Brief Fact Summary.
Kasten (Plaintiff), a non-managing member of Doral Dental USA, LLC (Doral Dental) (Defendant), claimed that the LLC’s operating agreement, which permitted members â€œupon reasonable requestâ€ to inspect company â€œdocumentsâ€ and â€œbooks,â€ required Doral Dental (Defendant) to disclose to her company emails and document drafts going back three years, upon her request.
Synopsis of Rule of Law.
(1) Where an LLC operating agreement permits inspection by members of â€œcompany documents,â€ business-related emails and document drafts may be subject to inspection.Â (2) Where a state’s LLC statute and an LLC operating agreement require that a member will be granted an inspection demand â€œupon reasonable request,â€ determining whether the request is reasonable must weigh the bias in favor of the member’s right of inspection against the LLC’s financial burden caused by the specific request.
Kasten (Plaintiff), a non-managing member of Doral Dental USA, LLC (Doral Dental) (Defendant) claimed her rights under the operating agreement of the LLC and state statute to inspect and copy company records and documents, including emails and document drafts from the prior three years that might be associated with the sale of the company and possible mismanagement.Â The operating agreement gave members the right to examine the company’s â€œbooks and recordsâ€ as well as â€œCompany documentsâ€ â€œupon reasonable request.â€Â The company (Defendant) complied with some of her requests, but not all.Â Kasten (Plaintiff) then brought suit to compel the production of documents and records not yet produced.Â The company (Defendant) opposed her request to inspect emails and other electronically stored files, claiming that the request was unreasonable, as it potentially would cover hundreds of thousands of emails.Â The trial court held that emails and document drafts were not unquestionably subject to inspection under state statute or the operating agreement.Â The state’s intermediate appellate court then certified the issue to the state’s highest court.
(1) Where an LLC operating agreement permits inspection by members of â€œcompany documents,â€ may business-related emails and document drafts be subject to inspection?Â (2) Where a state’s LLC statute and an LLC operating agreement require that a member will be granted an inspection demand â€œupon reasonable request,â€ must determining whether the request is reasonable weigh the bias in favor of the member’s right of inspection against the LLC’s financial burden caused by the specific request?
(1) Yes.Â Where an LLC operating agreement permits inspection by members of â€œcompany documents,â€ business-related emails and document drafts may be subject to inspection.Â The state’s LLC Act has a purpose of giving maximum effect to the principle of freedom of contract and to the enforceability of operating agreements.Â Unless the operating agreement specifies otherwise, the state LLC statute provides for inspection of any LLC â€œrecord,â€ â€œupon reasonable request,â€ though it does not define what constitutes such a record.Â LLC managers have a corresponding duty to disclose such records where it is reasonable to do so.Â Doral Dental’s (Defendant) operating agreement provided for the inspection of â€œbooks and . . . recordsâ€ and â€œdocumentsâ€ but was silent on the company managers’ duty to disclose information to members.Â Defendant asserts that only the types of documents, such as those listed in the LLC statute, such as member lists, tax returns, copies of the operating agreement and the like, qualify as â€œrecords,â€ but not emails or document drafts, which are not mentioned in the statute.Â While the state’s corporation and partnership statutes place specific limitations on the types of documents that partners or shareholders are permitted to inspect, or have additional requirements, the LLC statute, on the other hand, does not contain those restrictions or requirements.Â And so, those other statutes cannot be looked to for guidance as to how to interpret the LLC statute, which is intended to establish a more transparent business form than the other statutes.Â In fact, the other statutes do not impose on a manager a duty of disclosure of requested records.Â Accordingly, an LLC member’s right of inspection is exceptionally broad, which is consistent with the purposes of simplicity and freedom of contract that are at the heart of the LLC statute.Â In this case, however, Doral Dental’s (Defendant) inspection provisions are not identical to those of the LLC statute, and neither the operating agreement nor the statute defines â€œrecordâ€ or â€œCompany document.â€Â A â€œrecordâ€ is an authentic official copy of a document.Â Therefore, a â€œdocumentâ€ is a broader category of store information than a â€œrecord.â€Â Doral Dental’s (Defendant) operating agreement, by permitting inspection of â€œCompany documentsâ€ as well as the statutorily-provided records,â€ affords access to more forms of stored information than the default inspection provisions of the LLC statute.Â The issue then becomes whether emails and document drafts are covered by â€œCompany documents.â€Â While it is true, as found by the trial court, that email is a form of communication, it can also be a type of business â€œdocument.â€Â This does not mean that every email that a company sends and receives is considered a â€œcompany document.â€Â Only those relating to company business may be considered a â€œcompany document.â€Â Therefore, the trial court’s conclusion that email is categorically not a â€œcompany documentâ€ was incorrect.Â In addition, document drafts fall in the category of â€œcompany documentsâ€ because they are writings that convey information in the same way as does a document.Â Reversed and remanded as to this issue.
(2) Yes.Â Where a state’s LLC statute and an LLC operating agreement require that a member will be granted an inspection demand â€œupon reasonable request,â€ determining whether the request is reasonable must weigh the bias in favor of the member’s right of inspection against the LLC’s financial burden caused by the specific request.Â First, under the LLC statute, a manager has the duty to provide members â€œinformationâ€ about â€œall things affecting the members.â€Â This means that the manager has a duty to disclose to the member, upon reasonable request, everything affecting the member’s financial interest, regardless of whether the information is a record or document.Â This duty, however, does not limit the types of records and documents that must be disclosed to only those that affect the member’s interest.Â If the Legislature intended to limit the scope of inspection provision to only those â€œrecordsâ€ that affect a member’s membership interest, it would have done so in the text of the inspection provision.Â The issue then becomes what constitutes a â€œreasonable request.â€Â Kasten (Plaintiff) argues the reasonableness relates only to the timing and form of the request, whereas Doral Dental (Defendant) argues that it also relates to the breadth of the request, and whether the request is tied to the requester’s concerns and the types of records or documents requested, therefore trying to strike a balance between the member’s access to information and the company’s (Defendant) ability to conduct its business.Â Rejected, however, is the company’s (Defendant) assertion that the reasonableness language should be read to limit the right of inspection to specific kinds of formal records, such as tax returns, financial records and sales tax documents, since under the statute LLC members may inspect any LLC record. Since the statute itself does not address what constitutes reasonableness, it is unclear.Â Appropriate extrinsic sources for its interpretation are other state inspection statutes.Â Some of those include a â€œproper purposeâ€ requirement, intended to prevent inspection where the member’s motivation is improper.Â As this state’s statute does not contain such a requirement indicates that members do not need to demonstrate, as a threshold matter, that their inspection request is not made for an improper motive.Â Because the legislature did not intend the inspection statute to threaten the financial well being of the company, â€œupon reasonable requestâ€ pertains to the breadth of an inspection request, as well as the timing and form of the inspection.Â Therefore, one purpose of the reasonableness language is to protect the company from member inspection requests that impose undue financial burdens on the company.Â Whether an inspection request is so burdensome as to be unreasonable requires balancing the statute’s bias in favor of member access to records against the costs of the inspection to the company.Â When applying this balancing test, various factors may be relevant, including, but not limited to: (1) whether the request is restricted by date or subject matter; (2) the reason provided (if any) for the request, and whether the request is related to that reason; (3) the importance of the information to the member’s interest in the company; and (4) whether the information may be obtained from another source.Â In this case, the factors listed must be addressed by the trial court on remand.Â Reversed and remanded as to this issue.
In addition to those jurisdictions that have a reasonableness requirement or a â€œproper purposeâ€ requirement in their LLC inspection statutes, nine jurisdictions have adopted the Uniform Limited Liability Company Act (ULLCA), which contains a member right to inspect records that does not include language requiring that a request be â€œreasonableâ€ or made for a â€œproper purpose.â€Â Two states (Nebraska and Wyoming) have LLC statutes with no inspection provision included.