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Prokupek v. Consumer Capital Partners LLC, C.A. No. 9918-VCN (Del. Ch. Dec. 30, 2014)

December 30, 2014

In this letter opinion, the Court of Chancery dismissed the plaintiff’s complaint seeking inspection of certain financial documents of the defendant, a Delaware limited liability company (the “Company”), in connection with a dispute over the valuation of the plaintiff’s equity interests in the Company, holding that (i) the plaintiff was no longer a member of the Company at the time he made his inspection demand and (ii) Section 18-305 of the Delaware Limited Liability Company Act (the “DLLCA”) does not provide inspection rights to former members. 

Following the Company’s termination of the plaintiff’s employment with the Company, the Company exercised its right under the limited liability company agreement of the Company (the “LLC Agreement”) to redeem all of the plaintiff’s equity interests in the Company.  In accordance with the LLC Agreement, the Company provided notice of redemption and paid the plaintiff by check the fair market value of the plaintiff’s equity interest as determined by the Company’s manager.  The plaintiff disputed the Company’s valuation of his equity interests and initiated the dispute resolution mechanism provided for in the LLC Agreement, involving, among other things, the retention of an independent firm to value the Company.  The plaintiff separately made a demand to inspect books and records for the purpose of valuing his interests.  The Company refused the books and records demand, and the plaintiff subsequently filed this action for inspection under Section 18-305 of the DLLCA.  The Company moved to dismiss.

The Court granted the Company’s motion to dismiss, holding that the plaintiff, as a former member, lacked standing to pursue inspection of the Company’s books and records.

First, the Court held that the plaintiff ceased to be a member upon the closing of the redemption, which occurred upon the noticed closing date and payment by the Company of the redemption price.  Under the terms of the LLC Agreement, the plaintiff’s invocation of the dispute resolution mechanism to determine the fair market value of his interests did not delay closing or otherwise result in his continuation as a member.

The Court then held that because the plaintiff was no longer a member at the time he made his inspection demand, he was not entitled to statutory inspection rights under the DLLCA.  The Court reasoned that Section 18-305 of the DLLCA, by its plain language, provides inspection rights only to current members, and the Court declined to expand the statute to apply to former members.  The Court noted that an LLC Agreement may grant inspection rights that exceed the rights provided in the DLLCA. 

The full opinion is available here