ESCAPING MINORITY SHAREHOLDER OPPRESSION

Individuals who are minority shareholders in a closely held corporation can find themselves in a difficult position when a situation arises where there are management and/or operational decisions being made which they disagree or in which their voice is not being heard. While a shareholder in a publicly traded corporation could simply sell his/her shares for the current market price, there is no established market price for shares of closely held corporations. Instead, minority shareholders in a closely held corporation are forced to rely either contractual provisions and/or the applicable statutes to determine (1) if they have the ability to exert greater control on the management and/or operation of the corporation or (2) how they can best divest themselves of their shares and what those shares are worth. 

Under Florida law, there are certain circumstances where a shareholder has a right to petition for dissolution the corporation in which they own an interest when there are deadlocks in the management of the corporation, when corporate assets are being wasted; and/or when those in control of the corporation are acting illegally or fraudulently. 

Florida law also provides that a shareholder in non-publicly trades corporation have the right to dissent from some corporate actions. In exchange, those shareholders have right to receive an appraisal of the “fair value” of their shares.

Further, in some circumstances, Florida law provides a shareholder and/or a group of shareholders the ability to take either direct legal action against the corporation and/or its directors/officers seeking to recover the lost value of their shares or derivative legal action on behalf of the company (and, by extension, the shareholders) seeking to recover assets and/funds that were improperly lost due to the controlling directors/officers self-dealing, improper apportionment of dividends/distributions, and/or waste.

However, pursuing a dissolution or appraisal action can result in a significant discounts to the fair value of the price of a minority shareholders shares, and thus, an individual that finds themselves in such a situation where they are considering pursuing a claim for an appraisal or dissolution or believe they may have grounds to pursue a direct or derivative action should consult an attorney to determine what is their best course of action.

DISSOLUTION

When can a legal action for dissolution of a corporation be filed?

Generally, a shareholder can pursue a legal action for dissolution of a corporation when either (1) the directors of the corporation are in an unresolvable deadlocked in the management of the corporate affairs and irreparable injury to the corporation is threatened or being suffered; or (2) when the shareholders are deadlocked in voting power. Additionally, a shareholder in a corporation having 35 or fewer shareholders pursue a legal action for dissolution of a corporation when either (1) corporate assets are being misapplied or wasted, causing material injury to the corporation; or (2) directors or those in control of the corporation have acted, are acting, or are reasonably expected to act in a manner that is illegal or fraudulent.

A creditor of a corporation can pursue legal action for dissolution of the corporation when either (1) the creditor’s claim has been reduced to judgment, which was not satisfied, and the corporation is insolvent; or (2) the corporation has admitted in writing that the creditor's claim is owed and the corporation is insolvent; or

Additionally, the corporation itself can pursue legal action for voluntary dissolution under the court’s supervision.

Furthermore, the Florida Attorney General’s office includes the Department of Legal Affairs, which can take action to dissolve a corporation when either (1) the corporation obtained its articles of incorporation through fraud; or (2) the corporation has continued to exceed or abuse the authority conferred upon it by law.

How could dissolution of the corporation resolve my issues?

If the court did agree that there were proper grounds to dissolve the corporation, the corporation would be dissolved, and individual minority shareholder would receive their portion of the funds remaining after the corporation’s assets were sold and its debts satisfied. 

Additionally, rather than allow the corporation to be dissolved, the corporation itself or another shareholder/group of shareholders, can elect to purchase the petitioning minority shareholder’s shares for the “fair value” of those shares. In such situations the corporation and/or purchasing shareholders will likely seek discounts to the value of the minority shareholders shares for their lack of ownership of a controlling interest and/or for lack of marketability of the shares to be applied to the fair value of the shares. However, there are arguments regarding why such discounts should not be applied that can be made on the minority shareholder’s behalf. 

APPRAISAL

When can a legal action for appraisal of a minority shareholder’s shares be filed?

Under Florida law, a shareholder in a corporation in a non-publicly traded corporation is entitled to appraisal rights and to obtain payment of the fair value of that shareholder’s shares in the event the shareholder exercises his/her dissenters’ rights in to a major corporate decision such as a merger; share exchange; disposition of corporate assets; or amendment to the corporation’s articles of incorporation. However, the same appraisal right is not available to shareholders in corporations whose shares are publicly traded, as they have the ability to simply sell their shares on the existing markets. 

How could appraisal of my shares in the corporation resolve my issues?

If the court did agree that there were proper grounds for the appraisal of the minority shareholders shares the corporation, there would hear argument on the value of the shares in the corporation and determine the value.  In such situations the corporation will likely seek discounts to the value of the minority shareholders shares for their lack of ownership of a controlling interest and/or for lack of marketability of the shares to be applied to the fair value of the shares. However, there are arguments regarding why such discounts should not be applied that can be made on the minority shareholder’s behalf. 

DIRECT OR DERIVATIVE LEGAL ACTION

When can a direct or derivative legal action be filed?

Although a shareholder has a personal stake in the company and suffers a personal loss when the company loses value, this does not always entitle the shareholder to bring direct action. The issue of whether a shareholder can directly bring an action against the company and/or its directors/officers personally or whether it must be maintained as a derivative suit for the benefit of the corporation/other shareholders is a complex question. Determining whether the minority shareholders loss is compensable via direct suit or derivative action requires a look at the issues surrounding the loss of value. 

In general, a direct action may only be brought if there is a direct harm to the minority shareholder which is separate and distinct from those sustained by other shareholders. Generally, a derivative action is appropriate when there is a loss of assets and/or harm to the corporation that effects all or a group of shareholders, but management of the corporation refuses to take action. 

How could direct or derivative legal action resolve my issues?

Since claims that are brought directly are based on legal rights that belong to the individual shareholder, the minority shareholder can bring his/her own claim in their own name to vindicate a violation of legal duties owed to him/her by the corporation and its officer/directors.

Conversely, since derivative claims belong to the corporation, not the shareholder, the minority shareholder is asserting a claim on behalf of the corporation because the management of the corporation refuses to pursue a claim. In a derivative claim, the legal duties are owed to the corporation and not the shareholder, and thus, the legal remedy that the court awards is for the benefit of the corporation not the shareholder. However, prevailing on behalf of the corporation is still in the shareholder(s) interest, as that protects the value of his/her shares.

Please remember that this overview is being provided for informational purposes only and it is not a complete summary of the law.  Thus, it is not intended to and should not be relied upon as legal advice.  If you have any questions relative to this overview or other questions regarding minority shareholder oppression, you should contact an attorney. To speak with an attorney at Creed & Hall, please contact our office at (813) 444-4332.

RESTRICTIVE EMPLOYMENT COVENANTS IN FLORIDA – NON-COMPETE AND NON-SOLICITATION AGREEMENTS

Florida allows enforcement of contracts and contractual provisions which restrict and/or prohibit competition. However, in order to be enforceable, such contracts must (1) be in writing, (2) signed by the individual against who enforcement is sought and (3) reasonable in time, area, and line of business. In addition, an employer seeking to enforce a restrictive covenant must be able to identify a “legitimate business interest” for protection, including but not limited to:

1. Trade secrets;

2. Valuable confidential business or professional information; 

3. Substantial relationships with specific prospective or existing customers/patients/clients;

4. Customer/patient/client goodwill associated with:

a. An ongoing business or professional practice, using a trademark, service mark, or “trade dress”;

b. A specific geographic location; or

c. A specific marketing or trade area.

5. Extraordinary or specialized training.

Any restrictive covenant not supported by a legitimate business interest is unlawful and is void and unenforceable.

Issue of Reasonableness of Restrictions on Competition

Legal matters regarding the enforcement of contracts and contractual provisions which restrict and/or prohibit competition often focus on the issues of whether restriction is reasonable in time, area, and line of business. If a restriction is overbroad, overlong, or otherwise not reasonably necessary to protect the legitimate business interest or interests, a court can modify the restriction.

Florida law sets forth certain rebuttal presumptions regarding the reasonableness on the length of a restriction on competition for a former employee/agent/independent contractor of an employer; a former distributor, dealer, franchisee, or licensee of a trademark or service mark;  and the seller of all or a part of the assets of a business or professional practice/shares of a corporation/partnership or LLC or other equity interest in a business or professional practice and for post-termination restrictive covenant predicated upon the protection of trade secrets. Despite these presumptions of reasonableness, the reasonableness of a contract restricting and/or prohibiting competition is determined on a case-by-case basis. 

Enforcement and Attorney’s Fees

The courts have the power to enforce a contract which restricts and/or prohibits competition by any appropriate and effective remedy, including, temporary and permanent injunctions. In certain circumstances, restrictive covenants can be enforced by third-party beneficiaries of such contract or an assignee or successor to a party to such contract.

Additionally, a court may award attorney’s fees and costs to the prevailing party in any action seeking enforcement of, or challenging the enforceability of, a contract which restricts and/or prohibits competition. 

Please remember that this overview is being provided for informational purposes only and it is not a complete summary of the law.  Thus, it is not intended to and should not be relied upon as legal advice.  If you have any questions relative to this overview or other questions regarding restrictive covenants, you should contact an attorney. To speak with an attorney at Creed & Hall, please contact our office at (813) 444-4332.

Florida Appellate Court Finds That Local Florida Governments Cannot Set Minimum Wage Higher Than Amount Set by State

One of the most discussed employment related issues around the country the last few years has been the question of “What is a fair minimum hourly wage?” The current federally mandated minimum wage is $7.25 an hour while Florida currently requires employers to pay a minimum wage of $8.10. However, many local governments, like those in Seattle ($15 an hour) and Los Angeles ($15 an hour by 2020), have decided to set an even higher minimum hourly wage for employers due to the high cost of living in those cities. 

In June 2016, the City of Miami Beach joined the trend and passed a local ordinance that would set a citywide minimum wage at $10.31 an hour starting on January 1, 2018, and would include increases each year until it reached $13.31 per hour in 2021. In response, Plaintiffs Florida Retail Federation, Inc., Cefra Inc., Florida Chamber of Commerce, Inc., Gavin Shamrock, Inc., Start Again, Inc., and Florida Restaurant and Lodging Association filed suit seeking to invalidated Defendant Miami Beach’s minimum wage ordinance. The trial court agreed with the Plaintiffs that Florida Statute §218.077 invalidated Miami Beach’s minimum wage ordinance. Miami Beach appealed the decision to the Third District Court of Appeals Florida.

On appeal, the Third District looked at the recent history of Florida’s minimum wage laws. The court noted that in 2003, the Florida Legislature enacted section 218.077 which established the federal minimum wage as the minimum wage for the state of Florida. In addition, Subsection (2) of section 218.077 preempted local government ordinances that would seek to raise the minimum wage above the federal wage amount. 

However, the following year, in 2004, Florida's voters passed a citizens' initiative to amend the Florida Constitution by adding Article X, Section 24, which established a higher, statewide minimum wage than the federal minimum wage. Miami Beach argued that under Article X, Section 24 of the Florida Constitution, it had the ability to set a higher minimum wage than what was set by the state.

In December 2017, the Third District Court of Appeal affirmed the trial court’s decision, concluding that the 2004 amendment to the Florida Constitution did not nullify the Florida’s wage preemption statute (Florida Statute §218.077), which indeed does prohibit local minimum wage ordinances such as the one enacted by Miami Beach in 2016. 

Accordingly, the Third District Court of Appeals decision is a setback to those fighting for a higher minimum wage for employees living in areas of Florida with higher cost of living expenses. The decision is also a signal that such local ordinances will not be an option for Florida city governments until there is a modification to either the Florida statutes or Florida Constitution.