Defendants in business disputes often wish to have their cases heard in federal rather than state court. The Statutory inspection demands are one of the most potent tools available in prelitigation business disputes. Such demands can result in the production of key board materials, financial records, and even emails in appropriate circumstances. But there are important differences between the inspection rights available to corporate shareholders under 8 Del. C. § 220 on the one hand, and the inspection rights available to Limited Liability Company members and managers under 6 Del. C. § 18-305 on the other hand, that litigators should be aware of.
Statutory Rights v. Contractual Rights: The biggest difference between shareholder inspection demands and LLC member demands is the source of law. Whereas shareholders must avail themselves of the formal procedures of section 220, statutory LLC inspection rights may be expanded or circumscribed by the language of the LLC Agreement. An LLC Agreement can impact the types of documents that may be accessed, as well as the manner and frequency in which they may be demanded and accessed. Since it is common for LLC Agreements to expressly address information rights, in our experience, most LLC inspection demand suits are resolved based on contractual interpretation, rather than the default provisions of the LLC Act.
Special Inspection Rights of LLC Managers: LLC managers have unique rights to inspect all books and records that are reasonably related to their duties as a manager. That standard is broader than the default inspection rights of LLC members. And, unlike the inspection rights of LLC members, the LLC Act does not expressly subject a manager’s inspection rights to limitations in an LLC Agreement. Compare § 18-305(a) with § 18-305(b).
Inclusion of Subsidiaries and Affiliates: Section 220 expressly provides that if a parent corporation has possession, custody, or control of the records of its subsidiary then they fall within the reach of the inspection statute. The LLC Act does not have the same language, so it remains an open question whether, and under what circumstances, an LLC member would be permitted to inspect records held by an LLC’s subsidiary.
Demand and Enforcement Procedures: In the context of a Section 220 demand, a corporation must respond within five days, at which point the shareholder may file proceedings to enforce compliance. The court will evaluate the demand according to the guidelines of section 220, and will look to see if the shareholder has demonstrated a proper purpose and shown a need for the documents requested. In the LLC context, the contractual demand procedures may be less formal, and a member or manager may bring a suit for breach of contract if they do not agree with the LLC’s response. At that point, the judge will evaluate the contract to resolve the dispute, and will generally only turn to the statutory framework or analogous case law if the contract itself is ambiguous.
Forum Considerations: LLC Agreements often have applicable arbitration provisions that require the demand to be resolved in AAA or JAMS. In contrast, under Delaware law, section 220 enforcement actions must be brought in Delaware state court—specifically, the Delaware Court of Chancery.
Attorneys’ Fees: Section 220 authorizes an award of fees to the prevailing party in a section 220 action. By contrast, fees are only available in an LLC inspection demand suit if the LLC Agreement provides for them.
For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, or Joshua Korr.
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