Legal Memorandum: Derivative Suit by LLC Members in DE

Issue: Are members of an LLC allowed to bring a derivative suit under Delaware law?

Limited liability company members are expressly permitted to bring a derivative suit by statute.  Del. Code Ann., tit. 6, § 18-1001.*FN1  It is recognized that the derivative suit concept originated with corporate law but has now been “grafted onto the limited liability company form.”  Elf Atochem N. Am. Inc. v. Jaffari, 727 A.2d 286, 293 (Del. 1999).  In cases in which derivative claims are asserted the corporation or limited liability company itself is an indispensable party and must be named as a nominal defendant.*FN2  See Levine v Milton, 219 A.2d 145, 146 (Del. Ch. 1966); Maldonado v. Flynn, 413 A.2d 1251, 1255 (Del Ch. 1980) rev’d on other grounds, Zapata v. Maldonado, 430 A.2d 779 (Del. 1981).  However, the nominal defendant does not exercise control over the litigation.  Id.           

The general rule for determining whether a given claim is direct or derivative is simple to state but not so easy to apply:

[I]n determining whether a stockholder’s claim is derivative or direct, the issue must turn solely on the following questions: (1) who suffered the alleged harm (the corporation or the suing stockholders, individually); and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders, individually)?

Tooley v. Donaldson, Lufkin & Jenrette Inc., 845 A.2d 1031, 1033 (Del. 2004).

See Elf Atochem N. Am. Inc. v. Jaffari, 727 A.2d at 293 (although court did not […]