Can a Minority Member Bring a Derivative Action to Enforce the Rights of the LLC?
Under the Florida Revised LLC Act (the “Revised Act’), a minority member may file a “derivative action” to enforce any right of the LLC. So what is a derivative action? A derivative action refers to the method by which a member who owns a minority interest in an LLC can bring a claim in the name of the LLC even though the minority member does not control the LLC. Indeed, one of the primary reasons why derivative actions are necessary is that often the party who is harming the LLC is the LLC’s manager or majority member. Therefore, a derivative action provides an alternative remedy for a minority member when the manager or majority member will not authorize the LLC to bring a direct claim. As a result, a derivative action provides a remedy to protect the interests of minority members to enforce the rights of the LLC when those in charge are unlikely to take such action.
So what is required for a member to bring a derivative action against a wrongdoer on behalf of the LLC? One of the following must occur: (1) a member must make a demand on the managers (in a manager-managed LLC) or members (in a member-managed LLC) for the LLC to take action, and the LLC must not have taken such action within 90 days of the demand; (2) a demand would be futile; or (3) irreparable injury would result by waiting for the managers or members to take action. Fla. Stat. § 605.0802.
For a member to have standing to bring a derivative action, the following is required: (1) the member must be a current member at the time the lawsuit is filed; and (2) the member must have been a member of the LLC when the wrongful conduct occurred that is the basis for the claim. Alternatively, a member also will have standing if he or she was transferred his or her membership interest by operation of law or by the terms of the operating agreement from someone who was a member when the wrongful conduct occurred. Fla. Stat. § 605.0803.
Overall, a minority member of an LLC may enforce the rights of the LLC through a derivative action, if the member makes a demand without a timely response from the LLC or such a demand would be futile or cause irreparable harm. Derivative actions are a particularly appropriate remedy for minority members when the LLC’s management is abusing its fiduciary duties or engaging in self-dealing.