The Court of Chancery just decided a case that elucidates the rights of members and managers of an LLC to books and records of the LLC. A few bullet points will extract the nuggets of this decision. You should read the whole thing if you need to know the latest Delaware law on this topic. RED Capital Investment LP v. RED Parent LLC, C.A. No. 11575- VCN (Del. Ch. Feb. 11, 2016).
- First, this ruling should be compared to the recent ruling in the Yahoo opinion highlighted on these pages. Although this decision did not address electronically stored information (ESI), readers are likely aware that decisions regarding demands for the books and records of an LLC often apply the rationales in rulings interpreting the analogous DGCL provisions (however different they may be)–therefore, you read it here first that the reasoning in the Yahoo decision that ESI must be produced in a Section 220 demand under the DGCL, will also be applied in the future to demands for books and records under Section 18-305 of the Delaware LLC Act, to require ESI to be produced when there otherwise is an entitlement to books and records under the LLC Act.
- The money quote, which underscores the additional rights of managers of LLCs (and directors of corporations) to books and records:
Managers are entitled to all information falling within Section 18-305(a)(1)-(6) that is “reasonably related to the position of manager.”40 This language is tantamount to that used in 8 Del. C. § 220 with respect to director requests for corporate information.41 As such, LLC managers should be afforded similar “unfettered”42 access to company books and records, absent restrictions in an applicable LLC agreement. With this context, the Court is unwilling to deprive an LLC holding company’s manager of books and records of the company’s wholly-owned operating entities…. (footnotes omitted)
- One big difference between DGCL Section 220 and Section 18-305 of the LLC Act, is that LLC operating agreements can limit the rights that a member or manager may otherwise have to demand books and records. The LLC Act expressly says so. Section 220 does not expressly say so, but in a teleconference for a relatively recent Section 220 case, one member of the Court of Chancery informed the parties that a contract that purported to limit rights under Section 220 was not likely to be enforced. The name of the case was Brazil Mining. That case comes to mind readily, but I expect that there are similar cases, some of which have been featured on these pages over the last 10 years.
- This opinion is also helpful in how it addresses issues involving the interface between the rights of members or stockholders in affiliated entities relating to access to records of subsidiaries and parent entities in the corporate context and LLC context.
UPDATE: In a Law 360 article, Jeff Montgomery reports that subsequent to this decision, the company indicated in a letter that it would not produce the documents until the appeal period ended, which apparently was on or about March 15, as it had not yet decided whether to appeal. Vice Chancellor Noble, who previously set the end of February for his retirement from the bench, responded to that position, described by the opposing side as a self-granted unilateral stay, by ordering that the data be produced by March 3.