C.A. No. 4295-VCL (Del. Ch. May 6, 2009) (Lamb, V.C.)
In this case, one member of a Delaware limited liability company sought books and records of the LLC pursuant to section 18-305 of the Delaware Limited Liability Company Act. The plaintiff, JAKKS Pacific, Inc. (“JAKKS”), was one of two members of the LLC which was formed for the purpose of obtaining and exploiting a video game license from a sports-entertainment franchise. Pursuant to the LLC agreement, JAKKS contributed the license in return for a “royalty-like” payment of a percentage of the LLC’s future revenue stream, referred to in the agreement as the “Preferred Return.” The other member, THQ, Inc. (“THQ”), operated the LLC in return for the right to the profits remaining (if any) after the payment of the Preferred Return to JAKKS. Pursuant to the LLC agreement, the Preferred Return was to be reset periodically. As of the date of the lawsuit, the initial Preferred Return distribution period had expired and the two members had, as required by the LLC agreement, submitted a dispute over the Preferred Return rate for the second period to arbitration.
Prior to the lawsuit, JAKKS demanded a broad range of documents pertaining to the operation and performance of the LLC. THQ responded by providing a substantial amount of documents. Thereafter, JAKKS made a second inspection demand. THQ rejected the new demand as overbroad and lacking a proper purpose. JAKKS responded by filing the lawsuit, in which JAKKS asserted the following purposes supporting its books and records demand: (i) to aid it in negotiating the Preferred Return for the next (not the current) distribution period; (ii) to value its interest in the LLC; and (iii) to investigate potential mismanagement and wrongdoing by THQ in the operation of the LLC.
After trial, the Court denied JAKKS’s books and records demand in its entirety. With respect to the purpose of aiding JAKKS in its negotiation of the Preferred Return for the next distribution period, the Court found that the license held by the LLC was set to expire at the same time as the current distribution period and, because of issues between JAKKS and the licensor, was unlikely to be renewed. Accordingly, the Court held that there was no need, unless the license was renewed, for books and records to negotiate a Preferred Return rate for a further distribution period. With respect to the purpose of valuing JAKKS’s interest in the LLC, the Court held that while this is typically a valid purpose for a books and records demand, here it was “meaningless” because JAKKS’s only interest in the LLC was the right to the Preferred Return. The Preferred Return for the initial distribution period had already been paid and the Preferred Return for the current period was the subject of an arbitration. Thus, the Court held, because the value of JAKKS’s interest in the LLC was merely the present value of the Preferred Rate for the current distribution period, once the rate was determined by the arbitrator, the value of JAKKS’s interest could be determined by simple arithmetic and the “production of further books and records cannot reasonably serve the purpose of valuing JAKKS’s interest in the LLC.” Finally, with respect to JAKKS’s claim that it needed the documents to investigate mismanagement, the Court found that JAKKS had failed to offer any credible basis to suspect mismanagement by THQ.
The full opinion is available here.