California’s RULLCA Impossible Pleading Requirement For Derivative Suits

California’s Revised Uniform Limited Liability Company Act requires a member of a domestic or foreign LLC to include two specific allegations in any complaint brought in the right of the company.  Failure to include these two allegations could bar the member from instituting or maintaining the suit.  Cal. Corp. Code § 17709.02(a).  The two allegations are:

  • “the plaintiff was a member of record, or beneficiary, at the time of the transaction or any part of the transaction of which the plaintiff complains, or that the plaintiff’s interest later devolved upon the plaintiff by operation of law from a member who was a member at the time of the transaction or any part of the transaction complained of.”
  • “the plaintiff’s efforts to secure from the managers the action the plaintiff desires or the reasons for not making that effort, and alleges further that the plaintiff has either informed the limited liability company or the managers in writing of the ultimate facts of each cause of action against each defendant or delivered to the limited liability company or the managers a true copy of the complaint that the plaintiff proposes to file.”

These requirements are borrowed from Corporations Code Section 800 which governs derivative suits under the General Corporation Law, but LLCs aren’t exactly like corporations and sometimes matters become confused when corporate statutes are imported into laws governing other types of entities.

The first allegation is probably just a typographical error – “beneficiary” should be “beneficially”.  The second allegation is more problematical because it doesn’t account for the fact that an LLC may be member-managed.  Under California’s RULLCA, there can’t be a manager of a member-managed LLC because “manager” is defined as “a person that under the operating agreement of a manager-managed limited liability company is responsible, alone or in concert with others, for performing the management functions stated in subdivision (c) of Section 17704.07.”  Cal. Corp. Code § 17701.02(n).  If there is no manager, how can plaintiff allege her efforts to secure from the managers the action the plaintiff desires?

Another oddity of the statute is found in the introductory clause which begins “No action shall be instituted or maintained in right of any domestic or foreign limited liability company by any member of the limited liability company . . .”.  Under California’s RULLCA, “limited liability company” does not include a foreign corporation so that the phrase “any member of the limited liability company” can only refer to a member of a domestic LLC.  The clause should read “by any member of the limited liability company or foreign limited liability company”.

 

Topics:  Derivative Suit, LLC, Pleadings, RULLCA, Shareholder Litigation, Shareholder Rights, Shareholders

Published In: Business Organization Updates, Civil Procedure Updates, General Business Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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