November 26, 2019 Practice Points

A Quick Guide to the Multiple Paths for Obtaining Books and Records

This type of demand can be a powerful tool to overcome the information imbalance that is often present in company disputes between majority and minority shareholders.

By Emily Bridges

One issue that often frustrates minority shareholders or members is the information imbalance in their relationship with the majority. When things are going well with the company, information will usually flow freely, with all members and shareholders receiving similar access. However, when disputes and tensions rise, one freeze-out tactic the majority will often employ is to deny the minority member or members access to information about the business. This can be done for legitimate purposes, such as a well-founded fear that the minority is planning to leave for a competitor, or illegitimate reasons, such as personal disagreements.

One of the most powerful tools a minority member has in its arsenal to determine what is happening with the company is a books and records request. Many states have statutory grounds for such a request, but there is another avenue that often can and should be employed when drafting a books and records request. The operating agreement or other foundational documents likely include a provision detailing to what books, records, and other information all members, managers, or shareholders are entitled, and this could be even broader than that required under a statute. Moreover, this gives an individual with a minority interest another potential claim—a breach of contract action.

The status of the individual with a minority interest will impact to which books and records that individual will be entitled. For example, under the Delaware Corporations Code Section 220, a stockholder is entitled to the corporation’s stock ledger, a list of its stockholders, and its other books and records. However, under Delaware’s Limited Liability Code Section 18-305, a member of a limited liability company must have access to additional information, such as “true and full information regarding the status of the business and financial condition” of the LLC. Moreover, as directors and managers are considered fiduciaries to the company, their access is even greater. State statutes is just one method by which a party representing a party with a minority interest can demand access to the books and records, however.

Often, companies and corporations include a provision in their foundational documents detailing the types of books and records shareholders, directors, members, or managers have a right to obtain. Depending on the drafting of this provision, it could be as broad or even broader than the statute. Armed with this provision, a party could bring forth a second cause of action to obtain the books and records of the company—a breach of contract action. By asserting a breach of contract action, a party could seek a judgment from the court that the majority breached the contract, which may allow that party to seek additional remedies.

A books and records demand can be a powerful tool to overcome the information imbalance that is often present in company disputes between majority and minority shareholders. Coupling a statutory request with a breach of contract claim limited to a books and records provision in the company’s foundation documents may allow a party to have a stronger negotiating position or be entitled to additional remedies if successful.

Emily Bridges is an associate with Fox Rothschild LLP in Greenville, South Carolina.

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