DFG Wine Co., LLC v. Eight Estates Wine Holdings, LLC, C.A. No. 6110-VCN (Del. Ch. Aug. 31, 2011) (Noble, V.C.)
In this letter opinion, the Court of Chancery held that a member of an LLC who has a proper purpose to inspect the books and records of that LLC also has the right to inspect the books and records of a subsidiary of that LLC when the facts suggest that the parent and subsidiary are not, in reality, separate entities.
The plaintiff, DFG Wine Company, LLC (“DFG”), was a Delaware limited liability company that was owned by Peter Deutsch (50%) and Peter’s father and mother, William and Frances Deutsch (25% ach). In June 2008, DFG acquired 1,674,747 Class B units and 245,510 Class E-5 units of the defendant Eight Estates Wine Holdings, LLC (“Eight Estates”), a Delaware limited liability company. Eight Estates was formed in June 2008 for the purpose of holding Ascentia Wine Estates, LLC “Ascentia”), its sole asset and wholly owned subsidiary, which owned and operated eight wine brands.
Between September and November 2010, DFG sent a written demand for access to sixteen categories of Eight Estates’ and Ascentia’s records. Its stated purposes for seeking the records were (1) to determine the value of its investment in Eight Estates and (2) to determine whether it should appoint a representative to sit on Eight Estates’ board of managers. Eight Estates responded in November 2010 stating that it would provide the requested records of Eight Estates but that DFG was not entitled to the records of Ascentia. In January 2011, DFG filed an action seeking permission to inspect Ascentia’s books and records.
The Court of Chancery ruled that both of DFG’s purposes were proper. Eight Estates argued that DFG’s first purpose was improper because in a prior action DFG asserted that Eight Estates was insolvent, thus making a valuation meaningless. However, because there appeared to be a reorganization of debt and management since the prior action, the Court held that a valuation was not meaningless and therefore there was a proper purpose reasonably related to DFG’s status as a Preferred Unit Holder. The Court also concluded that DFG’s second purpose was proper even though the records needed to satisfy this purpose would be very limited.
Once DFG stated a proper purpose for inspecting Eight Estates’ books and records, the Court also found that DFG had a right to inspect the books and records of Ascentia. Citing Arbor Place, L.P. v. Encore Opportunity Fund, L.L.C., 2002 WL 205681, at *6 (Del. Ch. Jan. 29, 2002), the Court stated that the Delaware Limited Liability Company Act (“DLLCA”) “provides a right to inspect the records of such subsidiaries where the ‘facts at least suggest the absence, in reality, of separate entities.’” Here, Ascentia was Eight Estates’ sole asset, Ascentia was wholly owned by Eight Estates, Eight Estates had no value or business apart from Ascentia, Ascentia had no board and was managed solely by Eight Estates, and Ascentia and Eight Estates had the same address. As a result, the Court held that DFG had the right to inspect the books and records of Ascentia. The Court said that it would be “unfair” for DFG to attempt to value its holdings in Eight Estates without having access to the records of its only asset, Ascentia.
Eight Estates argued that divulging certain information would not be in the best interest of the company thus,under DLLCA §18-305(c), it was not required to release the information. Specifically, because William Deutsch and DFG had, in a prior action, alleged that Eight Estates was insolvent, sought permission to inform Eight Estates’ creditors of their views, and sought the dissolution of Eight Estates, divulging details regarding Eight Estates’ and Ascentia’s relations with their creditors would not be in the best interest of the company. The Court agreed to a limited extent but found that Eight Estates did not establish that its managers had a good faith belief that granting DFG information more tenuously related to Ascentia’s relationship with its creditors, such as Ascentia’s financial statements, would not be in the company’s best interests. As such, the Court granted DFG permission to inspect, inter alia, Eight Estates’ and Ascentia’s state tax returns, financial statements, employment agreements, general ledgers, business plans, budgets, projections for future performance, valuations of inventory, and grape contracts.