Derivative Actions

IV. Derivative Actions

A. Demand Requirement Under Corp. Code § 800

Cal. Corp. Code § 800 governs derivative actions on behalf of California corporations. Subdivision (b)(2) requires the plaintiff to allege with particularity the plaintiff's efforts to secure board action or the reasons for not making the effort. Subdivision (c) authorizes the corporation, on noticed motion, to require the plaintiff to furnish a bond of up to $50,000 if the corporation establishes that there is no reasonable possibility that prosecution of the action will benefit the corporation or its shareholders, or that the moving party did not participate in the alleged transaction. The statute also imposes a contemporaneous-ownership requirement that has been read flexibly enough to accommodate post-merger and successor-shareholder standing in appropriate cases.

B. Demand Futility After Bader v. Anderson

Bader v. Anderson (2009) 179 Cal.App.4th 775, is the leading modern California opinion on demand futility. The court of appeal confirmed that California's standard is materially aligned with Delaware's Aronson/Rales framework: demand is excused only where the particularized facts pleaded raise a reasonable doubt that a majority of the board (i) is disinterested and independent, or (ii) exercised valid business judgment in the challenged transaction. Bader rejected what it called "shotgun" pleading and emphasized that conclusory allegations of director domination by an interested CEO will not suffice; the complaint must allege concrete facts — financial ties, personal relationships, prior litigation patterns — that compromise the directors' independence as to the specific transaction at issue. The decision substantially raised the pleading bar in California derivative practice and remains the touchstone in motions to dismiss for failure to make demand.

C. Special Litigation Committees

When the board, having received a demand or facing a derivative suit, appoints a special litigation committee (SLC) to investigate and recommend whether the corporation should pursue the claim, the SLC's recommendation is reviewed under standards drawn from Delaware's Zapata framework as adapted to California. The court evaluates the independence and good faith of the SLC, the adequacy of its investigation, and — at the court's discretion — the substantive reasonableness of its conclusion. SLC procedures must be carefully insulated from the influence of the challenged directors; failure to do so collapses the deference and exposes the underlying conduct to direct judicial scrutiny.

D. Settlement Approval and Cy Pres

Derivative settlements require court approval and notice to shareholders. Trial courts evaluate the settlement for fairness, adequacy, and reasonableness, considering the strength of the claims, the risks of continued litigation, and the value of any therapeutic relief (governance reforms). Where direct distribution to shareholders is impractical, courts may approve cy pres distributions to non-profit organizations whose missions reasonably approximate the interests of the absent shareholders. Plaintiffs' counsel fees in derivative settlements are typically awarded under the common-fund or substantial-benefit doctrines and require an evidentiary record on lodestar, multiplier, and benefit conferred.

V. Partnership and LLC Disputes

A. Operating Agreement Enforcement

The operating agreement is the controlling document for most LLC disputes. RULLCA gives the agreement broad authority — it can allocate management, define distributions, customize voting, restrict transfers, and modify default fiduciary duties (within the limits of § 17701.10(c)). California courts enforce operating-agreement provisions like contracts, applying ordinary principles of contract interpretation, the parol evidence rule, and the implied covenant of good faith and fair dealing. Where the agreement is silent, RULLCA's default rules govern. Where the agreement conflicts with a non-waivable RULLCA provision, the statute controls.

B. Manager / Managing-Member Fiduciary Claims

Managers of manager-managed LLCs and managing members of member-managed LLCs owe fiduciary duties of loyalty and care under § 17704.09. The duty of loyalty includes the obligations to account for property, profits, and benefits derived from LLC transactions, to refrain from dealing with the LLC as or on behalf of an adverse party, and to refrain from competing with the LLC in the conduct of its activities. Feresi v. The Livery, LLC (2014) 232 Cal.App.4th 419, applied these principles to invalidate a self-dealing transaction in which a managing member had encumbered LLC property to secure a personal debt without proper disclosure or consent — a paradigmatic loyalty breach. Feresi also emphasized that the implied covenant of good faith and fair dealing operates as a backstop where the operating agreement does not specifically prohibit the conduct at issue.

C. Member Expulsion and Dissociation Buyouts

RULLCA permits expulsion of a member by court order under § 17706.02(e) for (i) conduct related to LLC activities that materially and adversely affects the LLC, (ii) a willful or persistent material breach of the operating agreement or duty of good faith, or (iii) conduct making it not reasonably practicable to carry on the LLC with the member. Following dissociation, the dissociated member is entitled to the buyout and accounting rights specified in the operating agreement; if the agreement is silent, the LLC is not required by default to redeem the dissociated interest, but the member may pursue § 17707.03 dissolution and the resulting fair-value buyout.

D. Capital Account and Distribution Disputes

Capital accounts, distribution waterfalls, and tax allocations are common flashpoints. Disputes typically arise from (i) disproportionate distributions to insiders disguised as "guaranteed payments" or "consulting fees"; (ii) capital calls structured to dilute non-contributing members below operating-agreement thresholds; and (iii) mid-stream amendments to the distribution waterfall. The implied covenant, Ahmanson-style controlling-member duties, and § 17704.09 loyalty obligations all bear on these disputes. Discovery in such cases is heavily document-driven: K-1s, capital-account ledgers, distribution histories, and tax returns are the workhorses.

This analysis is for informational purposes only and does not constitute legal advice. Consult qualified counsel for advice specific to your situation. Attorney advertising.