of Florida's demand rule, F.S. [section] 608.131 (repealed in 1975), which provided: "The complaint must set forth with particularity the efforts of the plaintiff to secure the initiation of such action by the board of directors of such corporation or the reasons for not having made such effort." (14) Thus, unlike later versions of Florida's demand rule, F.S. [section] 608.131 explicitly recognized a futility exception to the demand requirement by allowing litigants to set forth "the reasons for not having made such effort." (15) The Florida Legislature later excised the language excepting futility from the demand requirement, suggesting that futility is no longer a legally viable excuse from the demand rule as it stands today. (16)

The explicit requirement that a party must allege the making of a demand under Florida's current demand rule can be seen as a movement toward Florida's full adoption of the revised act's demand requirements because the revised act explicitly requires that a demand must be made prior to commencing a derivative action, with no futility exception, and away from prior Florida law that allowed litigants to plead reasons for not making such a demand. (17) However, as set forth below, despite statutory language stating that a litigant must plead that a demand has been made, courts are conflicted as to whether the futility exception exists under Florida law.

The Futility Exception to the Demand Requirement

In several jurisdictions, a demand may be excused if the shareholder shows that any demand on the board of directors would be futile. (18)

Courts typically will excuse the failure to make a demand in those jurisdictions where there has been no opportunity to make it, or where it is apparent that demand would be unavailing, unreasonable, or impracticable. (19) In particular, courts have excused the demand...