Knowledge is power, they say. In the context of a Delaware limited liability company (“LLC”), knowledge about the company’s finances, governance, operations, and affairs is found in the company’s books and records. But like any power, the power of a Delaware LLC’s members and managers to obtain information and knowledge about their LLC can be abused. A disgruntled, difficult, or disruptive member or manager can use their information rights as a cudgel against the LLC and its management, harassing them with burdensome or redundant requests for information and records for no legitimate reason.
But a member’s or manager’s right to LLC information is not absolute. The Delaware Limited Liability Act (the “Act”) establishes limits on why and how a member or manager can request and obtain LLC documents and information. However, those limits may not prevent bad actors’ abuse of those rights. Fortunately, the Act allows an LLC to further tailor and restrict members’ and managers’ information rights in its limited liability company agreement. Given the disruption, burdens, costs, and animosity involved in illegitimate or abusive information requests, Delaware LLCs should thoughtfully consider the information rights provisions they include in their organizing documents.
Information Rights under the Delaware LLC Act
As set forth in Section 18-305 of the Act, members and managers can make a reasonable, written demand for information from the LLC if the stated purpose of the request is “reasonably related to” either the member’s interest as a member of the LLC or the position of manager and the requested information is “necessary and essential to achieving that purpose.” This information includes:
- True and full information regarding the status of the LLC’s business and financial condition.
- A copy of the LLC’s federal, state, and local income tax returns for each year (promptly after becoming available).
- A current list of each member and manager’s name and last known business, residence, or mailing address.
- A copy of any written LLC agreement and certificate of formation, and all amendments and executed copies of any powers of attorney pursuant thereto.
- 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.
- Other information regarding the affairs of the LLC as is just and reasonable.
While an LLC must provide company documents and information so long as the request is “necessary and essential” for a proper purpose relating to the requestor’s role as a member or manager, Delaware courts have held that an LLC is under no obligation to create documents, explanations, summaries, or commentary. In evaluating whether a member or manager has a proper purpose, Delaware courts have held that when a manager makes an information request, they have made out a prima facie case for access given their role in managing the operations of an LLC. However, that presumptive manager access to information may nevertheless be denied if the LLC can demonstrate that the manager has made such request for an improper purpose.
Seemingly, the Act’s requirements of a proper purpose and limitation of requests to only “necessary and essential” documents would be sufficient to prevent the abuse of information rights. But that is not necessarily the case. A member or manager determined to cause havoc through abusive requests still has plenty of leeway to do so under the Act, including dragging the LLC through costly litigation about the legitimacy or scope of their demand if the LLC refuses to produce the requested information. LLCs can and should establish more robust protections against using information rights as a weapon.
Further Narrowing Information Rights in a Limited Liability Company Agreement
Like many other rights and obligations in the Act, the provisions in Section 18-305 regarding access to LLC information are default rules. That is, they apply in the absence of any corresponding provisions in the limited liability company agreement or the absence of any limited liability company agreement at all. As explained in that section, “The rights of a member or manager to obtain or examine information as provided in this section may be expanded or restricted in an original limited liability company agreement or in any subsequent amendment approved or adopted by all of the members or in compliance with any applicable requirements of the limited liability company agreement.”
To keep information rights from being abused, LLCs should consider drafting or amending their limited liability company agreement to include language providing the following:
- Any sensitive information requested, including customer lists, financial records, and other proprietary information, shall remain confidential and not be disclosed to others pursuant to detailed confidentiality and nondisclosure provisions. Section 18-305(c) of the Act permits managers to keep confidential from members information (i) in the nature of trade secrets, (ii) that the manager believes in good faith is not in the best interest of the LLC to disclose, or (iii) that the LLC is required by law or agreement to keep confidential. Nevertheless, including restrictive covenants regarding confidential information in a limited liability company agreement that clearly delineate the scope of and restrictions on such information can reduce disputes over whether information falls under Section 18-305(c).
- Information will be shared with members only on a “need-to-know” basis, meaning that only those members who require the information to perform their duties or make informed decisions will have access to it.
- Access to detailed financial information—such as tax returns, bank statements, and investor agreements—is restricted to a subset of members, such as managers or designated financial officers.
- Information rights may be terminated upon the withdrawal or expulsion of a member from the LLC.
Copyright 2023 Bodman PLC. A version of this piece was previously published as a Bodman Business Client Alert. Bodman has prepared this for informational purposes only. Neither this article nor the information contained in this article is intended to create, and receipt of it does not evidence, an attorney-client relationship. Readers should not act upon this information without seeking professional counsel. Individual circumstances or other factors might affect the applicability of conclusions expressed in this article.