Rutledge: Derivative Actions in Nonprofit Corporations

Thomas E. Rutledge, Member of Stoll Keenon Ogden, PLLC, has authored an article entitled “Who Will Watch the Watchers?: Derivative Actions in Nonprofit Corporations” on SSRN.  Rutledge argues that derivative actions may be available within organizations such as LLCs and nonprofit corporations through the judiciary’s equitable powers. Here is the abstract:

Unlike the Kentucky statutes governing business corporations, limited partnerships and statutory trusts, both the Kentucky Limited Liability Company Act and the Kentucky Nonprofit Corporation Acts are silent as to the requirements for “derivative actions” brought on behalf of the LLC or corporation by a member or other constituent thereof. Some have suggested that this absence indicates that derivative actions do not exist in those organizational forms, positing, it would seem, that it is the statute governing derivative actions that gives rise to the actions. This assessment is incorrect, and, presumably, arises out of a misunderstanding of the basis for derivative actions. In fact, the derivative action is a question of equitable standing that was later, in certain contexts, reduced to statute. It does not follow, therefore, that there are not derivative actions in LLCs and nonprofit corporations consequent to the failure of the statute to provide for them. Rather, equity will provide the rules applicable when the organizational statute does not specify the rules governing derivative actions.

DAB