Document Type

Article

Publication Date

Spring 2022

Publication Title

Business Lawyer

Publication Title (Abbreviation)

Bus. Law.

Volume

77

First Page

381

Abstract

Recent LLC acts adopt the rule developed for public corporations that most owner claims against managers or other owners are merely derivative rather than direct, and give the firm the right to appoint special litigation committees (SLCs) to decide how to dispose of derivative claims. The imposition of the complexities of derivative litigation upon closely held LLCs imposes significant transaction costs that cannot be spread and that typically serve no purpose. It is also contrary to the presumptive intent of members, who presumably expect to be treated as contracting parties with the normal remedies for breach, as in the case of partners. Legislatures should permit LLCs to opt in to the complexities of derivative litigation rather than force them to opt out of it when the claim is made against an insider. Short of that, legislatures should amend the rule that permits a majority of derivative defendants to appoint the SLC that resolves the claims against them. Even in the absence of legislative change, courts should adopt the Delaware approach that offers the possibility that the composition, work, and recommendations of SLCs may receive enhanced scrutiny in equity.

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