Court of Chancery Compels Production of Some, but not all, Books and Records for Plaintiff’s Permitted Purposes
By Scott Waxman and Ernest Simons
In Aloha Power Company, LLC v. Regenesis Power, LLC, the Court of Chancery granted in part and denied in part plaintiff’s action to compel inspection and production of certain books and records pursuant to provisions in the defendant’s operating agreement and the Delaware Limited Liability Company Act. The Court held that the operating agreement expressly required production of certain books and records without demand for inspection and determined whether there existed a proper purpose for inspection for the remaining demanded books and records.
In September and December of 2015, Aloha Power Company, LLC (“Plaintiff”), a member of Regenesis Power, LLC (the “Company” or “Defendant”), sent letters to the Company demanding inspection of the Company’s books and records. The operating agreement of the Company (the “Operating Agreement”) requires the Company to produce and send certain books and records to members without the need for any demand, while other documents require members to show a proper purpose for inspection.[1]
The Court determined that the following documents sought by Plaintiff required no demand under the Operating Agreement and granted Plaintiff’s motion accordingly: (i) the Company’s balance sheet, income statement, and changes in financial position from 2011; (ii) information that is necessary for Plaintiff to complete its federal and state income tax or information returns; (iii) minutes from all meeting of the members; and (iv) copies of any powers of attorney pursuant to which the Operating Agreement or any amendments thereto have been executed.
However, the Court found that Section 8.2 of the Operating Agreement, similar to 6 Del. C. § 18-305(a) permits Plaintiff to access certain books and records only “for purposes reasonably related to the interest” of Plaintiff as a member of the Company. Any number of purposes may be proper, but the proffered purpose to access books and record must not be adverse to the Company, unrelated to a legitimate interest of the member, or intended to harass the entity. Further, the access is restricted to inspection of the books and records needed to perform the task. The Court divided Plaintiff’s proffered purposes into three categories: (i) to value its membership interests; (ii) to understand the dilution of its membership interests; and (iii) to investigate mismanagement.
Stating that the burden of proof is always on the party seeking inspection to establish each category of books and records requested is essential to the stated purpose, the Court only granted Plaintiff access to books and records related to the dilution of its membership interests. The Court found that a list of the names, address, capital contributions, number of units, and percentage of interest of each member was essential to Plaintiff’s purpose of understanding the dilution of its membership interest. However, the Court found that Plaintiff made no attempt to explain why certain books and records requested regarding the Company’s financial statements were insufficient to satisfy the stated purpose of valuing its membership interest. As such, the Court denied access to other requested documents.
[1] For instance, Section 8.3.1 of the Operating Agreement provides, “[t]he Governing Members shall cause the Company to cause the financial statements prepared in accordance with generally accepted accounting principles to be sent to each of the Members not later than ninety (90) days (or such other period as the Governing Members shall select) after the close of the Fiscal Year.”
Aloha Power Company v. Regenesis Power, LLC, letter opinion 171222