Understanding Derivative Claims in Minnesota: Key Information for LLC Members
As a member of a Minnesota Limited Liability Company (LLC), you may encounter circumstances in which the LLC has suffered harm—perhaps due to the actions of another member, a manager, or a third party—yet the LLC itself declines to address the issue. In these situations, you may have the right to initiate a “derivative claim.” This post explains what derivative claims are, how to identify whether you have one, and how to properly pursue this kind of legal action under Minnesota law.
What is a Derivative Claim?
A derivative claim is a lawsuit filed by an LLC member (or a shareholder in a corporation) on behalf of the company when the company itself fails to seek relief. Put simply, you “step into the shoes” of the LLC and sue to protect the company’s rights if it refuses or neglects to do so. Although you bring the lawsuit, the harm being addressed is suffered directly by the LLC rather than by you personally.
Determining If You Have a Derivative or Direct Claim
Figuring out whether a claim is “derivative” (belonging to the LLC) or “direct” (belonging to you as an individual) can be challenging:
Direct Claims typically involve a harm unique to you—something that does not affect other members or the LLC as a whole in the same way.
Derivative Claims address injury to the LLC, such as the misappropriation of company funds or a breach of fiduciary duty owed to the LLC itself.
If your concern arises from an injury to the LLC rather than a personal grievance, you may have grounds for a derivative claim.
Making a Demand
Under Minnesota law, pursuing a derivative claim generally requires you to:
Make a Formal Demand on the LLC’s decision-makers—such as managers, board members, or governors—asking them to take action on the LLC’s behalf.
Wait a Reasonable Time to allow those decision-makers to address the issue.
If they choose not to act or if making a demand would be pointless (for example, if the same individuals you would ask to act are themselves responsible for the harm), you may then initiate a derivative lawsuit on the LLC’s behalf.
Procedural Requirements
When bringing a derivative claim, Minnesota law imposes several specific requirements:
Member Status: You must have been a member of the LLC at the time of the harmful conduct or have become a member by operation of law (e.g., through inheritance).
Detailed Allegations: Your lawsuit must clearly explain what efforts you made to encourage the LLC to act on its own. If you did not make any effort, you must show why a demand would have been futile.
Fair and Adequate Representation: You must fairly represent the interests of other members who are similarly situated. If a court determines you are motivated by personal gain rather than the LLC’s best interests, it may dismiss the suit.
Examples of Successful Derivative Claims
Minnesota courts have found certain types of claims particularly well-suited to derivative actions, including:
Breach of Fiduciary Duty: For instance, when managers or controlling members misuse LLC assets for personal benefit.
Misappropriation or Diversion of Funds: Such as improperly transferring LLC funds out of the business.
Corporate Waste: When LLC resources are used irresponsibly and the LLC itself fails to take action.
In these cases, the courts focus on whether the injury was primarily to the LLC rather than to an individual member, and whether the procedural requirements were followed.
Next Steps: Contact PDK for Assistance
If your LLC has been harmed and those in charge are not addressing the problem, you may have a derivative claim. However, these cases are often complex and subject to stringent procedural rules.
At Parker Daniels Kibort, we have extensive experience guiding clients through the nuances of pursuing or defending against derivative claims. If you are unsure about whether your issue qualifies or need help preparing the necessary demand and lawsuit, we can help.
Get in Touch
Greg Arenson represents plaintiffs and defendants around the country in a variety of disputes with an emphasis on business and commercial litigation.
Give us a call at 612.355.4100
Disclaimer
This post is for informational purposes only and does not constitute legal advice. Reading this blog does not create an attorney-client relationship. For advice specific to your situation, please contact our firm directly.
