Kentucky Legislature Adds Clarity To Derivative Litigation Against Limited Liability Companies

Changes last year to Kentucky's Limited Liability Company ("LLC") statute provide new clarity to the availability of and procedure for derivative litigation against LLCs in Kentucky.1 Clarification of derivative litigation against LLCs was much-needed, as previously the statute contained no provisions expressly authorizing the maintenance of such actions in the LLC (as opposed to business corporation) context.2

In order for an LLC to be sued derivatively, an LLC member who wishes to bring a derivative complaint must first either make a demand for action on the LLC, or convince a court that any such demand would be "futile." The clear preference in the law is that demand be made. If demand is made, it is to be supplied to the other LLC members, and, if the LLC is manager-managed, on the manager.3 The demand must request that the LLC cause the company to bring an action to redress the injury or enforce the right the member seeks to enforce.4 If demand is made, a derivative suit can be filed only if the members (and manager, if applicable) do not bring the action within a reasonable amount of time.5 If a derivative action is filed following demand, the complaint must state "with particularity" the date and content of the plaintiff member's demand and the response to that demand.6

One notable difference from the corporate derivative statute is lack of any express mention of what happens if the members and manager undertake an investigation into the allegations made in the pre-suit demand. In the business corporation context, the statute expressly states the commencement of an investigation permits a court to stay any derivative proceeding until the investigation is completed.7 The new LLC derivative statute lacks that language, though members and managers supplied with pre-suit derivative demand would be well-advised to attempt agreement with the purportedly aggrieved member to withhold filing of any action to permit the LLC to conduct an investigation in hopes that any allegations can be addressed without the need for expensive litigation. In the event agreement cannot be reached and the member files suit, the defendant LLC members should move for a stay of the litigation on similar grounds. Because any recovery by a derivative plaintiff goes back into the LLCmeaning the plaintiff does not enjoy any personal monetary recoverycommon sense and comparison to the business corporation statute strongly suggests that a good-faith investigation should...