Delaware Chancery Court Rules That Former LLC Members Lack Inspection Rights

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By Michael Greene

Jan. 5 — The Delaware Chancery Court reaffirmed in a Dec. 30 opinion that former LLC members do not have statutory inspection rights.

Vice Chancellor John W. Noble opined “[b]y its plain language, Section 18-305(a) of the LLC Act confers inspection rights only on current members of an LLC.”

He added that “[g]iven that ‘LLC agreements can grant members inspection rights that exceed the rights provided for in the statute, there is no reason to expand the LLC Act’s plain language when the parties refrained from doing so themselves.”

In this case, the court held that the plaintiff, a former chairman and chief executive officer of the defendant, did not have standing to inspect the books and records at issue because he was no longer a member of the LLC at the time his demand was made.

Books and Records

After the plaintiff was terminated from Smashburger Master LLC, under the company's LLC agreement, Smashburger called and redeemed all of the plaintiff's units and terminated his status as a member.

The plaintiff subsequently filed a books and records request for the purpose of evaluating the amount that the defendant owed from its redemption. Smashburger denied the request, asserting that the plaintiff did not have standing to make his demand.

No Equity Interest

The court first concluded that plaintiff was no longer a member of the LLC when he made his inspection demand.

That plaintiff was allegedly undercompensated did not preclude this finding, and Vice Chancellor Noble noted that he could pursue such damages in a breach of contract action.

The court next determined that the LLC agreement divested all of the plaintiff's rights as an equity owner in the LLC at the relevant time.

“While Prokupek may have damages claims related to the two closings, any recovery will be monetary, not restoration of an equity interest in Smashburger,” Vice Chancellor Noble opined.

No Standing

Because the plaintiff was not a member of the LLC, the court held that he did not have the right to inspect the company's business records.

Citing 8 Del. C. § 220 for guidance on the scope of § 18–305 of the Delaware LLC Act, Vice Chancellor Noble wrote that “Section 220 ‘plain[ly] and unambiguous[ly]' limits inspection rights to current stockholders and directors.” Accordingly, a director's right to inspect books and records ends upon his or her termination from office.

“While Plaintiff was recently a member of Smashburger and believes that he has a proper purpose in making his demand, these circumstances do not justify stretching the LLC Act’s plain language in order to find standing,” he added.

To contact the reporter on this story: Michael Greene in Washington at mgreene@bna.com

To contact the editor responsible for this story: Ryan Tuck at rtuck@bna.com

The opinion is available at http://www.bloomberglaw.com/public/document/Prokupek_v_Consumer_Capital_Partners_LLC_No_9918VCN_2014_BL_36683.