Chancery Court Approves Books and Records Request of Person Wearing Both Member and Manager Hats and Confirms That Only One Proper Purpose Is Necessary
By Scott E. Waxman and Annamarie C. Larson
Plaintiff George Polk served dual roles in relation to RED Parent LLC (the “Company”). Polk was both a manager of the Company and an indirect owner of the Company through his interest in one of the Company’s members. In RED Capital Investment L.P. v. RED Parent LLC, the court held that “[b]ecause Polk made a proper request in his capacity as Manager and stated a proper purpose, and because the requested information is within RED Parent’s control, he is entitled, pursuant to Section 18-305(b), to inspect the requested books and records.”
Polk requested to see more detailed financial information than what was provided in the periodic reports provided by the Company. Polk specifically requested monthly financial reports and bank statements of each entity in the “RED family” and intercompany financial payments for four months prior. One of the Company’s subsidiaries, RED Investment LLC, compartmentalized each of its assets – energy projects – into separate entities. In his request, Polk stated his purpose was to “understand the current cash financial position at RED, because by our calculations RED may be facing an imminent cash crisis, and as investors as well as a Manager we are bound by our fiduciary obligations to diligently reassure ourselves that all of the assets are solvent and stable.” The Company denied Polk’s request and he filed suit in the Court of Chancery.
Sections 18-305(a) and (b) of the Delaware Limited Liability Company Act contain default inspection rights for LLC members and managers, for example, the right to information regarding the financial condition of the company that is “reasonably related” to the member’s interest or the position of manager. Under the Company’s operating agreement, a member’s right to inspect Company records was limited to “books of account” of the Company, a less expansive term than “books and records”. On the other hand, the operating agreement did not limit the inspection rights of managers. In determining whether to use the member standard under the operating agreement or the manager standard under the statute, the court found the demand as a whole suggested Polk made the request in both capacities and therefore he was able to demand more detailed information as a manager.
The court emphasized facts that tied the Company to its subsidiaries: the Company had no business other than those of its subsidiaries, the Company had no employees or daily operations of its own, and each entity shared the same computer system, email domain, accounting software, and D&O insurance policy. Some of the information Polk requested was within the control of the subsidiaries, and because they were so closely related to the Company, the court found such information was reasonably related to discharging the manager’s fiduciary duties.
A footnote intimates that Polk was personally motivated to make the books and records request because he wanted to oust the Company’s management and obtain control. The court resolved this issue by pointing to Polk’s capacity as member and manager and finding his primary purpose was proper.
Red Capital Investment L.P. v. Red Parent LLC, C.A. No. 11575-VCN (Del. Ch. February 11, 2016) (Noble, V.C.)