Does California Law Apply To A Derivative Action Brought By Members Of A Foreign LLC?

In a ruling handed down this week, U.S. District Judge Lawrence J. O'Neill addressed whether California law applied to derivative claims apparently brought on behalf of an Oregon entity. I found Judge O'Neill's ruling confusing at best. First, he states:

"The California statute put forth in Plaintiffs' eighth claim allows a member of a limited liability corporation to bring an action on behalf of all or a class of members while exempting the action from the ordinary requirement that a class be so numerous that joinder of all members of the class is impracticable. Cal. Corp. Code § 17709.1."

However, the California Corporations Code does not refer to "limited liability corporations". Second, there is no Section 17709.1 in the Corporations Code. Elsewhere, the ruling refers to Section 17709.01, but that statute concerns class, not derivative, actions.

Judge O'Neill then states:

"The Ninth Circuit has held that "the rights of shareholders in a foreign company, including the right to sue derivatively, are determined by the law of the place where the company is incorporated." Batchelder v. Kawamoto, 147 F.3d 915, 920 (9th Cir. 1998). This "internal affairs" doctrine has been codified by California. Cal. Corp. Code. § 2116 . . . ."

Section 2116, however, is part of the General Corporation Law and governs directors. Thus, it does not apply to limited liability companies. Finally, the provision of California's Revised Uniform Limited Liability Company Act, Section 17709.02, concerning derivative actions expressly applies to domestic or foreign limited liability companies.