Effective August 1, 2021, the Delaware Limited Liability Company Act (“LLC Act”), the Delaware Revised Uniform Limited Partnership Act (“LP Act”) and the Delaware Revised Uniform Partnership Act (“Partnership Act”) have been amended to require that the “necessary and essential” standard apply to books and records inspection demands made under statutory or contractual grounds, subject to the LLC or partnership agreement expanding or restricting such inspection rights.
The amendments specifically apply to Section 18-305 of the LLC Act (6 Del. C. § 18-305), Section 17-305 of the LP Act (6 Del. C. § 17-305), and Section 15-403 of the Partnership Act (6 Del. C. § 15-403). The amendments were first introduced earlier this year in Delaware Senate Bill No. 114 (to amend the LLC Act), Senate Bill No. 115 (to amend the Partnership Act), and Senate Bill No. 116 (to amend the LP Act).
In light of the amendments, the scope of documentation to which a member of a Delaware LLC or partner of a Delaware limited partnership or general partnership is entitled is now more limited, consistent with 8 Del. C. § 220, the books and records inspection statute pertaining to Delaware corporations. Under case law construing Section 220 of the Delaware General Corporation Law (DGCL), the burden is placed upon a stockholder to demonstrate that the requested books and records are “necessary and essential” to a stated purpose.
The amendments were adopted to address the Delaware Supreme Court decision of Murfey, et al. v. WHC Ventures, LLC, et al., Del. Supr., No 294, 2019 (July 13, 2020). In Murfey, the Delaware Supreme Court found that the “necessary and essential” standard did not apply to a books and records demand made under a limited partnership’s agreement, because that condition was not expressly conditioned by the limited partnership agreement.
The author of this post represented the prevailing appellants in the Murfey appeal. A prior post discussing the Murfey decision can be found here.
Under each of the amendments, the right to obtain or examine information may be expanded or restricted in the original LLC or partnership agreement, or in an amendment thereto signed by all members or partners of the entity or in compliance with any applicable requirements of the LLC or partnership agreement.
Absent the LLC or partnership agreement stating otherwise, a member or partner seeking to inspect books and records of a Delaware alternative entity will now have the burden to show that the documents sought are “necessary and essential” to a stated purpose. Accordingly, these inspection amendments should be considered by any party to a books and records dispute involving a Delaware limited liability company, limited partnership or a general partnership.
Moreover, members or partners and their counsel should consider these amendments when forming an alternative entity and entering into an LLC or partnership agreement. If the members or partners desire to contract for full transparency into company books and records without the added burden of showing that such requested documents are “necessary and essential” to a stated purpose, they should consider negotiating for such rights at the onset and ensure that the agreement expands their inspection rights beyond the default now set by statute.
Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware. You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.