Trials involving books and records requests have become more common since the Delaware Supreme Court encouraged stockholder plaintiffs to use the “tools at hand” to discover information necessary to establish demand futility prior to pursuing derivative litigation. Less common are decisions post-trial regarding inspection rights for members of a Delaware limited liability company. The recent decision in Riker v. Teucrium Trading LLC, C.A. No. 2019-0314-AGB (Del. Ch. May 12, 2020) reflects the care by which the Court of Chancery applies the applicable standard to determine whether a member has met his burden to show entitlement to documents and, if so, the scope of necessary production. The case also demonstrates that a Company’s hard-fought litigation tactics opposing document requests, which the Court ultimately validates, does not by itself provide grounds to shift attorneys’ fees, particularly where plaintiff did not substantially prevail.
This case arose out of a control dispute between two members, Plaintiff Riker and Sal Gilbertie, who each owned approximately 46% of voting Class A units of Teucrium Trading LLC (the “Company”), a Delaware limited liability company whose principal assets were five agriculture-focused exchange-traded funds available on the New York Stock Exchange. The parties’ LLC Agreement gave certain veto rights to Gilbertie, including over the selection and removal of the Company’s officers. In 2018, Plaintiff sought to eliminate Gilbertie’s veto rights and install himself and his wife as the managers. Gilbertie opposed this effort and, acting with the third LLC member who owned approximately 8% of the voting power, removed Riker and installed himself and non-Riker family members as the management group.
In January 2019, Riker demanded books and records for three purposes: to value his membership interest (the “Valuation Purpose”); to investigate financial mismanagement (the “Financial Performance Purpose”); and to investigate mismanagement in corporate governance (the “Governance Purpose”). The Company agreed to produce certain documents and later produced others following a mediation. The parties could not agree on the scope of production and the Court conducted a one-day trial. Post-trial the only issues before the Court were the documents for the Valuation Purpose and for the Governance Purpose.
Court Finds Plaintiff Proved Entitlement to Limited Document Inspection
Applying the books and records standard in the corporate context under Section 220 of the Delaware General Corporation Law, the Court found that a member requesting documents to value their LLC interest is a valid purpose. The Court also accepted that Plaintiff was entitled to documents sufficient to allow him to perform a Discounted Cash Flow analysis. While the Court accepted that information about expenses and contingent liabilities might be important for a DCF analysis, the Court held that sufficient information about both would be in the Company’s 2019 audited financial statements that the Company had agreed to produce. The Court also ordered the Company to produce information about plans or projections in the Company’s 2020 budget that reflect plans to increase the Company’s assets under management or to restore the Company to profitability. The Company agreed to produce documents relating to its net operating loss carry forward, which mooted that issue. The Court held that Plaintiff failed to prove that information about whether the Company was a going concern, beyond what would be in the 2019 audited financial statements, was necessary for the Plaintiff’s Valuation Purpose. As to the Governance Purpose, the Court held that Plaintiff failed to prove that there were any more non-privileged documents than what the Company had already supplied related to his request to review alleged mismanagement in the 2018 removal of Riker. The Court also held that Plaintiff had failed to prove even a “credible suspicion” of mismanagement after removal of the Riker management team.
The Court also denied Plaintiff’s request for attorneys’ fees. The American Rule applies to books and records actions. The Court found that the mere fact that the litigation was hard fought did not reflect the type of “extraordinary circumstance” that warranted shifting attorneys’ fees. The Court noted that the Company prevailed on the substantial majority of issues and had made efforts to comply with the Plaintiff’s demands by producing some documents in response to the demand and others after a mediation. Moreover, the Court observed that Plaintiff had moved for summary judgment even though a material issue existed regarding the Plaintiff’s bona fides and had filed three non-meritorious motions in limine.
Absent an LLC Agreement that modifies traditional standards for inspection of books and records, the Court of Chancery will assess a books and records request to an LLC under standards similar to the corporate context under Section 220 of the Delaware General Corporation Law. A member seeking books and records to value their interest in an LLC likely states a valid purpose but the Court will examine the nature of the company, the valuation methodology at issue and the documents already produced to determine whether a Plaintiff has proven an entitlement to the documents sought. Finally, even if the Court ultimately determines post-trial that the Company must turn over some documents it previously declined to produce, that fact alone will not suffice to demonstrate bad faith sufficient to shift attorneys’ fees to the Company.