Robert Freedman v. MajicJack Vocaltec Ltd., 963 F.3d 1125

Plaintiff Robert Freedman, a magicJack shareholder, filed a putative class action alleging two proxy statements (Mar. 15, 2017 and June 23, 2017) contained material misrepresentations about Broadsmart valuation and executive compensation.
Freedman alleged the misleading proxies entrenched directors and injured shareholders by reducing shareholder value and by enabling compensation tied to a change-in-control; he sought injunctive relief, rescission of payments, and damages tied to a later $8.71/share sale (allegedly below a prior $9.50 offer).
The district court treated the Second Amended Complaint as derivative, applied Israeli law (magicJack’s place of incorporation), and dismissed under Fed. R. Civ. P. 23.1 because Freedman did not plead a pre-suit demand or that demand would have been futile.
On appeal Freedman argued his claims were direct and that he adequately pleaded violations of § 14(a) and § 20(a) of the Exchange Act.
The Eleventh Circuit affirmed: it held that the law of the state/place of incorporation governs the direct-versus-derivative question, agreed the claims were derivative (injury flowed to the corporation), and affirmed dismissal of both the § 14(a) claim and the related § 20(a) claim.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Which law governs whether a suit is direct or derivative?	Freedman implicitly relied on forum law; treated claim as direct.	magicJack: law of incorporation (Israel) governs demand/derivative rules.	The law of the state/place of incorporation governs the direct-vs-derivative question; federal courts incorporate that state law gap-filling into federal common law (Kamen principle).
Is Freedman’s § 14(a) claim direct or derivative?	The complained misstatements injured shareholders’ right to an informed vote, so claim is direct.	The injury alleged (decline in company/share value and payments to insiders) is to the corporation and all shareholders equally—thus derivative.	Claim is derivative: injury flowed from harm to the corporation, not a personal, special injury to Freedman.
Did Freedman satisfy the demand requirement or adequately plead demand futility?	He argued pleading was sufficient without a pre-suit demand.	Defendants: no demand alleged and no futility allegations.	Freedman failed to plead he made a demand or that demand would be futile; Rule 23.1 dismissal proper.
Is the § 20(a) control-person claim viable absent a pleaded § 14(a) violation?	§ 20(a) pleaded against individual defendants as control persons.	§ 20(a) requires a primary violation; if § 14(a) is dismissed, § 20(a) fails.	§ 20(a) dismissed because the underlying § 14(a) claim was not adequately pled/was dismissed.

Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90 (1991) (federal courts fill gaps in federal securities law with state law; state corporate law often governs derivative-demand rules)
J.I. Case Co. v. Borak, 377 U.S. 426 (1964) (injury from deceptive proxy solicitation ordinarily flows to the corporation)
Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004) (distinguishes direct from derivative suits by asking who suffered the alleged harm and who would benefit from recovery)
Edgar v. MITE Corp., 457 U.S. 624 (1982) (matters peculiar to relationships among corporation, officers, directors, and shareholders are internal affairs)
Culverhouse v. Paulson & Co. Inc., 791 F.3d 1278 (11th Cir. 2015) (clarifies that relief in direct actions flows to shareholders, in derivative actions to the corporation)
Mizzaro v. Home Depot, Inc., 544 F.3d 1230 (11th Cir. 2008) (§ 20(a) claim requires adequately pleaded primary securities-law violation)
Dinuro Invs., LLC v. Camacho, 141 So. 3d 731 (Fla. 3d DCA 2014) (Florida two-prong test for direct shareholder actions: direct harm and special injury)
Strazzulla v. Riverside Banking Co., 175 So. 3d 879 (Fla. 4th DCA 2015) (adopts the two-prong test for distinguishing direct from derivative shareholder claims)