An LLC (Limited Liability Company) Member in Massachusetts has a right to inspect certain records of the LLC. This includes basic information, such as the certificate of organization, the names and addresses of all Members and Managers, and a copy of the operating agreement.
Minority LLC Members who feel that they are being oppressed or frozen out will want to obtain as much information as possible, including especially financial information. A Massachusetts LLC must, by statute, have an office in the Commonwealth where it must keep certain records. These records include the following:
Income tax returns for last three years; and
Financial Statements, if any, for the last three years.
Any Member of the LLC shall be allowed to inspect and copy the records, at that member’s expense, and at reasonable times. Subject to the provisions of the Operating Agreement or standards set by the Manager(s), each Member shall also be allowed to obtain “true and full information regarding the state of the business and financial condition of the limited liability company, [. . . inluding] other information regarding the affairs of the limited liability company as is just and reasonable.” M.G.L. c. 156C, Sec. 10. How to determine what is “just and reasonable?” The wise majority owners should develop uniform standards regarding access to documents to prevent a claim of unfair treatment by the minority owner. The test is whether a request is “reasonably related” to the Member’s interest. A minority owner that makes repeated and numerous requests may be seen as being a pest or having an ulterior motive. By contrast, a Delaware court (addressing a similar statute) ruled that the following were “proper purposes” for requesting documents from the LLC: (1) putting a valuation on one’s ownership interest; and (2) investigating potential wrongdoing by the majority.
If the majority owners refuse a request for information, the minority owner must determine what action to take. There are no “LLC Police” to call. A minority owner will have to file suit to obtain the documents it wants. If there are enough facts to support such a claim, a minority owner can also bring a claim for a freeze out, which occurs when the majority owners violate their fiduciary duties to the minority owner and frustrate her reasonable expectations of ownership. A Member’s ownership interest in an LLC is considered personal property and a Member is entitled to obtain an accounting from a fellow Member, but you will have to file suit for an accounting. At least one Massachusetts court has held that a Member of an LLC is entitled to an accounting from a controlling Member or Manager where there is a fiduciary relationship between the parties. By contrast, there is no right to an accounting against the LLC itself because there is no fiduciary duty owed by the LLC to the Members.
The rights to records of a minority shareholder of a Massachusetts corporation are similar, but not identical to the rights of an LLC Member. A shareholder should be able to articulate specific facts regarding possible mismanagement or wrongdoing by the controlling interest in order to see financial records, meeting minutes and other business records (other than the basics).
The takeaway is to first check the Operating Agreement or Shareholder Agreement or other company documents and then the statute to determine what documents a minority owner is entitled to. Both sides should consider carefully whether their dispute over records can be resolved without resorting to litigation. Perhaps an independent mediator could help the parties resolve their dispute before both sides incur substantial legal fees. In other situations, someone is being unreasonable or someone is hiding something. This is a recipe for contentious litigation, so you better lawyer up if you think that the minority owner is being unreasonable or has an ulterior motive, or if you think that the majority is hiding something. As always, this post contains general information in a cursory fashion and is not legal advice.
By Adam P. Whitney, Esq.
CONNECT WITH ADAM
RELATED PRACTICE AREAS
ADAM’S RECENT POSTS
Losing your job is one of the most difficult things a person can go through. As someone who has been working in employment law for over 25 years, I can tell you that this is especially true for executives, professionals, and other high-level employees. If you have...
If you are a “foreign” Limited Liability Company, such as a Delaware LLC, you must register in Massachusetts if you do business here. See Mass. Gen. Law c.156C, §54. That’s not difficult, but it does take a bit of effort and yearly filing fees. You must also have a...
It’s been a crazy ride for several weeks. In some ways, the practice of law is the same. In some ways, it’s different. Sometimes it just feels different. In spite of the photo, I've been able to work in my satellite office and have been the only one here....
Private businesses will be back. It has to be. By definition, entrepreneurs are resilient and versatile. If your business is closed or running a skeleton operation, this is the time to think about how the world will be changed when things get back to “normal.” I...
If your business is either closed or running a smaller operation, now may be the time to step back, do some planning, and get your “house” in order. It’s a good time to evaluate your focus and your customer base. Do 80% of your revenues come from 20% of your...
GET IN TOUCH
Law Office of Adam P. Whitney265 Franklin Street, Suite 1702
Boston, MA 02110
ABOUT THE FIRM
Business Litigation and Employment Law
Outside General Counsel
Shareholder / LLC / Partnership Disputes
No attorney-client relationship is established by your use of this site. You must not send or share any confidential information about you or any legal issue without Attorney Whitney's express written permission. The content of this website may be considered advertising for legal services under the laws and rules of professional conduct. The content does not constitute legal advice. The content is for information purposes only. Legal advice cannot be provided unless you hire my firm and we perform a full review of the legal matter and the most current, applicable law. The law in your state may be different than Massachusetts, so the information in the content may be completely irrelevant if you are outside of Massachusetts.