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Derivative suits on behalf of LLCs: No futility exception? Not so fast.

Must all derivative suits in Massachusetts be preceded by a written demand that a company take action?  No. Members (shareholders) of a limited liability company seeking to bring suit derivatively on behalf of the LLC can do so without written demand.  

While much has been said about Massachusetts' so-called "universal demand" requirement, that requirement does not apply to LLCs.  A bit of history: prior to 2003 Massachusetts, like other jurisdictions, allowed a corporation shareholder to file suit on behalf of a company, derivatively, if he or she could demonstrate that it would have been futile for the shareholder seeking to sue to make a written demand on the company asking that the company itself bring suit.  See, e.g., Harhen v. Brown, 431 Mass. 838, 843 (2000) ("if a majority of directors are alleged to have participated in wrongdoing, or are otherwise interested, a plaintiff may seek to have the demand on the board excused as futile.  This is referred to as a demand excused case.").  In 2003, however, Massachusetts passed General Laws Chapter 156D ("Chapter 156D") which provided in Section 7.42 that "[n]o shareholder may commence a derivative proceeding until written demand has been made upon the corporation to take suitable action."  Accordingly, the Supreme Judicial Court has made clear that pre-derivative suit written demand is required with respect to companies governed by Chapter 156D.  See Johnston v. Box, 453 Mass. 569, 578 n.15 (2009).  Demand futility is alive and well, however, with respect to limited liability corporations subject to Chapter 156C, not 156D, of the Massachusetts General Laws, as two cases make clear.  The Supreme Judicial Court, in Billings v. GTFM, analyzed whether a plaintiff had standing to bring suit on behalf of the limited liability corporation of which the plaintiff had been a member.  449 Mass. 281 (2007).  The Court determined that, at the time of suit, the plaintiff did have standing to sue derivatively and did comply with the requirements of Massachusetts Rule of Civil Procedure 23.1, which governs derivative suits, in part because the complaint adequately alleged that written demand on the company would have been futile.  Id. at 290.  Likewise, in its decision after a jury-waived trial, Justice Janet L. Sanders of the Business Litigation Session of the Suffolk Superior Court found that a limited liability corporation's shareholder had standing to sue derivatively because the shareholder had properly alleged demand futility.  Beninati v. Borghi, Nos. SUCV201201985BLS2, SUCV201301772BLS2, 2014 WL 4639447, *24 (July 9, 2014).  Accordingly, if you are a member (shareholder) of a limited liability company, Chapter 156D's "universal demand" requirement that written demand be made does not apply to you.    

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