The Jayson Law Group LLC discussed in a previous post that New Jersey adopted the Revised Uniform Limited Liability Company Act. We also had a three part series on the new derivative suit law regarding corporations (Part 1, Part 2, and Part 3). In today’s blog post The Jayson Law Group LLC is going to discuss the Revised Uniform Limited Liability Company Act’s derivative action provisions. To do that we are going to examine 42:2C-68 through 42:2C-27 of the Revised Uniform Limited Liability Company Act.
What is a Derivative Action?
Before we begin our discussion on how to bring a derivative suit involving an LLC, we will examine what a derivative suit is. A derivative suit is a legal action brought by a member on behalf of the LLC due to the LLC’s inaction on the matter. What does that mean? Here is an example:
Jason is a member of Widget LLC. He believes that the LLC was wronged by Doodad LLC. Jason feels that Widget LLC should take legal action against the company to right this wrong. The members or managers who run Widget LLC disagree and take no legal action. Jason, still feeling that Widget LLC was wronged by Doodad LLC, brings a suit on behalf of Widget LLC against Doodad LLC. The suit brought by Steve is a derivative suit.
We will be using this example, or a variation thereof, for the rest of series.
Who Can Bring a Derivative Action and how can they bring the Derivative Action?
Section 42:2C-68 of the Revised Limited Liability Company Act states that there are two circumstances whereby a member of an LLC can maintain and derivative action. The first circumstance is when the member makes a demand on the other members or managers requesting that the company bring the cause of action and those members or managers fail to act within a reasonable time. What constitutes reasonable time? The statute does not define what a reasonable time is, and as the statute is relatively new it is hard to know.
The second way that a member can bring a derivative action is if adhering to the requirement of bringing the demand to the other members or managers would be futile. When would such a situation exist?
Take the example we discussed earlier with Jason and Widget LLC. Now, instead of Doodad LLC committing a wrong against Widget LLC it is the managers or managing members of Widget LLC who commit the wrong against Widget LLC. At this point having Jason bring a demand to those managers or managing members asking them to have Widget LLC sue the managers or managing members would be futile. Therefore Jason can bring the derivative suit on his own without making the demand on the managers or managing members of Widget LLC.
This concludes Part 1 of The Jayson Law Group LLC’s series on an LLC Derivative Action. Check back soon for Part 2.