This post was prepared by Brian E. O’Neill, Esq. of Eckert Seamans.
The Court of Chancery recently granted, in part, a request for books and records–largely based on the LLC’s operating agreement with respect to items subject to mandatory production, but denied the request for most of the items subject to discretionary production. In Aloha Power Company, LLC v. Regenesis Power, LLC, C.A. No. 12697-VCMR (Del. Ch. Dec. 22, 2017), Vice Chancellor Montgomery-Reeves addressed a limited liability company member’s books and records request pursuant to a provision in the governing operating agreement.
Background: Aloha Power Company (“Aloha”), a member of Regenesis Power, LLC (“Regenesis”), sought records in connection with an ongoing dispute between the parties. Aloha requested from Regenesis various financial statements, ranging from income and balance sheets to general ledgers and operating statements, as well as records related to each member of the company and records related to the internal affairs of the company for the previous four years.
Regenesis’s operating agreement contained a “books and records” provision that closely tracked the language contained in 6 Del. C. § 18-305 of the Delaware Limited liability Company Act. The books and records provision contained a mandatory provision for inspection and production of certain records, including financial statements and records necessary for the members to prepare their tax returns. The Court granted plaintiff’s requests with respect to these records.
The books and records provision also contained a discretionary category of documents “for purposes reasonably related to the interest” of Aloha as a member of the company. Similar to 6 Del. C. § 18-305(a), the discretionary provision required the demanding party to demonstrate a proper purpose for the request.
Aloha argued that its purpose for the operating statements and general ledgers related to its need to: (1) value its membership interest in Regenesis; (2) understand the dilution of its membership interest; and (3) investigate mismanagement. Regensis countered that the request was made solely to harass Regenesis.
Analysis: The Court noted that the burden to demonstrate a proper purpose rests with the plaintiff. The Court found Aloha’s arguments for inspection of operating statements and general ledgers unpersuasive, and concluded that the production of income statements and balance sheets satisfied Aloha’s stated purposes. Accordingly, the Court denied Aloha’s request for the operating statements and general ledgers.
The Court granted Aloha’s request to inspect records related to each member’s ownership interest, including capital contribution accounts, finding that such records relate to the valuation of Aloha’s membership interest.
The Court denied Aloha’s request for documents related to the internal affairs of the company. The Court found that such documents, though plausibly related to the investigation of mismanagement, do not overcome the familiar standard that “ a mere statement of a purpose to investigate possible general mismanagement, without more, will not entitle a shareholder to broad books and records inspection relief.”
Lastly, the Court awarded Aloha its request for attorneys’ fees based on a contractual fee-shifting provision. The operating agreement stated that a prevailing party shall be entitled to “reasonable actual attorneys’ fees and expenses” with respect to disputes between the company and members. The Court held that Aloha was the prevailing party because it was granted some of its requested relief.
Takeaway: The Delaware Court of Chancery continues to require more than a generalized and vague allegation of mismanagement when considering a broad books and records request to investigate corporate wrongdoing. Notably, in the LLC context, the Court of Chancery also continues to defer to the contractual terms of an operating agreement in assessing such a books and records request, as well as whether to award attorneys’ fees.