University of Pennsylvania Journal of Business Law
Every state authorizes shareholder derivative litigation, and the vast majority extend this remedy to LLCs and limited partnerships. As the availability and incidence of derivative litigation has expanded over time, a number of procedural hurdles have evolved in an effort to limit nuisance or strike suits. The theory is that these strike suits are brought by small shareholders, and the need to post a bond may deter these shareholders from bringing these suits. As part of this effort, some states have enacted “security for expense” provisions, requiring owners to post a bond to cover the defendants’ expenses before they can proceed with their suit. A few state have also enacted such provisions for derivative suit by LLC members and/or limited partners.
In the context of whether and how to bring a derivative suit, the challenges facing shareholders, LLC members and limited partners can be quite similar, yet the states’ treatment of who and how to post a bond before filing a derivative suits is uneven and inconsistent. This Article focuses on security for expense provisions applicable to LLCs and limited partnerships, providing an analysis and evaluation of the rights of and requirements facing these owners who, like their shareholder brethren, seek to hold those who manage their entities accountable for managerial neglect or malfeasance through the mechanism of derivative litigation.
This Article identifies the inconsistencies in states’ approaches to the rights of LLC owners and limited partners seeking to sue derivatively, specifically exploring whether such owners are required to post a bond as security for the litigation expenses, what effect this might have on the utility of derivative litigation generally, and whether the mechanism of security for expense provisions is adding value to the process writ large. The Article examines the existing corporate security for expense statutes requiring bond posting by shareholders, and then compares this corporate statutory landscape with the security for expense statutes applicable to LLC members and to limited partners as part of a broader evaluation of the usefulness of the bond posting statute as an effective gatekeeper in derivative litigation across the three forms of business generally.
Miriam R. Albert,
Security for Expense Statutes for LLCs and Limited Partnerships: Adding Value or Simply Adding to the Owners’ Hopelessness?, 23 U Penn J Bus L 626
Available at: https://scholarlycommons.law.hofstra.edu/faculty_scholarship/1347