By Serena Fichera, Barakat + Bossa PLLC
As an attorney in Florida, guiding your clients through the complexities of shareholder rights can be an important part of your practice. This article aims to serve as a practical guide for assisting minority shareholders of privately held companies who are considering exit strategies from a Florida corporation. Whether due to disputes, diverging interests, or other reasons for disengagement, minority shareholders in Florida have specific legal avenues available to them. This article will explore these legal pathways, focusing on actionable strategies and key considerations to effectively advise your clients on how to navigate these waters successfully and secure their rights under Florida law.
This article relies on the assumption that the majority shareholder is not open to negotiating a buy-out, and that there are no existing by-laws, shareholder agreements, or similar agreements in place to facilitate an exit. In cases where such agreements exist, they should naturally be the primary point of reference. However, absent these agreements, minority shareholders must lean on statutory protections and judicial routes to seek relief.
- Judicial Dissolution
The first avenue potentially available to a shareholder seeking to dissociate from a closely held corporation is filing for judicial dissolution.[1] Florida law (the “Statute”) states that a corporation may be dissolved in a proceeding by a shareholder, including a minority shareholder,[2] if one of the grounds established in Florida Statute Section 607.1430(1)(b) exists.[3]
First, a shareholder may petition for dissolution under the Statute if the directors are deadlocked in the management of the company, the shareholders are unable to break the deadlock, and (a) the corporation is suffering or there is the threat of irreparable injury, (b) the deadlock prevents the business and affairs of the corporation from being conducted to the advantage of the shareholders, or (c) both (a) and (b).[4] In this regard, the Statute specifies that, in the event of a deadlock, the provision of a shareholder agreement that contains a deadlock sale provision will prevail.[5] Deadlock sale provisions include but are not limited to redemption or purchase and sale of shares, a governance change, a sale of the corporation or all or substantially all its assets, or any other similar provision.[6] In this event, the applicability of the deadlock sale provision is preferred by the Statute to the judicial dissolution, provided that such provision meets the statutory requirements and the shareholders comply with its terms.[7]
Second, another instance triggering the shareholder’s right to petition for judicial dissolution is a deadlock in the voting power of the shareholders who have failed to elect successor directors, whose terms have expired or would have expired upon qualification of their successors.[8] In this case, the Statute also gives preference to the applicability of the deadlock provision of a shareholder agreement to govern the deadlock.[9]
Third, dissolution may be sought by a shareholder when the corporate assets are being misapplied or wasted, and such misapplication or waste causes material injury to the corporation.[10]
Finally, another basis for dissolution may be when the directors or any other person in control of the corporation have acted, are acting, or are reasonably expected to act fraudulently or illegally.[11]
Provided that certain requirements are met, the Statute also allows for the dissolution of a corporation in a proceeding brought by the Department of Legal Affairs,[12] a creditor,[13] the corporation itself (in case there was a prior voluntary dissolution proceeding that is now being continued under court supervision),[14] or in a proceeding by a shareholder if the corporation’s business has been abandoned and the corporation has failed within a reasonable time to liquidate and distribute its assets and dissolve.[15]
After the petition for dissolution, if the court finds that one of the above grounds for dissolving the corporation exists, the corporation will be dissolved. Each minority shareholder will be entitled to receive his or her share of the remaining funds, after the sale of the corporation’s assets and the settlement of all debts. This way the minority shareholder’s exit is finally completed.
A viable alternative to the dissolution of a corporation is provided under Florida Statute Section 607.1436.[16] In the context of a judicial dissolution process initiated by a shareholder,[17] the company or the non-petitioning shareholder can elect to purchase all the shares owned by the petitioning shareholder for the fair value of such shares[18] within ninety (90) days from the filing of the petition (or at a later time if allowed at the court’s discretion).[19] Once made, this election is irrevocable, unless the court finds it equitable to set aside and modify the election.[20] In this case, the final result is that the minority shareholder may be bought out from the company by the majority shareholder. However, this will happen in the context of the judicial dissolution process, which can be used as a mechanism to force the majority shareholder to negotiate the minority shareholder’s buyout.
- Appraisal Rights
The second avenue potentially available to a minority shareholder seeking to dissociate from a corporation is exercising his or her appraisal rights under and pursuant to Sections 607.1301 through 607.1340 Florida Statutes. Minority shareholders can exercise appraisal rights when they dissent from significant corporate actions initiated by the majority shareholders that fundamentally alter the nature of the dissenting shareholder’s investment in the company. If appraisal rights are properly exercised, the company has to undergo a valuation and the dissenting shareholders are entitled to the payment in cash of the fair value of their shares.[21] Appraisal rights can be triggered in several instances,[22] including but not limited to domestication, conversion, merger, share exchange, disposition of assets, or amendment to the corporation’s articles of incorporation.[23]
The Statute provides for detailed procedures and time limits for both the corporation and the dissenting shareholders to comply with. If the dissenting shareholders fail to comply with the Statute, the appraisal rights will be lost, and the shareholder will be bound by the proposed corporate action.[24]
The Statute places the initial burden of notice of appraisal rights on the corporation,[25] then shifts it to the shareholder,[26] and then back to the corporation.[27] Without getting into the intricacies of this complex process, what is relevant for minority shareholders’ exit strategies is that the corporation has to provide an estimate of the fair value of the shares in its appraisal notice, and it must offer to purchase the shares from the shareholder at a price based on the estimated fair value.[28]
If the shareholder accepts the corporation’s offer, the corporation must pay within ninety (90) days after the corporation’s receipt of the shareholder’s acceptance.[29] Once the corporation makes the payment, the shareholder shall no longer have any rights on the shares, including the right to receive any further consideration with respect to such shares.[30]
If a shareholder is dissatisfied with the corporation’s offer, the shareholder must notify the corporation of his or her own estimate of the fair value and demand payment of that amount, plus any applicable accrued interest.[31] If the shareholder fails to comply with statutory deadlines to dissent against the corporation’s offer, they waive the right to demand payment based on their estimate, and they will only be entitled to the payment initially offered by the corporation.[32]
If the corporation does not agree with the shareholder’s estimate and the shareholder’s demand for payment remains unsettled, the Statute provides a dispute resolution mechanism to settle the payment.[33] The corporation has an obligation to commence a legal proceeding within sixty (60) days after receiving the shareholder’s demand for payment (including the estimate of the fair value of the shares)[34] for the determination of the fair value of the shares and accrued interest, if applicable.[35] If the corporation does not commence the proceeding within the timeframe, any shareholder who has made a demand for payment may commence the proceeding in the name of the corporation.[36]
The court in which this legal proceeding is commenced has “plenary and exclusive” jurisdiction.[37] The court will exercise discretion in appointing appraisers to receive evidence and recommend a determination of fair value.[38]
Finally, the corporation must pay each shareholder the amount determined to be due within ten (10) days after the final determination of the proceedings.[39] A shareholder who receives this payment will no longer have any rights with respect to such shares.
In conclusion, the exercise of appraisal rights under the Statute may provide minority shareholders with an opportunity to exit the corporation and receive fair compensation for their shares. However, this is contingent upon the occurrence of specific events enumerated by the Statute that trigger the exercise of these rights. In addition, shareholders must adhere to the strict statutory notice and timing requirements to fully benefit from these provisions and secure their way out of the company.
- Direct or Derivative Actions
The last option for a minority shareholder seeking redress when there have been violations of legal duties by the corporation or its officers and directors is to file a legal action. This will not result in the shareholder’s dissociation from the corporation, but it can serve to redress the losses suffered by the minority shareholder. There are both direct and derivative actions available, which may also be coupled with judicial dissolution proceedings.
A direct action is a lawsuit filed by a shareholder against the corporation (or its directors and officers). This remedy is available when there is direct harm to the shareholder individually, rather than to the corporation as a whole. Common situations in which direct actions arise include breach of a shareholder agreement, or a violation of minority shareholder rights. The key is that the minority shareholder is seeking redress for damages that they suffered personally, and these damages are separate from the damages suffered by the shareholders as a group.
Conversely, a derivative action is a lawsuit filed by a shareholder on behalf of the corporation. This type of action is used when the harm is done to the corporation, as opposed to the individual shareholder. Common situations giving rise to derivative lawsuits include mismanagement, breach of fiduciary duty by directors, or other actions that caused harm to the corporation’s interests. Any recovery from the lawsuit usually goes directly to the corporation, not the individual shareholder— even if the shareholder initiated the lawsuit. Nonetheless, prevailing on behalf of the corporation can benefit the minority shareholder, as that protects the value of his investment in the company.
For both direct and derivative actions, it is advisable to consult with attorneys who have extensive experience in handling such cases to help navigate the complexities effectively and enhance the likelihood of a successful outcome. This is especially recommended when attempting to pursue a direct action because proving personal harm to the shareholder can be challenging.
About the Author:
Serena Fichera is an associate at Barakat + Bossa PLLC, located in Coral Gables, Florida. Ms. Fichera is a dual degree attorney, holding Juris Doctor degrees from both Italy and Florida. She focuses her practice on corporate, M&A and real estate matters. Ms. Fichera can be reached at sfichera@b2b.legal.
[1] See Fla. Stat. § 607.1430(2) (2023) for exceptions to the norm—where shareholders may not petition for judicial dissolution.
[2] Fla Stat. § 607.1430(5) (“For purposes of subsections (1) and (2), the term “shareholder” means a record shareholder, a beneficial shareholder, or an unrestricted voting trust beneficial owner.”)
[3] Fla. Stat. § 607.1430(1)(b).
[4] Fla. Stat. § 607.1430(1)(b)(1).
[5] Fla. Stat. § 607.1430(3)(a).
[6] Fla. Stat. § 607.1430(3)(b).
[7] Fla. Stat. § 607.1430(3)(a).
[8] Fla. Stat. § 607.1430(1)(b)(2).
[9] Fla. Stat. § 607.1430(3)(a).
[10] Fla. Stat. § 607.1430(1)(b)(3).
[11] Fla. Stat. § 607.1430(1)(b)(4).
[12] Fla. Stat. § 607.1430(1)(a).
[13] Fla. Stat. § 607.1430(1)(c).
[14] Fla. Stat. § 607.1430(1)(d).
[15] Fla. Stat. § 607.1430(1)(e).
[16] Fla. Stat. § 607.1436.
[17] Fla. Stat. § 607.1430(1)(b).
[18] Fla. Stat. § 607.1436(1).
[19] Fla. Stat. § 607.1436(2).
[20] Fla. Stat. § 607.1436(1).
[21] Fla. Stat. § 607.1301(5)(b).
[22] Fla. Stat. § 607.1302.
[23] See Fla. Stat. § 607.1302(2) for exceptions to the exercise of shareholders’ appraisal rights for certain types of corporations under the Statute.
[24] Fla. Stat. §§ 607.1323(3), 607.1321(4).
[25] Fla. Stat. § 607.1320.
[26] Fla. Stat. § 607.1321.
[27] Fla. Stat. § 607.1322.
[28] Fla. Stat. § 607.1322(2).
[29] Fla. Stat. § 607.1324(1).
[30] Fla. Stat. § 607.1324(2).
[31] Fla. Stat. § 607.1326(1).
[32] Fla. Stat. § 607.1326(2).
[33] Fla. Stat. § 607.1330.
[34] Fla. Stat. § 607.1326(1)).
[35] Fla. Stat. § 607.1330(1).
[36] Id.
[37] Fla. Stat. § 607.1330(4).
[38] Id.
[39] Fla. Stat. § 607.1330(6).