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LLC Member Has Right to Inspect Certain LLC Documents

On June 22, 2007, the Wisconsin Supreme Court released its opinion in Kasten v. Doral Dental USA, LLC relating to what documents a member in a limited liability company could inspect.  In Kasten, a member with a minority interest in an LLC asked to inspect copies of e-mails and draft documents after she became concerned that the management of the LLC might be engaged in activities adverse to her interest (e.g., transferring a valuable asset to an entity owned by the other members without adequate consideration).

The default rule under Wis. Stat. § 183.0405(2) is that "upon reasonable request," a member may, at the member's own expense, inspect and copy LLC "records."  In Kasten, the LLC had an operating agreement with a provision that dealt with a member's right to inspect documents and so the Court looked to the operating agreement instead of the default rule.  The LLC's operating agreement said that "upon reasonable request," a member may, at the member's own expense, inspect and copy LLC "records and documents."  The Court concluded that under the operating agreement, the member had the right to inspect and copy business related e-mails and draft documents.  The Court did not specify what documents could be inspected under the default rule, but the Court did note that the operating agreement gave the member the right to inspect more documents than the default rule.

The Court stated that the language "upon reasonable request," which appeared in the default rules and the operating agreement, was meant to protect the LLC from member inspection requests that impose undue financial burdens on the LLC.  The Court set forth the following factors to consider when determining whether an inspection request is so burdensome as to be unreasonable:  1) whether the request is restricted by date or subject matter; 2) the reason given (if any) for the request, and whether the request is related to that reason; 3) the importance of the information to the member's interest in the LLC; and 4) whether the information may be obtained from another source.

The Court also noted that Wis. Stat. § 183.0405(3) may also provide members with a right to certain documents, because that section requires the LLC to provide true and full information regarding all things affecting the LLC to a member "upon reasonable request" and to the extent the circumstances render it just and reasonable.  The Court stated that to the extent the requested documents in the Kasten case affected the member's financial interest in the LLC, these documents are required to be furnished to the member, regardless of whether the information is recorded or stored as a "record" or "document."

The Kasten case is an important reminder that members of an LLC can opt out of the statutory default rules in an operating agreement.  However, to the extent an operating agreement is silent on a subject matter, the default rules will govern.
 

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