Who Do I Sue?

LLC Members, Corporation Shareholders and Partners May Have A Derivative Action

We have recently been involved with several lawsuits by partners against other partners, LLC members against other LLC members and corporate shareholders against other corporate shareholders. In the last three of these cases, the plaintiff’s attorney was unaware of the law relating to derivative actions. Here is a primer on what a derivative action is and when your case is derivative.

What is a Derivative Action?

Under California law, a corporate shareholder (or LLC member and, in many instances, a partner in a partnership) cannot bring a direct action for damages against management on the theory that management’s alleged wrongdoing decreased the value of the plaintiff’s stock. The corporation must itself bring such an action, or a derivative action may be brought on the corporation’s behalf.

How Do I Know If My Action Is Derivative?

An action is derivative if the gravamen of the complaint is injury to the corporation, or to the whole body of its stock or property, rather than to the individual shareholder. For example, a shareholder who is stealing money from the corporation has damaged the corporation as a whole and typically not one individual shareholder.

The gist of the lawsuit is to recover assets for the corporation or to prevent the dissipation of its assets. Shareholders may bring a derivative action to, for example, enjoin or recover damages for breaches of fiduciary duty that directors and officers owe the corporation.

What Is The Point Of A Derivative Suit?

Imagine a large corporation in which an officer or director is self-dealing. If the court were to ignore the corporate entity and allow each individual shareholder to bring a lawsuit, the court would be inundated with lawsuits—all dealing with the same wrongdoing. Moreover, who should properly recover the money that the director diverts away from the corporation? That money should not go to just one shareholder. The money that was taken cannot be given to the first person to file a lawsuit. The money rightfully belongs to the corporation and it must be returned to the corporation.

The idea is that a shareholder does not own a direct interest in any particular asset of the company and so a shareholder cannot be directly injured when the company is improperly deprived of that asset. The shareholder is really suffering because the value of his or her shares has declined, an injury that affects all of the shareholders.

How Does A Derivative Action Work?

An injured shareholder must typically demand that the corporation itself bring a lawsuit to recover from the wrongdoer. In small corporations and LLCs, however, the wrongdoer is often in charge of the corporation. Such a demand may be futile. In that case the individual, on behalf of the corporation or LLC, can still proceed with the lawsuit. In such a case the corporation must be named as a nominal defendant and the injured shareholder (not the corporation) will prosecute the case on behalf of the corporation. However, the damages will be awarded to the corporation.

If you need more information on a partnership, LLC or corporate dispute, please look for more articles on our website (www.wagensellerlaw.com) or call us at (213) 286-0371.

Help Send A Kid To Camp

Wagenseller Law Firm is raising money to send inner-city children to the YMCA’s summer camp in Big Bear.

While most of us grew up going to summer camp, the Downtown YMCA serves local children who have, in many cases, never been outside the city, slept beneath the stars or sung around the campfire.

The YMCA sends local children to a week-long camp at Camp Whittle in Big Bear, where they are taught the six pillars of character — trustworthiness, respect, responsibility, fairness, caring and citizenship.

Due to the economic downturn, the YMCA has had to cut the number of kids they can send to camp. Please join us in sending as many kids to camp as we can this summer. Please show that we as adults know the pillars of character—responsibility and caring for those less fortunate than ourselves.

I will be sponsoring a cabin of ten campers at $3,500. Ask your employer whether they will also sponsor a cabin. Or sponsor one child ($350) or two children ($700). If you would like to donate any amount, please call me at (213) 286-0371 or send us a check made payable to the “Stuart M. Ketchum Downtown YMCA” c/o Wagenseller Law Firm, 523 W 6th St, #716, Los Angeles, CA 90014.

Thank you!
Laine