shareholder litigation and Limited Liability Companies

Question 1

Derivative claim

Answer 1

A derivative claim is a lawsuit brought by a shareholder on behalf of the corporation.
The shareholder is suing to enforce the corporation’s rights when the corporation has a
valid cause of action, but has failed to pursue it. This often occurs when the defendant
in the suit is someone close to the corporation (e.g., a director or officer).

Question 2

demand prior to derivative action

Answer 2

Generally, a shareholder must make a written demand on the board before
commencing a derivative action. After submitting the written demand, the shareholder
must wait 90 days to file the derivative action, UNLESS the board rejects the demand
during the 90-day period.
(1) However, under the common law, and in some jurisdictions today, the plaintiff
shareholder does NOT have to make a demand on the board if it would be futile
to do so (e.g., the board is interested in the transaction being challenged).

Question 3

Derivative claim damages

Answer 3

If a derivative claim is successful, the proceeds go to the corporation, not the
shareholder who brought the action. However, if the award to the corporation benefits
the defendants, the court may order that damages be paid directly to the shareholder.

Question 4

Direct claim

Answer 4

A direct claim is a lawsuit brought by a shareholder to enforce his OWN rights. The
shareholder must prove actual injury that is NOT solely the result of an injury suffered
by the corporation. If a direct claim is successful, the proceeds go to the shareholder.

Question 5

Certificate of formation

Answer 5

Generally, an LLC is formed when the certificate of formation is filed with the secretary
of state. The certificate of formation is analogous to a corporation’s articles of
incorporation. Commonly, the certificate of formation must provide:
(1) The name and purpose for which the LLC is organized;
(2) The address of the principal place of business;
(3) The name and address of the registered agent in the state;
(4) The initial capital contributions agreed to be made by all members; AND
(5) The number of persons, or classes of members, who will manage the LLC, and
the names and addresses of the persons or members who will serve as
managers.

Question 6

Operating Agreement

Answer 6

The operating agreement is analogous to a corporation’s bylaws. Commonly, it governs:

(1) The relations between the members and the LLC;
(2) The rights and duties of managers;
(3) The activities and affairs of the LLC; AND
(4) The conditions, if any, for amending the operating agreement.