Introduction:
As with any human endeavor, when people join forces to engage in business there is the possibility of dispute and conflict and when that occurs the various powers each Member has under the law and under the various formation documents become critical aspects of the power struggle. One of the key areas of concern for most owners is to gain access to the documents constituting the structure of the Limited Liability Company as well as its financial records.
Access to those documents is often the first area of conflict between members, with those managing the entity seeking to block access to the documents that provide information to other owners as to structural and distribution rights as well as economic activity. Often the matter of access ends up in court.
This article shall discuss what rights do members of an Limited Liability Company (“LLC”) have to gain access to documents and financial information? What legal process is available?
The Basic Law:
California Corporations Code § 17704.10 provides members of a limited liability company the right to inspect specified company information. Specifically, Corp. Code § 17704.10(d) allows members to request in writing a current list of members, list and name of each manager and copies of the company’s federal, state, and local income tax information for the six most recent fiscal years, to be delivered at the company’s expense.
In order to achieve this access, the California Corporations Code allows a court to enforce these rights and order the LLC to comply. The court will also have the discretion to force the company to pay for attorney fees and costs incurred if the failure to comply was done without justification. Note this is a discretionary power of the Court. It need not and usually will not if the management of the LLC has good reason to contest the disclosure.
Relevant Statutes:
Applicability to Foreign LLC
Corp. Code §17708.08 provides that if members of a foreign limited liability company residing in California represent 25 percent or more of the membership interest of that foreign limited liability company, those members shall be entitled to all the inspection rights provided in Section 17704.10.
Information Required to be Maintained by LLC
Corp. Code §17701.13(d) provides that a limited liability company shall maintain in writing all of the following:
(1) A current list of the full name and last known business or residence address of each member and of each transferee set forth in alphabetical order, together with the contribution and the share in profits and losses of each member and transferee.
(2) If the limited liability company is a manager-managed limited liability company, a current list of the full name and business or residence address of each manager.
(3) A copy of the articles of organization and all amendments thereto, together with any powers of attorney pursuant to which the articles of organization or any amendments thereto were executed.
(4) Copies of the limited liability company's federal, state, and local income tax or information returns and reports, if any, for the six most recent fiscal years.
(5) A copy of the limited liability company's operating agreement, if in writing, and any amendments thereto, together with any powers of attorney pursuant to which any written operating agreement or any amendments thereto were executed.
(6) Copies of the financial statement of the limited liability company, if any, for the six most recent fiscal years.
(7) The books and records of the limited liability company as they relate to the internal affairs of the limited liability company for at least the current and past four fiscal years.
LLC Duty to Provide Requested Documents
Corp. Code § 17704.10 provides LLC members the right to information. Upon written request of an LLC Member, a manager or, if the limited liability company is member-managed, a member in possession of the requested information, must promptly deliver, in writing, a copy of the information required to be maintained by Corp. Code § 17701.13 specifically: (d)(1) current list of members, (d)(2) list and name of each manager and (d)(4) copies of the company’s federal, state, and local income tax information for the six most recent fiscal years.
LLC Member Right to Inspect
Each member has the right, on reasonable request, for purposes reasonably related to the member’s interest, to each of the following:
(a) Pursuant to Corp. Code § 17704.10(b)(1), to inspect and copy during normal business hours the records required to be maintained under Corp. Code, § 17701.13.
(b) Pursuant to Corp. Code § 17704.10(b)(2), to obtain in writing from the company, promptly after becoming available, a copy of the company’s federal, state and local income tax returns for each year.
Further, Corp. Code § 17704.10(i), states that any request, inspection, or copying by a member may be made by that person or by that person’s agent or attorney.
Enforcement
Aside from the remedies provided in Corp. Code § 17713.07 (failure to maintain records[1]) and any other remedies, Corp. Code § 17704.10(f), states that a court may enforce the duty of making and mailing or delivering the information and financial statements required by Corp. Code § 17704.10. Pursuant to allegations and pleadings, in order to enforce their rights to inspect documents, LLC members must file a complaint.
In addition, Corp. Code § 17704.10(g) provides that in an action under Corp. Code § 17704.10, if the court finds that the failure of the LLC to comply with the requirements of Corp. Code § 17704.10 is without justification, the court may award an amount sufficient to reimburse the person bringing the action for the reasonable expenses incurred by that person, including attorneys’ fees incurred in connection with the action or proceeding.
Role of Attorney General
Pursuant to Corp. Code § 17704.10(k), after receiving a complaint that an LLC is failing to comply with the provisions of Corp. Code § 17704.10 or failing to afford to the members rights given to them in the articles of organization or operating agreement, the California Attorney General, may in the name of the people of the State of California, send notice of the complaint to the LLC. If the company does not answer within thirty (30) days of the date the notice was transmitted, or if the answer is not satisfactory, and if the enforcement of the rights of the aggrieved persons by private civil action would be so burdensome or expensive as to be impracticable, the Attorney General may take action.
This particular remedy is seldom enforced. The Attorney General will normally expect the private members in the LLC to seek their own relief and has few resources to devote to this type of action.
Conclusion:
Access to the documents and economic information as described above will be achieved, though some delay and expense may be encountered. It is important to note that it is wise to also send a formal demand that all e mail communications and hard drives of the company be safeguarded since a formal demand in that regard can invoke various protections under California law if the other parties destroy or “lose” such hard drives and e mails. In today’s world, many cases are won or lost on access to e mails in formal discovery.
Once the documents are obtained and reviewed, the legal team can normally strategize appropriate next steps either in LLC structural maneuverings or in a court of law.