LLC Members Beware: Your Statutory Right to Information Is About to Change

Janel M Dressen

By Janel Dressen

As the electronic age has vastly expanded the scope and amount of information available to the Internet surfing public about any random topic at the touch of a few buttons, the Minnesota Legislature has taken the opposite approach for members of limited liability companies (LLCs) by tightening the reins on their statutory right to information maintained by the company. The reason for this change is based upon the desire to obtain uniformity. The new provision is patterned after the same provision in the Revised Uniform Liability Company Act (RULCA).

All LLCs formed under Minnesota law starting on Aug. 1, 2015 will be governed by the new Minnesota LLC Act, Chapter 322C. For any existing LLCs that do not elect to be governed by Chapter 322C, they will continue to be governed by the current LLC Act, Chapter 322B, until Jan. 1, 2018, at which time, they too will be governed by the new act.

The current act requires an LLC to maintain 16 different categories of records and grants members the “absolute right” to inspect and copy those records at no cost to the member. Minn. Stat. § 322B.373. Additionally, a member has the right to inspect and copy, at the member’s expense, other company records if the member demonstrates a “proper purpose,” which means “one reasonably related to the person’s interest as a member” of the company. Id., subd. 2(b).

In contrast, in manager-managed and board managed LLCs under the new act, no specific records must be maintained by the company and a member is not entitled to any documents or information as a matter of right. A manager-managed or board-managed LLC shall make information available to a member only “as is just and reasonable if: (i) the member seeks the information for a purpose material to the member’s interest as a member; (ii) the member makes a demand in a record received by the company, describing with reasonable particularity the information sought and the purpose for seeking the information; and (iii) the information sought is directly connected to the member’s purpose.” Minn. Stat. § 322C.0410, subd. 2(2). In addition, the LLC may charge the member the “reasonable costs of copying, limited to the costs of labor and material” for the information requested. Id. at subd. 4. If the LLC decides not to provide any of the demanded information, the LLC must inform the member of its reasons for declining to provide the information. Id. at subd. 2(3)(ii).

Under the new act, a purpose must be stated to obtain any information, and arguably, the purpose standard is a heightened one. At a minimum, the changes require the member to do more work in requesting information. In addition, the new standard opens the door for creative litigation as to whether the stated purpose is “material.” That being said, as a practical matter, the current standard of “reasonably related to the person’s interest as a member” is unlikely to result in a proper denial of access to the same records under the new standard of “material to the member’s interest as a member.”

Minnesota case law will continue to be instructive in defining when a company may deny an owner’s request for company information. For example, the Minnesota Court of Appeals has determined that where the “stated” purpose is not the “actual” purpose, a shareholder’s request may be properly denied. Bergmann v. Lee Data Corp., 467 N.W.2d 636, 640 (Minn. Ct. App. 1991). Using a request to improve the shareholder’s position in a pending lawsuit against the company is a “purely personal purpose” and is “improper.” Id. In Bergmann, the plaintiff shareholder sued the corporation following the termination of his employment for alleged sexual harassment. Shortly after filing the lawsuit, the shareholder requested a variety of corporate records pursuant to Minn. Stat. § 302A.461, including documents relating to other sexual harassment or discrimination complaints and remedial actions, and documents relating to corporate stock options. The stated purpose for the shareholder’s request was to identify and evaluate alleged misconduct by corporate officers. The court denied the shareholder’s request, which was upheld on judicial review. Id.; but see Kococinski v. Collins, 935 F. Supp. 2d 909, 911 (D. Minn. 2013), in which the court dismissed the complaint with permission for leave to re-file an amended complaint urging the plaintiff to “consider exercising her statutory right to examine Medtronic’s books and records in order to potentially bolster her allegations.”

What should a member do if the LLC is governed by the new act? First, a member should inquire about the types of records maintained by the company, and if there is no policy in place, insist on a records policy, including the retention period for company records, the types of records that are required to be maintained, and when and how the records will be provided to members. Second, since there is no automatic right to information in a manager-managed or board-managed LLC under the new act, members should bargain for expanded access to company information, including the items specifically provided for in the current act. Third, a member should request a provision in the operating agreement that requires the company to cover the cost of providing copies of routine company information to its members. Finally, in requesting information from the LLC, the member should consider Minnesota case law that defines a “proper purpose” and be sure to state a proper purpose in any request for information.

Janel Dressen is a shareholder of Anthony Ostlund Baer & Louwagie P.A. where she represents businesses, directors, officers, shareholders and employees in all aspects of commercial litigation and dispute resolution, with an emphasis on shareholder, director and officer, corporate governance, employment and contract disputes. Ms. Dressen also counsels businesses regarding risk management and avoidance, corporate governance, employment matters and insurance coverage. Ms. Dressen can be reached at (612) 349-6969 or at jdressen@anthonyostlund.com. For more information, please visit www.anthonyostlund.com.