As discussed in the prior post, Section 18-305 of the Delaware Limited Liability Company Act (the “LLC Act”), allows any member or manager of a Delaware limited liability company (“LLC”) to petition the Court to inspect the books and records of the LLC upon reasonable demand, and in connection with a proper purpose.
The question therefore becomes: what constitutes a proper purpose? For demands made by LLC members, the LLC Act requires that the purpose be “reasonably related to the member’s interest as a member of the [LLC].” 6 Del. C. § 18-305(a). For demands made by LLC managers, the purpose must be “reasonably related to the position as manager.” 6 Del. C. § 18-305(b).
Delaware cases have held that the following purposes may be proper in this context:
- Investigation of potential wrongdoing or mismanagement
- Valuation of a member’s interest in the LLC
- Evaluating an offer to purchase shares
- Testing the propriety of a company’s public disclosures
- Determining the independence of the company’s management
In addition, Delaware case law has held that the purpose must be one of sufficient specificity to permit both the LLC and the Court to evaluate its substantive propriety. In this light, an LLC member or manager must do more than simply state in a conclusory manner, a generally accepted purpose. Instead, a member or manager must state what it will do with the information, or an end to which that investigation may lead.
Subsequent posts will address the requirement that the categories of documents requested be “narrowly tailored” to the purpose asserted in the demand.