Coming this summer to a business near you, you will see a brand new limited liability company organized under Minnesota law. After August 1, 2015, all LLCs in Minnesota will be organized under the newly enacted Minnesota Statutes, Chapter 322C a/k/a the Minnesota Revised Uniform Limited Liability Company Act (the acronym is obnoxiously long so we’ll just call it the “New Act”).
The current (1/1/1993 to 8/1/2018) Minnesota Limited Liability Company Act will be repealed completely on August 1, 2018. Limited liability companies organized under Minn. Stat. ch. 322B may opt-in and be governed by the New Act after August 1, 2015 or remain under the 1993 law until August 1, 2018. Choosing to opt-in now has significant advantages that will be attractive to most LLCs with multiple owners, especially if the LLC is faced with litigation by a fellow owner.
In this three-part blog series, we’ll take a closer look at what this New Act means for LLCs in Minnesota. Today, the subject at hand deals with derivative claims and how they will be handled starting in August. Keep reading to protect your business from unnecessary legal troubles!
What does the New Act say about derivative claims?
First, the New Act provides for greater certainty, more predictable liability and more certain company-control if a member sues the LLC and/or fellow owners allege misconduct related to ownership and governing issues. Under the New Act, derivative claims are specifically recognized (ch. 322B does not, although case law supports them). A derivative claim asserts rights belonging to the company based on a violation that effects all members and is not uniquely limited to any one member alone.
If a derivative claim is asserted then a sole member cannot sue on it without first bringing the claim to the company’s attention and demanding the board of governors, members or managers take action. If the governing body declines, then the member can sue derivatively on behalf of the company and all other members. This is somewhat similar to a class action lawsuit where the class comprises all other members of the LLC.
Rather than decline the demand out-of-hand, the wiser course of action is usually for the governing body to appoint an independent Special Litigation Committee (“SLC”) to investigate the claim and determine if it is in the LLC’s best interest to pursue the proposed litigation. After the SLC’s investigation, a member must make a business judgment regarding the viability of his or her claim. If the SLC determines the claim is not worthy (cost/benefit analysis) and the member sues anyway, the odds are high that the case will be dismissed via an early motion brought before too many resources are expended. The SLC must be independent, act in good faith and be well-served to make a defensible, appropriate, adequate and documented decision. SLC’s are specifically authorized under the New Act, although not mentioned in ch. 322B, and provide a way to maintain control and a predictable result.You may have questions about more of the specifics of the law and derivative claims as they relate to your LLC. Fortunately, we offer tailored legal counsel and can help you make the most informed decision for the future of your company. Get in touch with our business law attorneys in St. Paul today!