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Does California Law Apply To A Derivative Action Brought By Members Of A Foreign LLC?

In a ruling handed down this week, U.S. District Judge Lawrence J. O'Neill addressed whether California law applied to derivative claims apparently brought on behalf of an Oregon entity.  I found Judge O'Neill's ruling confusing at best.  First, he states:

"The California statute put forth in Plaintiffs' eighth claim allows a member of a limited liability corporation to bring an action on behalf of all or a class of members while exempting the action from the ordinary requirement that a class be so numerous that joinder of all members of the class is impracticable. Cal. Corp. Code § 17709.1."

However, the California Corporations Code does not refer to "limited liability corporations".  Second, there Section 17709.1 in the Corporations Code.  Elsewhere, the ruling refers to Section 17709.01, but that statute concerns class, not derivative, actions.

Judge O'Neill then states:

"The Ninth Circuit has held that "the rights of shareholders in a foreign company, including the right to sue derivatively, are determined by the law of the place where the company is incorporated." Batchelder v. Kawamoto, 147 F.3d 915, 920 (9th Cir. 1998). This "internal affairs" doctrine has been codified by California. Cal. Corp. Code. § 2116 . . . ."

Section 2116, however, is part of the General Corporation Law and governs directors.  Thus, it does not apply to limited liability companies.  Finally, the provision of California's Revised Uniform Limited Liability Company Act, Section 17709.02, concerning derivative actions expressly applies to domestic or foreign limited liability companies. 

© 2010-2020 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume X, Number 38

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About this Author

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

Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...

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