by Stuart R. Cohn
Florida courts have consistently noted that they will look to Delaware decisions for guidance when Florida’s corporate statute or case law leaves questions unanswered. Indeed, as the above quotation indicates, this approach has also been adopted by some federal courts applying Florida corporate law.1 Although Delaware decisions have no precedential value in Florida, Delaware is the principal state to which Florida courts look for guidance in corporate law matters. A review of Florida decisions indicates that Delaware case law is more than mildly influential.
Delaware is unquestionably the principal judicial forum in this country on matters of corporate law. Delaware attempts to maintain its prominence by staffing both the Delaware Chancery Court and the Delaware Supreme Court with jurists who have significant corporate law backgrounds.2 Indeed, the number and quality of Delaware judicial decisions are major factors in attracting Fortune 500 corporations and other publicly traded companies to incorporate in Delaware.3 The breadth and volume of case law in Delaware give substantial assistance to corporate lawyers who provide counsel and advice to their clients.
Although Florida boasts one of the highest numbers of incorporations in the country,4 there are relatively few major state Supreme Court decisions on matters of corporate law. In the past 25 years, Florida’s Supreme Court has ruled on only three principal corporate law matters.5 In recent years there have been efforts to establish “business” courts within the Florida judiciary, but to date those courts are scarce, and there is no judicial analog to the Delaware Court of Chancery.6 Moreover, as Florida attorneys are well aware, Florida courts do not tend to be staffed by practitioners experienced in corporate law. Given the relative paucity of precedent and the inexperience of many judges in the corporate law field, it is not surprising that Florida judges look to Delaware for persuasive guidance.7
Reasons for Caution
The prominence of Delaware courts should not, however, lead to an overly submissive attitude or one that gives undue influence to Delaware decisions. To be sure, relevant Delaware decisions should be carefully considered and, on occasion, can be substantially persuasive. Nevertheless, there are considerable differences between Florida and Delaware that ought to provide caution to Florida courts. Among those differences are the following:
Statutory Differences. Florida is a Model Business Corporation Act state; Delaware is not. There are more similarities between Florida’s statute and the Model Business Corporation Act than between Florida’s and Delaware’s statutes. For example, Florida has adopted the model act provision, F.S. §607.0830, regarding a director’s duty of care. Delaware has no statute on that subject. Delaware bases its duty of care standards entirely on judicial decisions. Other major areas of statutory difference include, inter alia, appraisal rights accorded to dissenting shareholders, the financial capacity of corporations to repurchase shares, shareholder voting rights regarding mergers and acquisitions, the capital concepts of par value, stated capital, and capital surplus, dividend provisions, promoter liability for pre-incorporation contracts, and shareholder rights to call special meetings. In interpreting many of our corporate provisions, Florida courts would be better guided by examining the Model Business Corporation Act commentaries, which contain extensive background and substantive discussion, and decisions from other model act states, than by examining Delaware case law.8
Corporate Size Differences. Many of the principal Delaware decisions deal with publicly held corporations. In contrast, Florida has relatively few publicly held companies incorporated in this state. Much of our corporate litigation involves small corporations with few shareholders. Delaware courts are accustomed to seeing large corporations with highly organized management and operational structures. Perhaps because of the propensity in Delaware for highly organized and technically managed corporations, Delaware courts have not shown any particular sensitivity to the rather informal manners by which small corporations are managed.9 Corporate attorneys in Florida are well aware of those informalities and that there may be justifiable instances where technical violations of statutory requirements by the several people who are both the shareholders and management of a closed corporation should be excused in the absence of harm to third parties.10
Philosophical Differences. Because of its acknowledged leadership in matters of corporate law, Delaware’s legislature and courts are exceedingly careful in the drafting and interpretation of its corporate law. Delaware courts are not prone to wander far from statutory norms. Delaware’s concern with maintaining its corporate law stature and attraction of Fortune 500 companies is illustrated by the recent comments of Leo Strine, vice chancellor of the Delaware Court of Chancery, when he stated that “the corporate law industry is as important, or more important, than any of those [i.e., business] industries. For a state of our size, the corporate franchise taxes and legal jobs that our corporate law advantage brings in are a substantial reason why Delaware is among the most prosperous of the 50 states.”11 Although revenues from incorporation fees, document filings, and franchise taxes are important to every state, including Florida, Delaware’s budgetary concerns create a particularly strong interest in assuring that its laws are attractive to our country’s largest companies.
The pervasive Delaware attitude to maintain its status in corporate law, reflected by Vice Chancellor Strine’s comments, suggests why Delaware courts might not be as open to arguments that stray from strict statutory interpretation or that seek to impose nonstatutory, equitable requirements. Thus, for example, Delaware courts have rejected the “de facto merger doctrine,” a doctrine that allows courts to reformulate and redefine the substance of transactions based on perceived realities rather than statutory provisions;12 have rejected their once-adopted notion that a “legitimate business interest” must exist to validate minority squeeze-outs accomplished pursuant to statute,13 and have rejected shareholder claims that were not based upon statutorily authorized shareholder agreements.14 The point here is not to agree or disagree with these decisions. Rather, it is to note that Delaware courts appear to take a rather hard line with regard to claims that seek avoidance or modification of strict statutory provisions.15
Should Florida courts adopt a rather strict constructionist approach as in Delaware? Our courts do not need to operate under the same sense of constraint as may exist in Delaware. Indeed, there is evidence that our courts may be more open to equitable claims. In Tillis v. United Parts, Inc., 395 So. 2d 618 (Fla 5th DCA 1981), a board’s decision to repurchase shares from a controlling shareholder was held to violate a concept of “equal opportunity” that should have been accorded to the minority shareholders.16 The repurchase was entirely within the corporation’s statutory rights, yet the court found an equitable basis for its decision that denied the validity of the transaction and provided nonstatutory rights to the minority. If the court had looked principally toward Delaware law, a different decision might have resulted, a decision that upheld the transaction under statutory norms or perhaps, as the majority argued, the business judgment rule. This is not to say that one decision is better than the other, but rather to point out that seeking persuasive guidance in Delaware case law may prevent or undermine a fuller examination of issues.
Freeze-outs. Consider the case of a freeze-out of a minority shareholder. Suppose three founders have invested equal amounts and orally agreed that each will be a director; each will have a particular office; and each will receive a set annual salary. This informal arrangement works as intended for several years and the corporation prospers. However, after some period of time, two of the founders determine that the third should be removed. At the next annual meeting, the third founder is not elected as director, is removed from office, and consequently loses the salary payment. Is there any remedy available to this frozen-out shareholder? Delaware’s clear answer is no. The shareholders had the opportunity to protect themselves by an agreement in writing pursuant to statute; they failed to do so; and a Delaware court will not come to the minority’s rescue.17 Delaware case law appears to negate very strongly any judicial relief in the absence of a firm, written shareholder agreement.
There is no clear decision in Florida on a minority freeze-out situation. A Florida court might reach a similar conclusion as in Delaware, citing F.S. §607.0732 and the ability of shareholders to commit themselves to certain arrangements through a written, unanimous agreement.18 But an alternative argument exists, namely that F.S. §607.0732 validates written, unanimous agreements, but does not preclude a court of equity from enforcing an oral agreement clearly understood to be binding by the parties, does no harm to the corporation or minority shareholders, and has been followed for several years. If a Florida court looked principally to Delaware for persuasive guidance, it might not adequately consider cases that support an equitable resolution upholding a unanimous oral understanding among shareholders.19
Conflict of Interest Transactions. Consider the case of a corporation with five directors, three of whom own a piece of property that they are prepared to sell to the corporation. The two supposedly disinterested members of the board approve the transaction. A shareholder objects that the sales price is too high and unfair to the corporation. Although it is often considered that the burden of proof is on the interested party to prove the merits of a challenged transaction, Delaware courts will shift the burden of proof to the plaintiff shareholder where there has been “disinterested approval” of the transaction.20 Thus, even though only two of the five corporate directors approved the transaction, plaintiff shareholder will bear the burden of proving that the transaction was not fair.
Although the Florida conflict of interest statute, F.S. §607.0832, is substantially similar to Delaware’s, neither statute expressly deals with the issue of burden of proof with regard to a challenged transaction. If in a case, such as the posed hypothetical, a Florida court decides that it will look to Delaware for persuasive authority, that court will be discounting the traditional notion of the burden of proof in conflict of interest transactions and rejecting case law from other states that have retained the burden on the interested parties.21 Perhaps the Delaware approach is appropriate, but it should not be taken without consideration of competing standards and the reasonable interpretation of Florida’s statute.
Derivative Actions. When a shareholder files a derivative action, the corporation, as a principal party in interest, usually forms a special litigation committee to consider whether the proposed litigation serves the best interests of the corporation. If the litigation committee determines that the lawsuit lacks merit, or that any possible recovery is not sufficiently material to be worth the costs and time of litigation, the corporation will, based on the committee’s report, file a motion to dismiss.
A principal question facing courts is whether the special litigation committee whose report has led to the motion to dismiss was composed of directors capable of making an objective judgment. This question is especially sensitive when, as is common, the derivative action has been brought against all of the directors of the corporation, some of whom serve on the special litigation committee. Can a defendant-director objectively consider the merits of the litigation? The answer in Delaware is that being a potential defendant does not in and of itself disqualify a director from serving on the litigation committee.22 Delaware’s case law is consistent with the model act, which specifically provides that being named a defendant does not ipso facto preclude a director from serving on a litigation committee.23 However, Florida has not adopted this model act provision. F.S. §607.07401, unlike the model act, is silent as to qualification presumptions.
There are at least two Florida federal district court opinions that have expressed serious doubt that under Florida law defendant-directors are qualified to serve on a litigation committee.24 In both cases there were additional factors supporting the courts’ decision regarding director disqualification. Thus, on the pure issue of whether defendant-directors are qualified to serve on a litigation committee, we have no definitive case law and a statute that is silent. There are substantial arguments that can be made against defendant-directors and their seeming lack of objectivity. In addition, Florida’s nonadoption of the model act’s qualification provision may influence Florida courts to restrict the role of defendant-directors. The point is that looking toward Delaware for guidance may unduly narrow a court’s focus. It would be a mistake for a Florida court to consider Delaware as persuasive without examining other relevant decisions and concerns.
The Business Judgment Rule. Cases charging directors with breach of their fiduciary duty of care in Florida are frequently met with the defense of the business judgment rule, generally resulting in the dismissal of the litigation. The business judgment rule is, in fact, not a rule but an evidentiary presumption developed by courts to protect directors against shareholder litigants upset with corporate decisions.25 The business judgment rule has also been a mainstay of Delaware jurisprudence.
Although the business judgment rule has been recognized and applied in Florida and Delaware, there is a significant difference between Florida and Delaware law. Unlike Delaware, Florida has a statutory mandate regarding the director’s duty of care, F.S. §607.0830. That mandate has three different elements, namely 1) good faith; 2) the care of an ordinarily prudent person in a like position; and 3) reasonable belief that the action is in the best interest of the corporation.26 Delaware has no statutory duty of care standards. Thus, Delaware courts that apply the business judgment rule to exonerate directors do not have any relevant statutory standards to be applied. On the contrary, a Florida court should not apply a presumptive rule of evidence without cognizance of Florida’s statutory mandate. At a minimum, the Florida statute appears to require that a director meet three statutory elements before any application can be made of the business judgment rule. In other words, if the three statutory elements are met, which essentially means that the director has used reasonable care and diligence in reaching a decision determined to be in the best interests of the corporation, the business judgment rule will protect the director unless fraud, illegality, or conflict of interest is proven. This would be an appropriate application of both the statutory standards and the business judgment rule.
Corporate directors can on occasion make major mistakes, costing their corporations dearly.27 If those decisions were made in haste without adequate consideration, the business judgment rule should be of no benefit to directors whose judgment is challenged. But if such decisions were made in accordance with the statutory fiduciary standards set forth in Florida’s corporate law, the business judgment rule should immunize the directors from lawsuit regardless of the economic results. In short, Florida’s corporate law demands that courts look initially to our statutory standards. Delaware’s corporate law does not have a similar demand. Florida courts have a greater statutory responsibility than Delaware courts and, thus, Delaware case law regarding a director’s duty of care must be viewed with this understanding.
Appraisal Rights. A similar issue of statutory versus nonstatutory standards applies to appraisal rights and arose in Williams v. Stanford, 977 So. 2d 722 (Fla. 1st DCA 2008), in which the court was faced with interpreting Florida’s statutory phrase “fraud or material misrepresentation” in F.S. §607.1302(4)(b) to determine whether a shareholder derivative action was barred by the exclusivity provisions of the appraisal statute.28 Noting that no Florida court had interpreted the “fraud or material misrepresentation” provision, the court observed that “As is often true, however, Delaware case law provides guidance to our construction of the statute.”29 Turning to Delaware case law, the court cited several decisions in which shareholders avoided the exclusivity of the appraisal remedy by alleging acts of over-reaching or unfairness. Most notably (and fortuitously), the Williams court found a Delaware case, Berger v. Intelident Solutions, Inc., 911 A.2d 1164 (Del. Ch. 2006), involving a Florida corporation in which the Delaware court interpreted Florida’s “fraud or material misrepresentation” provision to include an “entire-fairness analysis” similar to other Delaware decisions.30 The Williams court concluded that it was “inclined to align our interpretation with” the Berger decision and, thus, interpret fraud as “essentially synonymous with unfair dealing.”31
However much one may agree in concept with the bottom line interpretation adopted by the Williams court, concern must be expressed at the manner in which that interpretation was reached. Unlike Florida, Delaware does not have a statutory exclusivity provision regarding appraisal rights. Delaware courts have developed common law exceptions to appraisal rights that are not constrained by any statutory exclusivity provision.32 Moreover, Delaware’s case law exceptions to exclusivity are stated in terms broader than Florida’s statutory provision. Nevertheless, despite this fundamental difference, it was Delaware’s court-made doctrine that the Berger court applied in interpreting Florida law. Perhaps Florida’s statutory reference to “fraud” can reasonably be interpreted to include unfair dealing or breach of fiduciary duty, but such an interpretation is not readily apparent from the literal words of the statute, nor should it be necessarily drawn from case law in jurisdictions that do not have similar standards.
If the Florida court had sought guidance from cases interpreting statutory provisions, it might have, for example, cited a Seventh Circuit Court of Appeals decision stating that “[t]he appraisal remedy cannot substitute for a suit for breach of fiduciary duty or other torts.”33 On the other hand, the court’s attention might have been brought to cases in which the term “fraud” was strictly interpreted in the deceitful, tort sense and that allegations that fundamentally involved valuation of plaintiff’s shares, even though couched as fraud, were held to be resolvable through the appraisal process.34 The point is that the Florida court, faced with a question of statutory interpretation, might have been better served by examining case law in states with analogous statutes, rather than or at least in addition to Delaware, which has no statute. The interpretive result may or may not have been the same, but the process would have been closer to traditional notions of statutory interpretation.
Hostile Tender Offers. There is no field of corporate law in which Delaware decisions have greater dominance than the consideration of target management’s fiduciary duties in light of potential or threatened hostile tender offers. With many of the major publicly held companies incorporated in Delaware, Delaware courts have been the battleground for much of the principal tender offer litigation. Dozens of major decisions have been announced by Delaware courts. Law students and corporate lawyers throughout the country astutely study Delaware case law. Some of Delaware’s principal cases are simply known, like rock stars, by a single name, such as Unocal,35 Moran,36 and Revlon.37
Florida has not been the forum for major takeover litigation due to the relatively few publicly held companies incorporated in this state. However, as this state continues to expand commercially, and our corporate code remains an effective, modern statute, there will likely be a growing number of publicly traded companies that incorporate in and choose to remain Florida corporations. If litigation arises regarding a hostile takeover of a Florida corporation, there will be a strong tendency to look to Delaware case law for guidance. However, such a response would be inappropriate if the court did not first consider the import of Florida’s corporate statute, which contains three provisions relative to hostile takeovers that were adopted during the heyday of the 1980s hostile tender offers: 1) F.S. §607.0624(2), which allows the discriminatory issuance of stock rights or options for the express purpose of allowing poison pills and other share rights to be allocated to target shareholders to the exclusion of hostile acquirers who own target’s shares; 2) F.S. §607.0901, which sets forth conditions to back-end mergers by which an acquirer of less than all of target’s shares squeezes out the remaining shareholders; and 3) F.S. §607.0902, perhaps the most powerful of the anti-takeover provisions, which denies voting power to acquirers unless approved by the remaining shareholders, thus, creating a strong incentive for a tender offer for all of target’s shares.
Suppose that, in the face of a hostile tender offer, target management concludes that adoption of a poison pill is an appropriate defense because of the threat of an unfair back-end merger. The threat of such a back-end merger was a key factor supporting target management’s defensive tactics in Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985). Florida law permits poison pills, but their unilateral adoption by the board of directors could well lead to shareholder challenge based on fiduciary grounds. Would a Florida court look to Unocal for guidance in determining whether target management’s action was justifiable under fiduciary standards? Perhaps, but such guidance should not be pursued without first considering that Florida, unlike Delaware, has two specific statutory provisions (§§607.0901 and .0902) intended to protect against unfair back-end mergers. A serious interpretive question exists as to whether Florida courts should supplement or in any way modify statutory norms applicable to a perceived takeover abuse. In other words, although a poison pill might in some circumstances be legitimately adopted, is adoption appropriate when based on the potentiality of a transaction that is otherwise regulated? Delaware courts do not have to consider this issue, as there is no Delaware analog to the Florida statutory provisions. Thus, recourse to Delaware law should not be undertaken without careful analysis of the purpose and impact of Florida’s corporate scheme.
As discussed above, significant differences exist between Florida and Delaware with regard to statutory provisions and the type of corporate law issues most likely to arise. Where substantial similarities exist, it may be entirely appropriate for Florida courts to seek guidance and be persuaded by Delaware judicial decisions. Nevertheless, there may be circumstances where this interpretive approach is inappropriate. As one Florida court perceptively noted, “While courts ‘rely with confidence upon Delaware law to construe Florida corporate law,’...Florida courts are tasked with giving statutory language effect without resort to any canon of construction, if possible.”38 However prominent Delaware may be in corporate law matters, Florida courts must be ever-mindful that legal and other differences exist between the two states that necessarily raise a cautionary flag to adoption of Delaware standards in our jurisdiction.
1 Florida courts are not alone in seeking persuasive guidance from Delaware cases. See, e.g., Mullen v. Academy Ins. Co., 705 F. 2d 971, 974 (8th Cir. 1983) (“Although New Jersey law governs the Pension Life acquisition, we discuss Delaware case law as well, because of Delaware’s position as a leader in the field of corporate law. The courts of other states commonly look to Delaware law...for aid in fashioning rules of corporate law.”).
2 A majority of both the Delaware Court of Chancery, where most corporate law cases are heard, and the Delaware Supreme Court consists of judges who have extensive corporate law experience. Biographies available at http://courts.delaware.gov/courts.
3 The 2007 Annual Report of the Delaware Department of State Division of Corporations reported that 61 percent of Fortune 500 companies and half of all U.S. companies traded on the New York Stock exchange and NASDAQ are incorporated in Delaware, available at http://corp.delaware.gov. Most public corporations did not begin as Delaware corporations, but became Delaware corporations through a merger or conversion process some time during their period of growth.
4 The Florida Division of Corporations reports a total of 925,608 for-profit corporations incorporated in Florida as of 2007. During 2007, 135,851 new Florida corporations were formed, compared to 35,700 reported in Delaware, available at http://www.sunbiz.org/corp_stat.html; http://corp.delaware.gov.
5 Corporate Express Office Products, Inc. v. Phillips, 847 So. 2d 406 (2003) (regarding the acquiring company’s ability to enforce a covenant not to compete given to a merged or acquired company); Southern Bell Telephone & Telegraph Company v. Deason et al., 632 So. 2d 1377 (1994) (regarding the test for privileged communications between corporate employees and company counsel); and Dania Jai-Alai Palace, Inc. v. Sykes, 450 So. 2d 1114 (1984) (a piercing the corporate veil case).
6 The historical distinction that led to separate courts of law and courts of equity no longer exists in most states, including Florida, where matters of law and equity are determined within a single action and court. Delaware has maintained a distinct Court of Chancery to hear cases in equity. Nearly all major corporate law issues involve equitable principles, such as fiduciary duty. Thus, most corporate law cases in Delaware begin in the Delaware Court of Chancery.
7 There may be other factors in addition to the number and quality of Delaware decisions that motivate Florida courts to seek such guidance. One element could be a desire for uniformity in corporate standards, on the assumption that Delaware cases will be persuasive throughout the country. Uniformity, however, will be impossible to achieve given the differences between the MBCA and Delaware law. Indeed, uniformity is more likely to be achieved by consistency among model act states rather than resort to Delaware cases. A second element might be a desire to emulate Delaware in order to promote Florida’s corporate law. However noble might be this sentiment, Florida courts should not lose sight of the important statutory and other differences between Delaware and Florida that would render imitation inappropriate.
8 Guidance from other model act jurisdictions in addition to Delaware was appropriately noted in Boettcher et al. v. IMC Mortgage Company, 871 So. 2d 1047, 1052 n. 5 (Fla. 2d D.C.A. 2007) in the following terms: “Florida’s dissenters’ rights statutes are based, in part, on the Revised Model Business Corporation Act (RMBCA), adopted by the American Bar Association in 1984....Therefore, we may look for guidance to cases from other jurisdictions that have adopted the provisions of the RMBCA in substantially the same form. We may also look to the law of Delaware for guidance because “[t]he Florida courts have relied upon Delaware corporate law to establish their own corporate doctrines.”
A number of the cases in which Florida courts relied on Delaware law predate Florida’s 1989 adoption of the MBCA. See, e.g., Davidson v. Ecological Science Corp., 266 So. 2d 71 (Fla. 3d D.C.A. 1972) (inspection of shareholder list); De La Rosa v. Tropical Sandwiches, Inc., 298 So. 2d 471 (Fla. 3d D.C.A. 1974) (liability for attorneys’ fees regarding corporate notes); Naples Awning & Glass, Inc. v. Cirou, 358 So. 2d 211 (Fla. 2d D.C.A. 1978) (corporate note and mortgage invalid impairment of capital). Florida’s pre-MBCA statute was rather atypical and our case law was sparse. In such circumstances, resorting to the extensive body of Delaware case law was quite understandable.
9 In Nixon v. Blackwell, 626 A.2d 1366 (Del. 1992), minority shareholders of a closely held Delaware corporation were admonished and denied relief on a claim of unfair discrimination, the court noting that the shareholders “could have bargained for protection” and the court “will not fashion an ad hoc ruling” for which the parties had not contracted. Nixon, 626 A.2d at 1380.
10 E.g., Galler v. Galler, 203 N.E.2d 577, 584 (Ill. 1964) (“...there has been a definite, albeit inarticulate, trend toward eventual judicial treatment of the close corporation as sui generis. Several shareholder-director agreements that technically ‘violate’ the letter of the Business Corporation Act have nevertheless been upheld in the light of the existing practical circumstances, i.e., no apparent public injury, the absence of a complaining minority interest, and no apparent prejudice to creditors.”).
11 Leo E. Strine, Jr., The Role of Delaware in the American Corporate Governance System and Some Preliminary Musings on the Meltdown’s Implications for Corporate Law, paper delivered at the Molengraaff Institute for Private Law, Utrecht University, Utrecht, The Netherlands, December 13, 2008, at 11 (draft on file with the author).
12 Hariton v. Arco Electronics, Inc., 188 A.2d 123 (Del. 1963) (rejecting de facto merger doctrine in favor of strict statutory interpretation).
13 Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983), abolishing legitimate business purpose requirement established in Singer v. Magnavox Co., 380 A.2d 969 (Del. 1977).
14 Nixon v. Blackwell, 626 A.2d 1366 (Del. 1992).
15 This is not to say that Delaware courts are averse to reaching equitable decisions despite contrary statutory provisions. Schnell v. Chris-Craft Industries, Inc., 285 A.2d 437 (Del. 1971) is an oft-cited case in which the Delaware court held that technical compliance with statutes or bylaws does not supersede inequitable action. The facts in Schnell were fairly egregious, as the board used its power to amend the bylaws to thwart an insurgent effort to elect alternative directors. The bald retention of control was the sole purpose of the board’s action and thus did not withstand judicial scrutiny.
16 Tillis v. United Parts, Inc., 395 So. 2d 618, 619 (Fla. 5th D.C.A. 1981).
17 Nixon v. Blackwell, 626 A.2d 1366 (Del. 1992).
18 Fla. Stat. §607.0732 permits shareholders of a corporation with 100 or fewer shareholders to enter into a unanimous, written agreement that will govern one or more corporate matters ordinarily left to determination by the board of directors, such as the appointment of officers, the determination of salaries, and the declaration of dividends.
19 E.g., Wilkes v. Springside Nursing Home, Inc., 353 N.E.2d 657, 663 (Mass. 1976) (upholding oral understanding among the founding shareholders because “the majority shareholders...have not shown a legitimate business purpose for severing Wilkes from the payroll of the corporation or refusing to reelect him as a salaried officer and director”).
20 Fliegler v. Lawrence, 361 A.2d 218 (Del. 1976).
21 Cookies Food Products v. Lakes Warehouse, 430 N.W.2d 447 (Iowa 1988) (burden of proof as to transaction’s fairness remains on interested parties regardless of formal approval).
22 Aronson v. Lewis, 473 A.2d 805 (Del. 1984) (threat of personal liability for approving a questioned transaction, standing alone, is insufficient to challenge the disinterestedness of directors).
23 Section 7.44 (c), Revised Model Business Corporation Act (2002) (“None of the following shall by itself cause a director to be considered not independent for purposes of this section:...(2) the naming of the director as a defendant in the derivative proceeding....”). The Fourth Revised Model Business Corporation Act (2008) retains a similar policy.
24 Kloha v. Duda et al., 220 F. Supp. 2d 1342 (M.D. Fla. 2002); Klein v. FPL Group, Inc., 2004 WL 302292 (S.D. Fla. 2004).
25 In re Southeast Banking Corp., 827 F. Supp. 742, 748 (S.D. Fla. 1993) (“Under the Business Judgment Rule, Florida will not find directors to have breached a duty, and legally will presume that directors acted properly and in good faith...in the absence of a showing of abuse of discretion, fraud, bad faith or illegality.”).
26 Fla. Stat. §607.0830.
27 Examples that quickly come to mind are the exploding Pinto, the Edsel, and New Coke.
28 Fla. Stat. §607.1302(4)(b) provides that a shareholder may not challenge a completed transaction for which appraisal rights are available unless such corporate action “was procured as a result of fraud or material misrepresentation.” The shareholder’s complaint in the derivative action in Williams v. Stanford sounded in breach of fiduciary duty by the controlling shareholder.
29 Willams v. Stanford, 977 So. 2d 722, 727 (Fla. 1st D.C.A. 2008).
30 Berger v. Intelident Solutions, Inc., 911 A.2d 1164, 1171 (Del. Ch. 2006).
31 Willams v. Stanford, 977 So. 2d 722, 729 (Fla. 1st D.C.A. 2008).
32 A leading Delaware case, Weinberger v. UOP, Inc., 457 A.2d 701, 714 (Del. 1983)
(determined that appraisal is normally the exclusive remedy for shareholders challenging a merger for which appraisal rights are available except where “fraud, misrepresentation, self-dealing, deliberate waste of corporate assets, or gross and palpable overreaching are involved”).
33 Kademian v. Ladish Company, 792 F.2d 614 at 630 (7th Cir. 1986) (interpreting the
phrase “fraud or illegality” in the Wisconsin statute). Breach of fiduciary duty was also upheld against a claim of exclusivity in Mullen v. Academy Ins. Co., 705 F.2d 971 (8th Cir. 1983) (interpreting New Jersey statute providing for exclusivity except for ultra vires, fraudulent or unlawful transactions). I have been unable to find to date a definitive case involving interpretation of the exact words in Florida’s statute, “fraud or material misrepresentation.”
34 Werner v. Alexander, 502 S.E.2d 897 (N.C. Ct. App. 1998).
35 Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985) (establishing basic standards of conduct for target management).
36 Moran v. Household International, Inc., 500 A.2d 1346 (Del. 1985) (confirming the validity of the poison pill as a defensive measure).
37 Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986) (establishing the “auctioneer” role of target directors when a takeover by one of a competing group of potential acquirers is inevitable).
38 Batur v. Signature Properties of Northwest Florida, Inc., 903 So. 2d 985, 994 n. 18 (Fla. 1st D.C.A. 2005) (involving the interpretation of Florida’s derivative action statute).
Stuart R. Cohn is the John H. & Mary Lou Dasburg professor of law and associate dean for international studies at the Levin College of Law, University of Florida. He has served as chair of the Corporations & Securities Committee of the Business Law Section of The Florida Bar and is on the Business Law Section Executive Council. He and Stuart Ames are co-authors of Florida Business Laws Annotated (Thomson/West). Prof. Cohn holds law degrees from Oxford University and Yale Law School and practiced law in Chicago, Illinois, before joining the Florida faculty.