Wisconsin’s Supreme Court issued an important decision last week in Marx v. Morris, 2019 WI 34, holding that “[c]orporate principles of derivative standing do not apply to the distinct business form of an LLC.” Id. ¶ 4.
In a 4-3 decision written by Chief Justice Patience Roggensack, the court explained that the statutory scheme applicable to LLCs does not distinguish between direct and derivate claims and that the court would not “judicially import” one from the corporation statutes. Id. ¶¶ 40-41. The pass-through nature of LLCs also played a role in the decision; the court observed that there is “a much closer financial connection between harm to an LLC and harm to its members than between harm to a corporation and harm to its shareholders.” Id. ¶ 45.
Marx appears to allow LLC members to start litigation in their own name, free from strictures of the derivate procedures for corporations. And, without an equivalent of the special-litigation-committee process for corporations, see Wis. Stat. § 180.0744, LLCs might be left without a mechanism to stop the suit short of full litigation, regardless of where the best interests of the LLC lie. According to a dissent written by Justice Daniel Kelly and joined by Justices Shirley Abrahamson and Rebecca Bradley, the decision “eliminate[s] the LLC’s ability to control litigation,” and “a cause of action [now] belongs to the first person to grab it.” 2019 WI 34, ¶ 87.
Marx also calls into question the continued relevance, at least for inter-company disputes among LLC members, of Wis. Stat. §183.1101, which provides that members can bring actions on behalf of the company only after first receiving an affirmative vote by the members holding at least 50% of the membership interests. After Marx, there would seem to be no need to name the company as a party in the first instance, and, instead, individual members might be left to fight it out, with potentially no one representing the best interests of the company.
Marx could lead to an uptick in litigation by LLC members who wish to challenge company decisions in the courtroom. As a precaution against this, LLC members who want to control litigation by members might consider amending their LLC’s operating agreements to “opt in” to corporate derivative procedures.