Getting Access to an LLC's Books and Records
Suppose you've made an investment in an LLC running, say, a nightclub. It's a manager-managed LLC so someone else is handling the day to day affairs of the company. Then, what was once a popular hot spot becomes passe and the business becomes less profitable. So you start to worry about how things are being done and may even suspect that there has been some financial mismanagement. You decide to take a look at the company's books yourself, but are surprised to find that the manager of the LLC refuses to give you access. Can he do that?
Peter Mahler over at the New York Business Divorce blog (which has a terrific and very appropriate masthead of two hands engage in a tug-of-war) posted last week on divergent results reached in two New York cases concerning the right of non-managing LLC members to inspect the books and records of the company. He also pointed out that the New York statutes governing access to a company's books and records differed depending upon whether the entity was formed as a corporation or a limited liability company.
What LLC Members Have to Do to Get Information. Because the pertinent Ohio statute (Ohio Rev. Code 1705.22) is similar to the New York statute, I became interested. Like New York, Ohio law provides LLC members with a right of access to certain specified types of information, including financial information "upon reasonable demand for any purpose reasonably related to [the member's] membership interest in the company". In both states, one of the categories of information includes a catch-all "other information regarding the affairs of the company that is just and reasonable". And what does that mean?
Peter describes two recent New York cases reaching opposite results, with one holding that the member was entitled to the documents sought and the other concluding that the request was too vague. To be fair, in the case denying the member access to LLC records, there was already litigation pending and the member was refusing to pay for the expense of copying. In dicta, however, the court said that the desire to obtain documents to determine if the LLC manager had engaged in fraud or other wrongdoing went "well beyond the scope of the type of documents detailed in the Limited Liability Company Law."
In the other case described by Peter, the LLC members seeking access wanted to determine if the LLC manager had caused the LLC to improperly enter into a management contract with a certain third party in violation of Department of Health regulations. The court determined that access to the books and records sought was required. In contrast to the first case, the court chose to interpret the statute broadly, placing the burden on the company to justify the restrictions rather than on the member to justify inspection rights:
Respondent's assertion that petitioners must demonstrate a need to review the records before such records are made available is without merit. The only statutotry requirements for obtaining full access to the records is that the person demanding access is a member at the time the demand is made and that the demand is reasonably related to the member's interest.
I didn't find any Ohio caselaw interpreting its version of the statute. Ohio law in the analogous situation of shareholders seeking access to corporate books and records has been to place the burden on the company to demonstrate the sound basis for any restrictions. However, to be certain access to company records is at the level desired, it is best to spell it out in the Operating Agreement.
Comparison with Access to Books and Records of Corporation or Partnership. Which brings me to Peter's other interesting point - namely, the statutes governing access to a company's books and records are not identical to one another, regardless of whether the entity has been formed as an LLC, corporation. or partnership. In New York, there is apparently a statute that makes obtaining access to the books and records of a corporation a bit more complicated to obtain than in the LLC context. Ohio doesn't have this sort of procedure, but Ohio Rev. Code 1701.37(C) does seem to establish a slightly different standard for shareholders seeking access to the corporation's books and records. Here, the shareholder "upon written demand stating the specific purpose thereof" may have access "at any reasonable time and for any reasonable and proper purpose."
Limited partners in Ohio are entitled pursuant to Ohio Rev. Code 1782.21 to access to partnership books and records "upon reasonable demand for any purpose reasonably related to the limited partner's interest as a limited partner." This is quite similar to the LLC statute's language. However, unless prohibited by the partnership agreement, the general partner does have the right under Ohio law
... to keep confidential from limited partners, for the period of time that the general partner considers reasonable, any information... which the general partner in good faith believes is not in the best intersts of the limited partnership or could damage the limited partnership or its business...
There is no similar provision with respect to LLCs.
Do these language differences mean anything? Francis Pileggi of the Delaware Corporate and Commercial Litigation blog also recently noted a difference in the access to records in Delaware statutes governing LLCs and corporations. He describes a recent Delaware case involving an LLC in which the Delaware Chancery Court chose to turn to caselaw regarding the question in the context of corporations.
Whether access to the books and records of a company is given to equity holders will undoubtedly be determined on a case by case basis. However, to me, it makes little sense to distinguish among types of entities regarding the level of access equity holders should have to the books and records of the company. Why should an equity holder in a 3 person manager-managed LLC have different rights than the shareholder in a close corporation with three shareholders?
On the other hand I can see logic in distinguishing between entities depending on the sopistication of the company and number of equity holders. In the case of "closely held" entities with only a few owners, the presumption ought to favor the equity holder. As the entity grows larger, and is perhaps even a public company, the burden on the company and the possiblity of abuse of the right by dissident equity holders seems greater. So here I would tend to support placing more of a burden on the equity holder to justify the need and purpose for seeking access.
