A member of a Minnesota LLC finds out the manager has been steering the company’s best work to a second entity he owns. The facts are clean. The damages are calculable. And there’s a real chance the case gets dismissed before a judge ever looks at them — because the complaint was framed the wrong way, by a person who’s about to stop being a proper plaintiff, without the demand allegations the statute requires to be stated with particularity.
Chapter 322C puts four gates in front of a derivative claim, and each one stands on its own. Clearing three doesn’t help. I’ve watched clean facts die at every one of them. Worse, the people you’re suing partly control two of them: they decide whether to respond to your demand, and in a closely held company they often control whether you stay a member long enough to finish the case. If what you really want is to be bought out, not to recover money for a company you’re trying to leave, start with Minnesota LLC member disputes and buyouts instead. The derivative action is frequently the wrong tool for that job.
Gate one: is the claim yours or the company’s?
This question decides everything else, and Minnesota answers it with a pleading burden, not a doctrine. Section 322C.0901, subd. 2 provides:
A member maintaining a direct action under this section must plead and prove an actual or threatened injury that is not solely the result of an injury suffered or threatened to be suffered by the limited liability company.
Look at the two verbs. Plead and prove. A member can’t survive a motion on the pleadings by promising to sort out the distinction in discovery, and can’t get to judgment on an injury that turns out at trial to have been the company’s all along.
The grant in subd. 1 is broad — a member may sue “another member, a manager, a governor, or the limited liability company to enforce the member’s rights and otherwise protect the member’s interests, including rights and interests under the operating agreement or this chapter or arising independently of the membership relationship” — and subd. 2 is the limit on it. In practice the sorting usually comes down to who lost what.
| Injury | Typically | Why |
|---|---|---|
| Manager diverted company revenue to a side entity | Derivative | The company lost the revenue; every member is diminished proportionally |
| Member’s promised distribution never paid while others were paid | Direct | The injury is to that member’s own distribution right, not to company value |
| Books and records withheld | Direct | § 322C.0410 confers the right on the member — see member information rights |
| Company assets sold below value to an insider | Derivative | Company-level injury; all members share it |
| Member fired from employment in a company with 35 or fewer members | Often direct | § 322C.0102, subd. 18(a)(2)(ii) treats that capacity as within the oppression definition |
The hard one is the injury that looks like both. A controlling member who strips the company and freezes out the minority at the same time has caused a company injury and a member injury. I don’t pick one. I plead the direct claim with an injury description that satisfies § 322C.0901, subd. 2 on its own terms, and I plead the derivative claim separately with the demand allegations § 322C.0904 requires. Merge them into a single count and you can lose both.
Gate two: do you have to make a demand first?
Yes, unless it would be futile. Section 322C.0902 permits a derivative action “to enforce a right of a limited liability company” only if one of two things is true. Here’s the first:
the member first makes a demand on the other members in a member-managed limited liability company, the managers of a manager-managed limited liability company, or the board of governors of a board-managed limited liability company requesting that they cause the company to bring an action to enforce the right, and the member, manager, or board does not bring the action within a reasonable time
Who gets the demand depends on how the company is managed. Member-managed: the other members. Manager-managed: the managers. Board-managed: the board of governors. Send it to the wrong body and you haven’t made a demand. I confirm the company’s actual management form from the operating agreement and the articles before I draft anything — not from what people put on their business cards.
“A reasonable time” isn’t defined. Chapter 322C fixes no number of days and prescribes no waiting period. That cuts both ways. A plaintiff can’t point to an expired statutory clock, and a defendant can’t say the plaintiff filed too early just because some familiar period hadn’t run. What “reasonable” means will get argued from the nature of the claim, the urgency, and what the recipients actually did.
You’ll end up litigating the demand itself. Section 322C.0904 requires the complaint to state with particularity “the date and content of the plaintiff’s demand and the response to the demand by the other members, managers, or board of governors.” Write the demand knowing it’ll be quoted back to you. Name the specific transactions, the specific right to be enforced, and a specific date by which you expect an answer.
Gate three: when is a demand futile?
Section 322C.0902, clause (2) permits the action if “a demand under clause (1) would be futile.” That’s the whole of it. The chapter doesn’t define futility, doesn’t give factors, and doesn’t say who bears what burden.
What it does say is how you have to plead futility. Section 322C.0904, clause (2) requires the complaint to state with particularity “if a demand has not been made, the reasons a demand under section 322C.0902, clause (1), would be futile.” Particularity is the word that matters. The reasons, not the conclusion.
In a small company the argument writes itself. In a member-managed LLC, § 322C.0902, clause (1) sends the demand to “the other members” — which, in a two-member company, means the demand goes to the person you plan to sue. Pleaded right, that’s not a bare claim of futility. It’s a set of facts futility follows from. Name who would receive the demand, state their interest in the challenged transactions, and let the court draw the conclusion.
Two cautions. Going the futility route gives up the one thing a demand sometimes produces: a company that actually brings the claim, at company expense. And a futility allegation that fails takes the whole derivative claim down with it, while the limitations period doesn’t pause during the motion. Where futility is arguable but not obvious, I’d rather make the demand and plead the response under § 322C.0904, clause (1).
Gate four: are you a proper plaintiff, and will you still be one at judgment?
This is the gate I see missed most, and in a closely held LLC it’s the most dangerous of the four. Section 322C.0903, subd. 1 provides:
Except as otherwise provided in subdivision 2, a derivative action under section 322C.0902 may be maintained only by a person that is a member at the time the action is commenced and remains a member while the action continues.
That’s two separate requirements, and the second one runs for the life of the case.
Member is a defined term. Under § 322C.0102, subd. 15, a member is a person who became one under § 322C.0401 and “has not dissociated under section 322C.0602.” Someone holding only the economics of a former member’s interest is a transferee (§ 322C.0102, subd. 29), not a member, and can’t maintain the action. That puts assignees, judgment creditors holding charging orders, spouses awarded an interest in a dissolution, and estates of deceased members outside the section unless they became members under § 322C.0401. See six ways a Minnesota LLC dissolves for the same standing line in the dissolution statute.
Remains a member while the action continues is the trap, and § 322C.0602 is where you’ll find it. At least three of the events causing dissociation can be worked by the other side while the case is pending: dissociation on “an event stated in the operating agreement as causing the person’s dissociation” (clause (2)); expulsion “pursuant to the operating agreement” (clause (3)); and expulsion by judicial order “on application by the company” on grounds including wrongful conduct materially affecting the company’s activities, willful or persistent material breach of the operating agreement or of duties under § 322C.0409, or conduct making it “not reasonably practicable to carry on the activities with the person as a member” (clause (5)(i)–(iii)). The defendants typically control the company, and the company is the applicant under clause (5). Before I file one of these, I map every way the plaintiff could stop being a member, and I decide up front whether to ask for an order preserving the status quo. What a departing member keeps and loses is laid out in Minnesota LLC dissociation.
The statute gives you exactly one exception. Subdivision 2: “If the sole plaintiff in a derivative action dies while the action is pending, the court may permit another member of the limited liability company to be substituted as plaintiff.” Death of the sole plaintiff. Not expulsion, not a forced buyout, not a transfer.
What must the complaint actually say?
Two sources, and they don’t line up neatly.
Section 322C.0904 requires the complaint to state with particularity either the demand — “the date and content of the plaintiff’s demand and the response to the demand by the other members, managers, or board of governors” — or the reasons a demand would be futile.
Minn. R. Civ. P. 23.09 adds requirements the statute doesn’t have. The rule, captioned “Derivative Actions by Shareholders or Members,” provides that in such an action “the complaint shall allege that the plaintiff was a shareholder or member at the time of the transaction of which the plaintiff complains or that the plaintiff’s share or membership thereafter devolved on the plaintiff by operation of law.” It further provides that the action “may not be maintained if it appears that the plaintiff does not fairly and adequately represent the interest of the shareholders or members similarly situated in enforcing the right of the corporation or association,” and that the action “shall not be dismissed or compromised without the approval of the court, and notice of the proposed dismissal or compromise shall be given to shareholders or members in such manner as the court directs.”
Put the ownership requirements side by side. The statute requires membership at commencement and continuously thereafter. The rule requires membership at the time of the transaction complained of, or devolution by operation of law. Between them they cover the whole stretch from the wrongdoing to the judgment. A member who bought in after the misconduct satisfies § 322C.0903 and has a Rule 23.09 problem. A member expelled during the case satisfies Rule 23.09 and has a § 322C.0903 problem.
There’s a wrinkle. Rule 23.09 is written in terms of “a corporation or of an unincorporated association” and doesn’t name limited liability companies. Whether and how it applies to a chapter 322C company is a question this article doesn’t resolve. I plead so that both the statute and the rule are satisfied. The allegations cost nothing, and leaving them out can cost you the case. And the rule’s court-approval and notice requirements outlast the filing: you can’t quietly settle a derivative action between the plaintiff and the defendants.
The special litigation committee: the motion that stops the case
Even a perfectly pleaded complaint can be taken away from the plaintiff. Under § 322C.0905, subd. 1, a company named in a derivative proceeding “may appoint a special litigation committee to investigate the claims asserted in the proceeding and determine whether pursuing the action is in the best interests of the company.” On the committee’s motion, “except for good cause shown, the court shall stay discovery for the time reasonably necessary to permit the committee to make its investigation.” Two things survive the stay under that subdivision: enforcement of information rights under § 322C.0410, and, for good cause, a temporary restraining order or preliminary injunction.
Who appoints the committee is where it gets interesting. Section 322C.0905, subd. 3 gives the appointment power to the members, managers, or governors not named as parties — and then, if everyone is named, to a majority of those named as defendants. Naming every possible defendant doesn’t get rid of the committee. It hands the appointment to the defendants.
Under subd. 4 the committee can decide that the case continue under the plaintiff’s control, continue under the committee’s control, be settled on terms the committee approves, or be dismissed. But the committee doesn’t get the last word. Under subd. 5, it must file its determination and its report with notice to the plaintiff, and the court “shall determine whether the members of the committee were disinterested and independent and whether the committee conducted its investigation and made its recommendation in good faith, independently, and with reasonable care, with the committee having the burden of proof.” If the court so finds, it “shall enforce the determination of the committee.” If not, it “shall dissolve the stay of discovery entered under subdivision 1 and allow the action to proceed under the direction of the plaintiff.” The detail I hold onto is the burden. It sits on the committee, not on the plaintiff.
If you win, who gets the money?
The company. Section 322C.0906, subd. 1 provides that “any proceeds or other benefits of a derivative action under section 322C.0902, whether by judgment, compromise, or settlement, belong to the limited liability company and not to the plaintiff,” and that “if the plaintiff receives any proceeds, the plaintiff shall remit them immediately to the company.”
I tell any client thinking about a derivative claim the same thing: a winning judgment gets paid to the entity, and in a closely held company the entity is often still run by the people you sued. Your economic benefit is indirect.
The one direct recovery is fees. Under § 322C.0906, subd. 2, if the action “is successful in whole or in part, the court may award the plaintiff reasonable expenses, including reasonable attorney fees and costs, from the recovery of the limited liability company.” Two limits: it’s discretionary, and it comes out of the company’s recovery, not out of the defendants’ pockets.
That’s why the derivative action and the buyout are different strategies, not two names for the same thing. The derivative case puts value back into a company the plaintiff may want no part of. Compare shareholder oppression under § 302A.751 on the corporate side, and note that the clawback remedy for improper distributions in § 322C.0406 likewise runs to the company.
The sequence I follow
- Characterize the injury first. If it’s not “solely the result of an injury suffered or threatened to be suffered by the limited liability company,” it may be direct — and a direct claim needs no demand, no futility pleading, and no special litigation committee.
- Confirm membership status and how fragile it is. Are you a member under § 322C.0102, subd. 15 today, and what in the operating agreement or § 322C.0602 could end that tomorrow?
- Confirm the management form before you address a demand; § 322C.0902, clause (1) routes it differently for member-, manager-, and board-managed companies.
- Plead the ownership allegations required by both § 322C.0903 and Rule 23.09. They’re different allegations.
- Expect the committee, and set the client’s expectations about the § 322C.0906 recovery before the complaint is filed, not after judgment.
Where the underlying claim is a breach of duty by a manager or controlling member, the operating agreement may already have settled whether the duty exists at all. Read fiduciary duty versus the operating agreement before you assume § 322C.0409 applies unmodified.
At Madgett Law, LLC I represent members and managers of closely held Minnesota LLCs in internal disputes — sorting out whether a claim is direct or derivative before it’s filed, drafting and answering demands under § 322C.0902, and litigating proper-plaintiff and special-litigation-committee motions on both sides. In my experience the way the first complaint is framed decides what’s left to recover. Send us a message or call 612-470-6529.
Sources: Minn. Stat. § 322C.0902 (clause (1), the demand requirement, the body on which demand must be made in member-managed, manager-managed, and board-managed companies, and the failure to bring the action within a reasonable time; clause (2), the futility exception); Minn. Stat. § 322C.0903 (subd. 1, membership required at commencement and continuously while the action continues; subd. 2, substitution on the death of the sole plaintiff); Minn. Stat. § 322C.0901 (subd. 1, the scope of a member’s direct action, including interests arising independently of the membership relationship; subd. 2, the requirement to plead and prove an injury not solely the result of injury to the company); Minn. Stat. § 322C.0904 (clause (1), particularity as to the date and content of the demand and the response; clause (2), particularity as to the reasons a demand would be futile); Minn. Stat. § 322C.0905 (subd. 1, appointment of a special litigation committee, the stay of discovery except for good cause, and the preservation of § 322C.0410 information rights and extraordinary relief; subd. 2, composition; subd. 3, who may appoint, including where all members, managers, or governors are named; subd. 4, the four available determinations; subd. 5, the committee’s filing and report, the court’s review of disinterest, independence, good faith, and reasonable care, the committee’s burden of proof, and the consequences of each finding); Minn. Stat. § 322C.0906 (subd. 1, proceeds belong to the company and must be remitted; subd. 2, discretionary award of reasonable expenses including attorney fees and costs from the company’s recovery); Minn. Stat. § 322C.0102 (subd. 15, “member”; subd. 18(a)(2)(ii), the employee capacity in a company with 35 or fewer members; subd. 29, “transferee”); Minn. Stat. § 322C.0602 (events causing dissociation); Minn. Stat. § 322C.0410 (information rights preserved during a discovery stay) (Minnesota Office of the Revisor of Statutes, 2025 Minnesota Statutes). Minn. R. Civ. P. 23.09, “Derivative Actions by Shareholders or Members” (allegation that the plaintiff was a shareholder or member at the time of the transaction complained of or that the share or membership thereafter devolved by operation of law; fair and adequate representation; court approval of and notice of any dismissal or compromise) (Minnesota Office of the Revisor of Statutes, Minnesota Rules of Civil Procedure). Chapter 322C prescribes no fixed waiting period after a demand; § 322C.0902, clause (1) states only that the action may be brought if the recipients do not bring it “within a reasonable time,” and the chapter does not define “futile.” Minn. R. Civ. P. 23.09 is written in terms of a corporation or an unincorporated association and does not by its terms name limited liability companies; its application to a chapter 322C company is not resolved here. This article is general legal information about Minnesota law, not legal advice, and reading it does not create an attorney–client relationship. Whether a particular claim is direct or derivative, and whether a demand is required or futile, depends on the specific facts, the operating agreement, and the governing law. No outcome is promised or implied.