OKC Attorney Tami Hines Gavel to Gavel: LLCs in Oklahoma
June 2, 2022
Journal Record Gavel to Gavel
An LLC – a hybrid of partnerships and corporations – is a newer business structure now widely used throughout the U.S. In Oklahoma, LLCs are governed by the Oklahoma Limited Liability Act (the “Act”), which provides the default and, sometimes, mandatory, rules for Oklahoma LLCs. While most other states have adopted either the Uniform Limited Liability Company Act (“ULLCA”) or the Revised ULLCA, Oklahoma did not. This decision – to adopt an Act so markedly different from all other states including Delaware – was in stark contrast to Oklahoma’s approach to governing corporations, which has historically mirrored Delaware. This approach has made sense, because Oklahoma’s General Corporation Act is almost identical to Delaware’s. The Act, however, is very different from Delaware’s LLC Act, including one critical way: the rules governing derivative actions. Specifically, Oklahoma’s Act does not provide for the futility rule.
Generally, when an entity is wronged, the entity – a legally distinct person from its owners – must seek redress. The entity, being a legal fiction, must seek such redress through its authorized agents: In corporations, those are the board members or officers (or both), and in LLCs, those are either the members or the managers. Oklahoma, unlike virtually every other state (including Delaware), defaults to a manager-managed format for LLCs and, therefore, generally only managers will have authority (and therefore standing) to file derivative suits.
While the derivative process is fundamental to proper corporate governance, a serious issue arises when a non-managing member (“NMM”) believes the manager is the one causing harm to the LLC. Generally, under such circumstances, an NMM of a Delaware LLC would have the following options: (1) make demand on the LLC (the manager); if rejected, the NMM is out of options unless the NMM can show that the decision was wrongful as judged by the deferential business judgment rule; or (2) make no demand and instead file the derivative suit utilizing the futility doctrine by pleading with particularity why such demand would have been futile.
For Oklahoma LLC NMMs, however, the Act does not provide for the futility doctrine, and both the wording and enactment of 12 O.S. § 2023.1 paired with Delaware’s comparable rule indicate § 2023.1 applies only to unincorporated entities (e.g., trusts) and corporations. Omission of futility in the Act leaves NMMs with few reasonable options: Absent demand, an NMM has no standing to file a derivative action, and, even after demand, the manager’s decision is final (absent a showing of wrongfulness per the business judgment rule), and thus still leaves the NMM without standing to file a derivative action.