Picture this: You’ve been happily doing business with your fellow LLC members for some time now. But now, trouble is brewing on the horizon. The other two members are ganging up on you and exclude you from any further business dealings. When you ask to see the LLC’s books, records, bank accounts, tax returns, or other financial records, they tell you that you don’t have any right to see such documents.
The majority ousted LLC member often lacks access to information about what is going on in that LLC business. While such a member often suspects wrongdoing, he cannot look at the LLC’s bank accounts, accounting, and other records, because the other members refuse to show it to him. What is he or she supposed to do?
Access to LLC Books and Records
Luckily, the New York LLC law gives the ousted (or any) LLC member an explicit right to ask for the LLC’s books and records. The law provides in Section of 1102 of the New York LLC law that:
“Any member may, subject to reasonable standards as may be set forth in, or pursuant to, the operating agreement, inspect and copy at his or her own expense, for any purpose reasonably related to the member’s interest as a member, the records referred to in subdivision (a) of this section, any financial statements maintained by the limited liability company for the three most recent fiscal years and other information regarding the affairs of the limited liability company as is just and reasonable.”
The records mentioned in subdivision (a) are:
“(1) if the limited liability company is managed by a manager or managers, a current list of the full name set forth in alphabetical order and last known mailing address of each such manager;
(2) a current list of the full name set forth in alphabetical order and last known mailing address of each member together with the contribution and the share of profits and losses of each member or information from which such share can be readily derived;
(3) a copy of the articles of organization and all amendments thereto or restatements thereof, together with executed copies of any powers of attorney pursuant to which any certificate or amendment has been executed;
(4) a copy of the operating agreement, any amendments thereto, and any amended and restated operating agreement; and
(5) a copy of the limited liability company’s federal, state, and local income tax or information returns and reports, if any, for the three most recent fiscal years.”
Additional LLC Information
But the LLC member is not necessarily limited to asking only for these records. The law also gives access to “other information regarding the affairs of the limited liability company as is just and reasonable.” This can open the door to asking for more detailed records, such as proof of expenses, revenue, bank accounts, or other documents underlying the LLC’s business accounting. The judge ultimately had discretion on how much access will be granted.
Claim for an Accounting
While it is not mentioned in the law, the courts have also given LLC members the right to ask for an accounting of the LLC business. In other words, you may ask for a full picture and explanation of the LLCs financial affairs. This is a different claim than the one for books and records since it asks for much more than just the opportunity to review financial information. You may be entitled to ask for explanations underlying the financial information to get a full picture of what went on. You cannot demand this on a whim or what your adversary would call a “fishing expedition.” There have to be some allegations of concrete wrongdoing by the LLC members in charge. The LLC members in charge cannot counter that they already gave you access to the books and records under 1102 because this is a much broader demand.
Majority Member Defenses
Is there something that the remaining members can do to prevent you from getting the desired access to the LLC’s books and records?
Yes, if the other members can plausibly show that any information sought is in the nature of trade secrets or their disclosure is not in the best interest of the LLC, they may be able to restrict such material. But this is not easy to show and they have to have those rights under the operating agreement or show special circumstances in order to succeed. Plus, you can offer to sign a confidentiality agreement to protect such information from third parties.
Pre Lawsuit Demand
In both claims described above, the claim for access to books and records and the claim for accounting, you have to make a formal written demand before bringing a lawsuit. You can do it yourself or have your attorney do it so that the secretive LLC members get the message that you are serious.
Finally your operating agreement may contain special provisions about access to books and records. So make sure to read the operating agreement to see whether it mentions any particular requirements to access the LLC’s books and records.