LLC Derivative Actions

The Right to Bring Derivative Actions Under the Illinois LLC Act

The Illinois Limited Liability Company Act (805 ILCS 180/) provides for a mechanism called a “derivative action” that allows an LLC member to bring a lawsuit on behalf of the LLC when the LLC itself has a cause of action, but the managers or members of the LLC have failed to take action.

A derivative action is a legal action brought by a member of an LLC on behalf of the LLC against a third party, typically a manager or another member of the LLC. This action is necessary when the LLC has a claim against someone, but the managers or members of the LLC have not taken action to pursue that claim. In such cases, a member can bring a derivative action on behalf of the LLC to recover damages or seek other relief.

The Illinois LLC Act provides for derivative actions under Section 15-7.1. According to this section, a member may bring a derivative action on behalf of the LLC if:

• The member was a member of the LLC at the time the cause of action arose, or became a member through transfer by operation of law from someone who was a member at that time.
• The member is suing to enforce a right that the LLC could enforce, but the managers or members of the LLC have failed to enforce.
• The member is not a manager of the LLC.
• The member has made a written demand on the managers or members of the LLC to take action to enforce the right, and the managers or members have failed to take action within 90 days.

If these conditions are met, the member can file a lawsuit on behalf of the LLC. The lawsuit must name the LLC as a nominal defendant and must provide notice to all other members of the LLC.

The derivative action provision in the Illinois LLC Act is intended to protect the interests of LLC members when the managers or members of the LLC are not acting in the best interests of the LLC. It allows members to take action to enforce the rights of the LLC and recover damages when necessary.

However, it’s important to note that derivative actions can be complex and costly. Members who are considering bringing a derivative action should seek the advice of an experienced business attorney who can help them evaluate the merits of their case and navigate the legal process.

In conclusion, the derivative action provision in the Illinois LLC Act provides an important mechanism for protecting the interests of LLC members. By allowing members to bring legal action on behalf of the LLC when necessary, the provision helps ensure that the LLC is able to enforce its rights and recover damages when it has been wronged. However, members should be aware of the complexities involved in bringing a derivative action and seek the advice of an attorney before taking action.

If you are a LLC member that is facing or wants to bring a member derivative action you can call our Illinois LLC derivative action and member oppression lawyers at 630-333-0333.