Colorado § 7-80-716 - Dismissal of derivative proceeding.

§ 7-80-716. Dismissal of derivative proceeding.

(1) A derivative proceeding commenced pursuant to this part 7 shall be dismissed by the court on motion by the limited liability company if any one of the groups specified in subsection (2) of this section has determined in good faith, after conducting an inquiry upon which the determination is based, that the maintenance of the derivative action is not in the best interests of the limited liability company.

(2) (a) Subject to the requirements of paragraph (b) of this subsection (2), the determination whether the maintenance of the derivative proceeding is in the best interests of the limited liability company shall be made by the independent manager of the limited liability company or, where there is more than one such manager, by a majority of said managers; except that, if there is no independent manager of the limited liability company or if the majority of such managers is unable to make the determination, the determination shall be made by a majority of the independent members of the limited liability company.

(b) If the determination is not made pursuant to paragraph (a) of this subsection (2), the determination shall be made by the person, or, in the case of more than one person, by a majority of such persons, sitting upon a panel of one or more persons appointed by a court upon motion filed with the court by the limited liability company for such purposes.

(3) The court shall appoint only independent persons to the panel described in paragraph (b) of subsection (2) of this section.

(4) None of the following shall by itself cause a person not to be considered independent for purposes of subsection (2) of this section:

(a) The naming of the person as a defendant in the derivative proceeding or as a person against whom action is demanded;

(b) The approval by such person of the act being challenged in the derivative proceeding or demand where the act did not result in personal benefit to such person;

(c) The making of the demand pursuant to section 7-80-714 or the commencement of the derivative proceeding pursuant to this section.

(5) Subject to section 7-80-717, a panel appointed by the court pursuant to paragraph (b) of subsection (2) of this section shall have such authority to continue, settle, or discontinue the derivative proceeding as the court may confer upon such panel.

(6) The plaintiff in the derivative proceeding shall have the burden of proving that any of the requirements of subsections (1) and (2) of this section have not been met.

Source: L. 2002: Entire section added, p. 1725, § 160, effective October 1.

ANNOTATION

A decision-maker is "independent" within the meaning of this section if he or she has neither a stake in the litigation nor a relationship with a defendant that would preclude making an unbiased judgment as to whether dismissal of a derivative action is in the limited liability company's (LLC's) best interests. Business, personal, or familial relationships with a defendant raise a question about whether the decision-maker is independent, but they are not dispositive. A court may find, under the facts before it in a given case, that the specific relationship at issue would not interfere with the decision-maker's independence. Young v. Bush, 2012 COA 47, 277 P.3d 916.

Trial court should have allowed the plaintiff discovery to establish whether business and family relationships interfered with the LLC members' ability to exercise independent, unbiased judgment regarding maintenance of a derivative action when the facts set forth in plaintiff's affidavit showed relationships sufficient to create a material question of fact as to the independence of the LLC members who made the best interests determination. Young v. Bush, 2012 COA 47, 277 P.3d 916.

An inquiry in a derivative proceeding under this section may be less searching and detailed than the investigations in corporate or limited partnership derivative action cases. The independence of the person making the determination regarding whether the derivative proceeding is in the best interests of the LLC is a matter of degree rather than an absolute. Young v. Bush, 2012 COA 47, 277 P.3d 916.

While subsection (1) does not appear to contemplate production of a written report or an investigation as wide-ranging as those required in corporate derivative actions, it nevertheless requires that there be an inquiry producing facts sufficient to enable LLC members to make an informed and good-faith decision on whether maintenance of a derivative action is in the LLC's best interests. Young v. Bush, 2012 COA 47, 277 P.3d 916.