Derivative actions are a legal recourse available to members of a limited liability company (LLC) to hold the LLC’s managers accountable for wrongdoing or mismanagement. These actions allow LLC members to sue on behalf of the company to remedy harm caused to the LLC and its members.
One common reason for bringing a derivative action against an LLC manager is self-dealing or conflicts of interest. For example, if a manager is found to be using their position to benefit themselves at the expense of the LLC or its members, a derivative action may be warranted.
Another reason for a derivative action is when the LLC’s managers fail to properly manage the company’s affairs. This could include failing to follow the LLC’s operating agreement, misusing company funds, or making poor business decisions that harm the LLC.
To bring a derivative action against an LLC manager, the plaintiff (typically an LLC member) must show that they have standing to bring the suit and that the action is brought in the best interests of the LLC. This typically requires the plaintiff to show that they have suffered some sort of harm as a result of the manager’s actions or inaction.
If the court finds in favor of the plaintiff, the LLC manager may be required to pay damages to the LLC and/or be removed from their position. In some cases, the court may also appoint a new manager to oversee the LLC’s affairs.
It’s important to note that derivative actions can be complex and time-consuming, and it may be advisable to seek the guidance of an attorney with experience in this area of law. However, for LLC members who feel that their company’s managers are not acting in the best interests of the LLC, a derivative action can be an effective way to hold them accountable and protect the interests of the company and its members.