In Durham v. Grapetree, LLC, Civil Action No. 2018-0174-SG (Del. Ch. January 31, 2019), the Delaware Court of Chancery granted in part and denied in part a suit to compel books and records under Section 18-305 of the Delaware Limited Liability Company Act. Durham is illustrative of the rule that books and records requests are not a proper method to conduct plenary discovery into a business entity or its management, especially if driven by animus, but must be related to a proper purpose established by the requestor in his or her demand on the business.
Plaintiff Andrew Durham and his four siblings inherited Grapetree, LLC (the “Grapetree”), a family-owned manager-managed Delaware limited liability company with a single asset, a rental property known as Les Chaudieres (the “Property”). Andrew is the only sibling who is a member of Grapetree who is not also a manager. The Property is a long-time source of animosity between the siblings, and Andrew has previously served books and records inquiries on Grapetree, one of which was settled in 2011. Here, Andrew appeared pro se, and though the court wrote that Andrew appeared to misunderstand the limitations and purpose of a books and records action, it addressed and winnowed out which requests were proper under Section 18-305.
Section 18-305 entitles an LLC member to:
(1) True and full information regarding the status of the business and financial condition of the limited liability company; (2) Promptly after becoming available, a copy of the limited liability company’s federal, state and local income tax returns for each year; (3) A current list of the name and last known business, residence or mailing address of each member and manager; (4) A copy of any written limited liability company agreement and certificate of formation and all amendments thereto, together with executed copies of any written powers of attorney pursuant to which the limited liability company agreement and any certificate and all amendments thereto have been executed; (5) True and full information regarding the amount of cash and a description and statement of the agreed value of any other property or services contributed by each member and which each member has agreed to contribute in the future, and the date on which each became a member; and (6) Other information regarding the affairs of the limited liability company as is just and reasonable.6. Del. C. § 18-305.
As a threshold matter, a member seeking books and records of an LLC must state “a purpose reasonably related to the member’s interest as a member of the limited liability company.” Andrew articulated multiple purposes for his demands, including, “to better understand the reasons the business continues to be failing, whether there continues to be fraudulent bookkeeping, whether embezzlement and misappropriation continues by [other members], whether the assets of [Grapetree]… are being properly administered or abused, whether corporate documents that protect the owners are in order… and to obtain information and compliance previously agreed to in the [2011 settlement agreement] and other information available [for unstated reasons] under [Section 18-305].” From this list, the court teased out a proper purpose from Andrew’s request to “better understand the reasons the business continues to be failing.” The court equated this request to a demand for documents to establish the value of Andrew’s ownership stake in Grapetree; all of Andrew’s other stated purposes were invalid or based on allegations which were wholly conclusory.
A books and records request can be disruptive to the business affairs of a company, especially in instances concerning small single-asset companies such as Grapetree. The court’s task is to exercise its discretion so that “the interests of the [business] are balanced with those of the inspecting [member].” A demand for existing documentation which falls outside the scope of a proper purpose, or that new documents be created to help Andrew achieve his proper purpose, even when responsive to that purpose, were onerous and outside the scope of a books and records demand and must be denied.
In light of the court’s interpretation of Andrew’s stated purpose for the request, it ordered all record requests made by Andrew relating to determining the value of Grapetree be satisfied, to the extent the requested documents existed, but denied all other requests. At the crux of the court’s opinion is the rule that books and records requests are for seeking existing company records, and are improper when seeking new documents or narratives. Nearly all of Andrew’s demands failed because they were not related to a proper purpose, but even those that were related to a proper purpose asked for “explanations” or a “show of cause” for actions by Grapetree. Under Section 18-305, an LLC, like a corporation under Section 220, is not required to create new documents or records outside the normal course of business to answer demands for information made by a stakeholder, even when they are related to a proper purpose.