A member of a Minnesota LLC discovers that the manager has been routing the company’s best work to a second entity he owns. The facts are clean. The damages are calculable. And there is a real chance the case is dismissed without a judge ever looking at them — because the complaint was filed in the wrong posture, by a person who is 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 they are independent. Clearing three does not help. Worse, two of them are partly controlled by the people you are suing: they decide whether to respond to your demand, and in a closely held company they often control whether you remain a member long enough to finish the case. If your real objective is to be bought out rather than to recover money for a company you are trying to leave, start with Minnesota LLC member disputes and buyouts instead — the derivative action is frequently the wrong tool for that goal.
Gate one: is the claim yours or the company’s?
This is the question that decides everything else, and Minnesota answers it with a pleading burden rather than 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.
Note the two verbs. Plead and prove. A member cannot survive a motion on the pleadings by promising to develop the distinction in discovery, and cannot get to judgment on an injury that turns out at trial to have been the company’s all along.
The affirmative 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. The practical sorting is usually about 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 hardest category is the one that looks like both. A controlling member who strips the company and simultaneously freezes out the minority has caused a company injury and a member injury. The answer is not to pick one, but to plead the direct claim with an injury description that satisfies § 322C.0901, subd. 2 on its own terms and to plead the derivative claim separately with the demand allegations § 322C.0904 requires. Merging them into a single count is how both get dismissed.
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. 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
Three things about that sentence matter in practice.
The recipient depends on the management structure. Member-managed: the other members. Manager-managed: the managers. Board-managed: the board of governors. Send a demand to the wrong body and you have not made a demand. This is a reason to confirm the company’s actual management form from the operating agreement and the articles before drafting, not from how people describe themselves on business cards.
“A reasonable time” is not defined. Chapter 322C fixes no number of days and prescribes no waiting period. That cuts both ways: a plaintiff cannot point to an expired statutory clock, and a defendant cannot say the plaintiff filed too early merely because some familiar period had not run. What “reasonable” means will be argued from the nature of the claim, the urgency, and what the recipients actually did.
The demand is a document you will litigate. 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 will be quoted back — identify 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 is the entire statutory treatment. The chapter does not define futility, does not supply factors, and does not say who bears what burden.
What it does say is how futility must be pleaded. 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 operative word: the reasons, not the conclusion.
The structural argument writes itself in a small company. In a member-managed LLC, § 322C.0902, clause (1) directs the demand to “the other members” — which, in a two-member company, means the demand goes to the person you intend to sue. Pleaded properly, that is not an assertion of futility; it is a set of facts from which futility follows. Name who would receive the demand, state their interest in the challenged transactions, and let the court draw the conclusion.
Two cautions. The futility route forgoes 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 with it, while the limitations period does not pause during the motion. Where futility is arguable rather than obvious, making the demand and pleading the response under § 322C.0904, clause (1) is the safer sequence.
Gate four: are you a proper plaintiff, and will you still be one at judgment?
This is the gate that gets missed, and in a closely held LLC it is 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.
Two separate requirements, and the second 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.” A person holding only the economics of a former member’s interest is a transferee (§ 322C.0102, subd. 29), not a member, and cannot maintain the action — which 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 to look for it. At least three of the events causing dissociation can be operated 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 filing, map every route by which the plaintiff could cease to be a member, and decide whether to seek an order preserving the status quo at the outset. What a departing member keeps and loses is set out in Minnesota LLC dissociation.
The statute supplies 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 do not overlap cleanly.
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 states requirements the statute does not contain. 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.”
Read the ownership requirements together. 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 bracket the entire period 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.
One honest limitation. Rule 23.09 is written in terms of “a corporation or of an unincorporated association” and does not name limited liability companies. Whether and how it applies to a chapter 322C company is a question this article does not resolve. The prudent course is to plead so that both the statute and the rule are satisfied — the allegations cost nothing and their absence can cost the case. Note also that the rule’s court-approval and notice requirements survive the filing: a derivative action cannot be quietly settled 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.” That subdivision preserves two things through the stay: enforcement of information rights under § 322C.0410, and, for good cause, a temporary restraining order or preliminary injunction.
Who appoints the committee is the interesting part. 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 does not eliminate the committee; it hands the appointment to the defendants.
The committee’s determination under subd. 4 can be 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 does not have 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 burden allocation is the point worth remembering: it is 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.”
Say that plainly to any client considering a derivative claim: a successful judgment is paid to the entity, which in a closely held company is often still controlled by the people who were sued. The plaintiff’s 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 is discretionary, and it is paid out of the company’s recovery, not by the defendants personally.
This is why the derivative action and the buyout are different strategies rather than alternative labels. The derivative case restores value to 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 that avoids the traps
- Characterize the injury first. If it is 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 its fragility. 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 addressing 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 are different allegations.
- Expect the committee, and set the client’s expectation about the § 322C.0906 recovery before the complaint is filed rather than after judgment.
Where the underlying claim is a breach of duty by a manager or controlling member, whether the duty exists at all may already have been settled by the operating agreement — see fiduciary duty versus the operating agreement before assuming § 322C.0409 applies unmodified.
Madgett Law, LLC represents members and managers of closely held Minnesota LLCs in internal disputes — evaluating whether a claim is direct or derivative before it is filed, drafting and answering demands under § 322C.0902, and litigating proper-plaintiff and special-litigation-committee motions on both sides. The posture of the first complaint usually determines what is 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.