Delaware Supreme Court Affirms The Partial Denial Of Books And Records Demand
On January 26, 2021, the Supreme Court of Delaware affirmed a decision by the Delaware Court of Chancery rejecting in part the request by a member of a limited liability company (LLC) for the production of certain books and records for inspection pursuant to Section 18-305 of the Delaware Limited Liability Company Act (the analog to a Section 220 inspection demand for Delaware corporations). Durham v. Grapetree, LLC, No. 343, 2019 (Del. Jan. 26, 2021). The Delaware Supreme Court clarified that plaintiff was entitled pursuant to the requests approved by the trial court to informal records, such as emails, text messages, and phone records, to the extent the company conducted its business without documenting its actions in minutes, board resolutions, or by other formal means. But the Delaware Supreme Court held that the Court of Chancery did not abuse its discretion in denying requests it found overbroad, unrelated to a proper purpose for inspection, or that required the company to create new records.
Plaintiff, a non-managing member of the LLC, alleged that the managers were devaluing his interest through the mismanagement of the LLC’s sole real estate asset. Plaintiff sought to inspect certain books and records to evaluate the condition of his stake in the LLC and to assess potential derivative claims. The Court of Chancery granted his demands in part, but denied demands that sought (i) all correspondence among a number of specified individuals, (ii) a list of all decisions made by the managing members in the prior three years, and (iii) all correspondence between the LLC and certain other named entities and individuals.
The Delaware Supreme Court evaluated the lower court’s determinations under a “highly deferential” abuse-of-discretion standard of review and found that it “did not deny any request simply because the request sought informal records, and it did not limit any records that it granted solely to formal records.” Moreover, the Court highlighted that the lower court “granted other requests that provide access to the relevant informal communications [plaintiff] seeks.” Thus, the Delaware Supreme Court held that the Court of Chancery properly denied “additional, broad requests for ‘all communications’ between parties and ‘lists’ of transactions.”