June 28, 2022

Volume XII, Number 179

Advertisement
Advertisement

June 28, 2022

Subscribe to Latest Legal News and Analysis

June 27, 2022

Subscribe to Latest Legal News and Analysis

Court Insists No Standing In LLC Derivative Actions Without Continuous Ownership

Derivative actions by members of domestic or foreign limited liability companies are governed by Section 17709.02 of the California Corporations Code.  That statutes provides that “[n]o action shall be instituted or maintained in right of any domestic or foreign limited liability company by any member of the limited liability company unless” two conditions are met.   The first of those conditions requires that the plaintiff allege that it was a member of record or beneficially, 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 such a member.  If this language sounds familiar, it is derived from the General Corporation Law (Cal. Corp. Code § 800).

In Grosset v. Wenaas, 42 Cal. 4th 1100, 72 Cal. Rptr. 3d 129 (2008), The California Supreme Court held that Section 800 requires both “contemporaneous ownership” and “continuous ownership" on the part of a shareholder wishing to maintain a derivative action.  Yesterday, the California Court of Appeal, noting the nearly identical language in Sections 800 and 17709.02, held that both contemporaneous membership and continuous membership are required for a plaintiff to have standing in a derivative action on behalf of an LLC.  Sirott v. Superior Court,  Cal. Ct. App. Case No. A164037. 

Section 17709.02 also permits a member who does not meet the first condition to maintain an action in the discretion of the court after consideration of five factors.  Based on this provision, the trial court in Sirott determined that it had discretion to allow the plaintiffs to maintain their derivative action even though they had ceased to remain members of the LLC.  The Court of Appeal reversed, holding that a "court’s discretion to permit a derivative action by '[a]ny member who does not meet these requirements' (§ 17709.02(a)(1)) does not include the discretion to confer standing on a plaintiff who is not a member". 

© 2010-2022 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume XII, Number 126
Advertisement
Advertisement
Advertisement
Advertisement
Advertisement
Advertisement

About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm
Partner

Keith Bishop works with privately held and publicly traded companies on federal and state corporate and securities transactions, compliance, and governance matters. He is highly-regarded for his in-depth knowledge of the distinctive corporate and regulatory requirements faced by corporations in the state of California.

While many law firms have a great deal of expertise in federal or Delaware corporate law, Keith’s specific focus on California corporate and securities law is uncommon. A former California state regulator of securities and financial institutions, Keith has decades of...

949-851-5428
Advertisement
Advertisement
Advertisement