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Rights of LLC Members and Shareholders to Financial Records

If you are a minority member of a Tennessee limited liability company (“LLC”) or a minority shareholder of a Tennessee corporation, you may, at some time, need to review financial information of the LLC or the corporation.  What financial records are you allowed to obtain?  On what grounds can the LLC or corporation refuse to produce financial records to you?  What do you do if the company will not supply you with the requested financial records?

The by-laws of the corporation of which you are a shareholder or the operating agreement of the LLC of which you are a member may specify the financial records to which you are entitled and may even require that the LLC or corporation provide you with certain financial information on an annual basis, or even more frequently.  As a shareholder or member of a Tennessee corporation or LLC, you are entitled to certain financial information, as a matter of law, under the provisions of the Tennessee Business Corporation Act and Tennessee Limited Liability Company Act even if the by-laws or operating agreement don’t contain provisions allowing you to have any financial records whatsoever.

Limited Liability Companies

To determine the financial records to which you are entitled from a Tennessee LLC, you first have to determine whether the LLC of which you are a member is Board Managed or Member Managed.

Board Managed LLC’s

If you are a member of a Board Managed LLC, you have the right, provided you give notice five (5) business days in advance, to inspect and copy the LLC’s state and federal income tax returns for the past three (3) years; annual financial statements; and “accounting records.”  (T.C.A. §48-228-101)  Under Tennessee law, a Board Managed LLC must prepare financial statements no less than annually, which statements must include a balance sheet and income statement.   Under Tennessee law, if a member of a Board Managed LLC requests that the LLC mail it annual financial statements, the LLC must do so within one month after notice of the member’s request, except that annual financial statements for the most recently completed fiscal year do not have to be mailed until four (4) months after the close of the fiscal year.  (T.C.A. §48-228-201)

Member Managed LLC’s

If you are a member of a Member Managed LLC, you have the right, provided you give notice five (5) business days in advance, to inspect and copy the LLC’s state and federal income tax returns for the past three (3) years and “financial information sufficient to provide true and full information regarding the status of the business and financial condition of the LLC.”  (T.C.A. §48-228-101)

Corporations

If you are a shareholder of a Tennessee corporation, you can inspect and copy the financial statements, which must include a balance sheet, income statement, and statement of change in shareholders’ equity, for the past three years and the “accounting records” of the corporation.  (T.C.A. §48-26-101)  To be entitled to do so, you must give notice of your intent to do so at least five (5) business days in advance and meet the “good faith” requirements.  What are the good faith requirements?  Under the Tennessee Business Corporation Act, your request as a shareholder must: (1) be made in good faith and for a proper purpose; (2) must describe with reasonable particularity your purpose for wanting the financial records; and (3) the records you request must be “directly connected” to your expressed purpose. (T.C.A. §48-26-102)

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If either the majority owners or directors of a corporation or the majority owners or managers of an LLC do not provide to the minority LLC member or minority shareholder the requested information, the member or shareholder may file an action in Chancery Court to compel the production of the records.  In the case of either corporate financial records or LLC financial records, a Chancery Court may award attorney’s fees and expenses incurred by the requesting party.  (T.C.A. §§48-228-104; 48-26-104)

A corporation or LLC can choose not to produce financial records which have been requested, but, if a court decides that the corporation or LLC did not have a reasonable basis to refuse to produce the records, it may award attorney’s fees and expenses to the requesting member or shareholder.  A court might decide that a corporation or LLC had the right to refuse to produce financial records if it finds that the requesting shareholder or member desired them in order to harm the LLC or corporation by, for example, disclosing them to a competitor.

A Tennessee court can always impose restrictions on the use and distribution of the financial records of the LLC or corporation.  (T.C.A. §§48-26-104; 48-228-104) For example, a court could limit a member’s or shareholder’s right to reveal or distribute the records to other people.

In reality, many requests for financial records are made by attorneys for minority members and shareholders.  That is allowed under Tennessee law.  When lawyers handle requests for financial records, in my experience, an inspection at the place of business of the corporation or LLC never takes place —– the LLC or corporation just produces the requested financial information by mail or email.

An operating agreement of an LLC or the by-laws of a corporation may provide that a minority member is entitled to specific financial records not mentioned in the Tennessee Business Corporation Act or in the Tennessee Limited Liability Company Act such as statements of cash flow or records of compensation or distributions made to officers or directors.  Such provisions in operating agreements and by-laws are enforceable contracts.  Under both of the previously mentioned Acts, any provisions in the governing documents of a Tennessee corporation or LLC which restrict a member’s or shareholder’s right to the financial records which those Acts require the corporation or LLC to produce are ineffective.

As set forth above, the Acts (Tennessee Business Corporation Act and Tennessee Limited Liability Company Act) require LLC’s and corporations to give members and shareholders “accounting records.”  A very recent case, Daugherty v. Doyle (Tenn. Ct. App. 2014), supports the argument that the term “accounting records” is very broad and inclusive.  In that case, the requesting shareholder asked for about every imaginable record from the corporation, which was in the business of manufacturing thread, including, but not limited to, records of all yarn purchases; itemized detailed monthly yarn inventory; yarn transfer documents; historical lab production records; signed NAFTA certificates; and official company guidelines regarding different inventory locations.

I would never have considered some of the records requested in the Daugherty v. Doyle case to  be “accounting records.”  Then again, I am not an accountant.  In that case, the accountant hired by the shareholder who requested the records testified that everything requested was an “accounting record.”  The trial court and Court of Appeals of Tennessee agreed.

If you have doubts about what financial records you are entitled to receive, you should consult with a Tennessee law firm which handles LLC and corporate disputes.