The Delaware Chancery Court has made an important ruling regarding the right to inspect the books and records of a Delaware limited liability company. Plaintiff Max Sanders loaned $2 million to a member of Ohmite Holding, LLC, and received a security interest in the member's units as collateral. The member later transferred the units to Sanders and Sanders became a member of Ohmite. During the period from when the loan was made until Sanders became a member, Ohmite issued additional units causing Sanders' units to become significantly diluted. After becoming a member, Sanders made a formal demand for the books and records, to determine why the units were diluted, the value of his interest and the performance of Ohmite's management. Ohmite denied the request, claiming that Sanders did not offer a "proper purpose" and did not have the power to make a demand for the books and records that related to events that pre-dated his membership.
Section 18-305(a) of the Delaware Limited Liability Company Act provides a member of an LLC with the right, upon reasonable demand for any purpose reasonably related to the member's interest as a member of the LLC, to inspect its books and records. The court found that Sanders' rights were coextensive with Section 18-305 of the LLC Act because Ohmite's LLC Agreement did not limit those rights. The court observed that the extensive case law surrounding the rights of a shareholder to books and records of a corporation under Delaware General Corporation Law Section 220 are often considered by analogy in the LLC context. Likewise, the following basic rules apply: (1) there must be a "proper purpose" for the inspection; (2) that proper purpose must be reasonably related to such person's interest as a member; and (3) the requested books and records must be reasonably required to fulfill the stated purpose.
Delaware cases have established several proper purposes in this context, including valuation of one's ownership interest and investigation of potential wrongdoing and mismanagement. Note that to satisfy this proper purpose, one need not prove wrongdoing. Rather, it suffices in this context to merely present a "credible basis" to suspect wrongdoing and from which the court may "infer" wrongdoing that would warrant further investigation.
Since Sanders was seeking to value his interest, and the documents he requested were necessary for him to fulfill that purpose, the court granted summary judgment to Sanders and determined that Sanders had a proper purpose for inspecting the books and records regardless of whether such books and records pre-dated when Sanders formally acquired member status. Although, a member seeking such access must show a proper purpose and the burden is on the member to show that the proper purpose is reasonably related to that person's interest as a member, this case is significant since a Delaware LLC may not be able to deny access to books and records solely based on when a person became a member, absent specific restrictions in the company's LLC Agreement. Delaware LLCs that are concerned about members seeking access to books and records for periods that pre-date their membership status may want to address those rights and provide for limitations of that right in their LLC Agreements.
Sanders v. Ohmite Holding, LLC, C.A. No. 5145-VCL (Del. Ch. Feb. 21, 2011)