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The Corporate provisional director: Has due process been overlooked?

Shareholders deadlocked in voting power may seek judicial dissolution pursuant to F.S. 607.1430. Courts generally recognize, however, that judicial dissolution is an extreme remedy and will enter a decree of dissolution only when no other adequate remedy is available. Thus, Florida also offers shareholders alternative statutory relief to judicial dissolution. These alternative remedies are relatively new. Their application and constitutionality have not been questioned yet by the appellate courts. It is unclear whether, in their application, they comport with constitutional principles of due process.

If a shareholder of a closely held corporation invokes the jurisdiction of the court pursuant to 607.1430, the court is empowered to appoint a provisional director as an alternative to judicial dissolution if it appears that the appointment will remedy the grounds alleged by the complaining shareholder. The provisional director shall have all the rights and powers of a duly elected director, including the right to notice of and vote at meetings of directors.

Fla.Stat. 607.1435(2) mandates that the provisional director report to the court 1) concerning the matter complained of; or, 2) the status of the deadlock, if any; and, 3) the status of the corporations business, as the court shall direct. Further, upon the direction of the court, the provisional director shall make recommendations as to the appropriate disposition of the action.

The statute is unclear in its application as to what recommendations the provisional director may make as to the appropriate disposition of the action and the character of those recommendations, as will be explained below. No Florida cases construe the statute, and the Model Business Code, from which the statute was drawn, does not provide assistance in construing it.

Nothing in the statute limits the power of the provisional director to make recommendations to the court concerning the appropriate disposition of the action. However, constitutional considerations suggest the recommendations of the provisional director as to the appropriate disposition of the action are advisory only and subject to the due process rights of the parties to a trial on the issues raised in the pleadings. The disposition of the action solely upon the provisional directors' recommendations in the absence of an evidentiary hearing would constitute an impermissible delegation of judicial responsibilities. The legislature failed to clarify this issue when it enacted '607.1435(2).

The Provisional Directors Report to the Court Is Advisory

1) The Appointment of the Provisional Director Is Not a Delegation of Judicial Power.

The role of the provisional director is to advise the court on such matters as the court shall direct. The statute does not prescribe the qualifications of the provisional director. He or she could be a lawyer, a businessperson, an accountant or anyone who is an impartial person who is neither a shareholder nor a creditor of the corporation.

The statute does not authorize the provisional director to hear and receive evidence. Thus, although facially comparable to the role of a master provided for in Fla.R.Civ.P. 1.490, the provisional director's role is fundamentally different from that of a master.

The Florida Constitution imposes on the judiciary the duty to provide to all persons access to the courts such that justice shall be administered without denial. The courts may not delegate their judicial power in whole or in part.

When the provisional director reports his findings and recommendations, the court thereafter must take evidence and apply the law to the facts. It is emphatically the province and duty of the judicial department to say what the law is.

2) The Provisional Directors Role Is Comparable to the Advisory Role of Other Judicial Appointees.

The provisional director has broad opportunity to make his investigation. The report of the provisional director, made from independent investigation and the out-of-court statements of the parties does not become part of the record in the case until it is offered into evidence, and, then, subject to the rules of evidence.

In contrast to masters provided for in Rule 1.490, the provisional director does not have authority to conduct hearings, examine witnesses under oath, or compel the production of documents. This is inferential from the fact that statute does not specify the background of the provisional director. Consequently, the findings of the provisional director and his recommendations are not accorded the weight of a jury verdict that is supported by competent substantial evidence.

Even though the use of masters is specifically provided for in the Rules of Civil Procedure, the rule prohibits the use of a master without the consent of the parties. The rationale is that the courts may not abdicate their responsibility to accord everyone a right to trial. Even after the master makes his report based on the record made before him or her, the court is duty bound to examine and consider the evidence for itself and to make a judicial determination as to whether under the law and the facts the court is justified in entering the judgment recommended by the master.

Due Process Guarantees Opportunity to be Heard

The Florida Constitution protects all persons from the deprivation of property without due process. Fla.Const.Art. I, 9. Procedural due process dictates that the parties be given the opportunity for a hearing and to present their case before the court. The costs in time, effort, and expense resulting from a hearing held prior to the deprivation of a property interest cannot outweigh the constitutional right to a hearing.

1) Corporate dissolution requires the establishment of specific criteria.

Judicial dissolution proceedings brought under F.S. 607.1430 require that certain conditions be established prior to invoking judicial intervention. For example, an action brought pursuant to 607.1430(2) authorizes a court to dissolve a corporation if it is established that either:

(a) The directors are deadlocked in the management of the corporate affairs, the shareholders are unable to break the deadlock, and irreparable injury to the corporation is threatened or being suffered; or

(b) The shareholders are deadlocked in voting power and have failed to elect successors to directors whose terms have expired or would have expired upon qualification of their successors.

The requirement that such facts be established strongly suggests that 607.1430(2) contemplates the taking of evidence as a condition to ordering the dissolution of a corporation.

As discussed, although the provisional director makes findings of facts and reports such findings and recommendations to the court, he or she does not take evidence per se. Without having the force of evidence, the provisional director's report is insufficient to establish the requisite criteria for corporate dissolution.

2) The parties are entitled to present evidence in support of their respective positions.

To enjoy their right to due process, the parties must have the opportunity to present evidence of their own, examine evidence, and cross examine the witnesses whose testimony was introduced by the opposing party. Due process requires that the opportunity to be heard be full and fair, not merely colorable or illusive.

Upon the appointment of a master, the parties retain the right to present evidence to the master, and upon an objection to the report and recommendation, the parties have the opportunity to present their case before the court. Rule 1.490(h) provides that if a party takes exception to the masters report, that party is entitled to appear before the judge and present its argument in support of the exceptions.

F.S. 607.1435, does not specify how the court will treat the provisional directors recommendation as to the disposition of the case. There is no case law in Florida construing the courts obligations in reviewing a provisional directors recommendation. Comparisons to other judicial appointees sheds light on the appropriate disposition of the provisional directors recommendation.

3) The report and recommendations of the provisional director are not evidence and must be introduced in evidence to be a part of the record of the case.

In order that the full value of the provisional directors report and recommendations be understood, they must be introduced into evidence according to the rules of evidence. There is no provision in the rules of evidence that allows the court to take judicial notice of the provisional directors report and recommendations. The statute does not require the report or the information upon which the report is based to be under oath. The report and recommendations do not, in and of itself, rise to the level of evidence. If they are to be considered by the court in rendering its final decision, they must be a part of the record since every judgment must be supported by competent substantial evidence.

Until the time they are introduced into evidence, the report and recommendations of the provisional director are extrajudicial statements, upon which alone the court may not dispose of the cause. The rule derives from the landmark case of Atlas Land Corp. v. Norman, 156 So.2d 885 (Fla. 1954), holding that the addition of a transcript from the main proceeding from which a receiver was appointed was error where the transcript was not a part of the record of the ancillary proceeding under review.

CONCLUSION

Because the statute does not refer to how a court must treat the provisional directors recommendation for the disposition of an action, the statute appears reasonably susceptible to more than one interpretation. Courts must construe the statute in such a way as to render it constitutional. Courts will avoid error by granting the parties all of the procedural due process safeguards, particularly the right to an evidentiary hearing on the issues, prior to rendering final judgment.