A pair of recent decisions by New York and Delaware courts adds to the small but growing body of case law surrounding efforts by non-controlling members of limited liability companies (LLCs) to enforce the right to inspect company books and records. (Read here and here my prior posts on the subject.)
In both cases, the courts grant the complaining members the requested access. The New York case affirms that a member may obtain access to records for the proper purpose of ascertaining the LLC's financial condition. The Delaware case clarifies the circumstances under which a member may inspect the books and records of the LLC's wholly owned subsidiaries.
With facilities located in Manhattan's Soho district, Citibabes bills itself as a private family membership club offering best-in-class education amenities and fun for young children. According to a complaint filed by Tara Lipton in March 2010, she and Tracy Rensky co-founded Citibabes in 2003 and served as the LLC's co-managers until 2008 when Lipton resigned her managerial role for personal reasons and due to "increased conflict with Rensky." Lipton alleges that in 2009 Rensky blocked Lipton's attempted sale of her membership interest to Lipton's father.
Lipton's complaint alleges that since 2008 Rensky has refused to provide her with financial reports despite repeated requests, using as a pretextual excuse Lipton's refusal to sign a confidentiality agreement when she left Citibabe's employment. Lipton alleges that she is prepared to enter into a confidentiality agreement and that Rensky's personal animus toward her is the real reason for her refusal to provide access to company records.
Last month's decision by Manhattan Supreme Court Justice Eileen A. Rakower grants without opposition Lipton's motion for summary judgment filed in May 2010, and orders the LLC to make available for Lipton's inspection and copying at Lipton's expense "all records maintained by the LLC pursuant to LLC Law §1102(a), and all financial statements maintained by the LLC for the three most recent fiscal years."
The cited statute, §1102(a), specifies five categories of records required to be maintained by the LLC, including member and manager names and addresses, articles of organization and operating agreements, and tax returns for the last three years. Section 1102(b) gives any member the right to inspect and copy at his or her own expense, "for any purpose reasonably related to the member's interest as a member," the records specified in §1102(a) plus "any financial statements maintained by the [LLC] for the three most recent fiscal years and other information regarding the affairs of the [LLC] as is just and reasonable."
The scope of inspection granted by the court tracks the minimum statutory entitlement, which also appears to be all that the complaint requested even though the LLC's operating agreement, quoted in the decision, grants a member the right to inspect and copy "all accounts, books and other relevant Company documents" not limited to any time period, "for any purpose reasonably related to the requesting Member's Membership Interest." Neither the complaint nor the decision sheds any light on Lipton's apparent omission of any request for the LLC's detailed financial and accounting records, bank statements, etc.
Section 1102(b)'s proper-purpose requirement, which is mirrored in the LLC's operating agreement, does not set a particularly high hurdle. Justice Rakower's decision holds that Lipton "is entitled to inspect the LLC's records for the legitimate purpose of ascertaining the financial condition of the LLC." She also rules that Lipton is not required to enter into a confidentiality agreement as a condition for the right of inspection since, under another provision of the LLC's operating agreement, she is bound not to disclose company confidential information to any third party.
It's unclear from the public record what caused the lengthy delay between the filing of the complaint in March 2010 and its disposition in September 2011, although the substitution of plaintiff's counsel in April 2011 may be a clue. My own preference when bringing a books and records proceeding is to utilize the far more expeditious form of a summary proceeding commenced by order to show cause, as opposed to filing an ordinary summons and complaint as was done in this case.
This 31-page letter opinion by Vice Chancellor John W. Noble of the Delaware Court of Chancery (read here) was featured in a detailed post by Francis Pileggi, so I'll merely highlight the central issue concerning the right of an LLC member to inspect records not of the LLC, but of the LLC's wholly owned subsidiary.
The plaintiff in the case is a non-manager member of a Delaware company called Eight Estates Wine Holdings, LLC whose sole asset is a wholly owned subsidiary known as Ascentia Wine Estates, LLC. Ascentia, based in California, owns and operates eight wine brands and the assets associated with the brands. In late 2010, plaintiff sent Eight Estates an extensive demand for access to records of Eight Estates and Ascentia for the stated purposes of determining the value of its investment in Eight Estates and to determine whether it should appoint a representative to sit on Eight Estates' board of managers. Eight Estates responded that it was not required under its LLC agreement -- whose document inspection provision makes no mention of books and records of a subsidiary -- or under the Delaware statute, 6 Del. C. §18-305, to provide Ascentia's records.
VC Noble finds that the language of the LLC agreement does not support the plaintiff's demand for access to the subsidiary's books and records. He goes on to find, however, that plaintiff is entitled to the records under §18-305 based on Delaware case precedent recognizing that "the statute provides a right to inspect the records of such subsidiaries where the 'facts at least suggested the absence, in reality, of separate entities'" (quoting Arbor Place, LP v. Encore Opportunity Fund, LLC, 2002 WL 205681, at *6 [Del Ch Jan. 29, 2002]). The factors cited by VC Noble, showing that Eight Estates and Ascentia are the same entity for purposes of §18-305, are:
- Ascentia is Eight Estates' sole asset.
- Ascentia is wholly owned by Eight Estates.
- Eight Estates has no value apart from Ascentia's.
- Ascentia has no board of managers, but is instead managed by its sole member, Eight Estates.
- Eight Estates and Ascentia have the same address.
- Eight Estates has no budget, business plan, or projections apart from Ascentia's.
Under these circumstances, VC Noble adds, "[i]t would be unfair . . . to require, for example, a member of Eight Estates to attempt to value its holdings without providing access to the records of [Eight Estates'] only asset, records that would allow the member to value that asset."
Would a New York court applying New York's LLC Law §1102(b) reach the same result? I can't say for sure, but a 2005 decision by the Appellate Division, First Department, in Sachs v. Adeli, 26 AD3d 52, points in the same direction.