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Aloha Power Company, LLC v. Regenesis Power, LLC

Court of Chancery of Delaware, New Castle

December 22, 2017

Aloha Power Company, LLC
v.
Regenesis Power, LLC

          Date Submitted: September 29, 2017

         Dear Counsel:

         This post-trial Letter Opinion resolves the plaintiff's action to compel inspection or production of certain books and records. For the reasons that follow, the plaintiff is entitled to some, but not all, of the books and records it demands.

         I. BACKGROUND

         The facts stated herein reflect my findings based on the parties' stipulations, forty-two documentary exhibits, and the testimony of one live witness during trial on August 3, 2017. I grant the evidence the weight and credibility that I find it deserves.[1]

         Plaintiff Aloha Power Company, LLC ("Aloha") is a Delaware limited liability company founded in May 2006 by Dennis Marini.[2] Defendant Regenesis Power, LLC ("Regenesis" or the "Company") is a Delaware limited liability company founded in May 2006.[3] Aloha is a member of the Company.[4]

         Aloha seeks inspection of the Company's books and records under the Company's operating agreement (the "Operating Agreement")[5] and 6 Del. C. § 18-305 of the Delaware Limited Liability Company Act.[6] On September 24, 2015 and December 7, 2015, Aloha sent letters to Regenesis demanding inspection of the Company's books and records. On October 7, 2016, Aloha filed its Verified Amended Complaint for Inspection of Books and Records (the "Complaint").

         II. ANALYSIS

         Aloha seeks a host of books and records under the Operating Agreement.[7]

         The Operating Agreement requires the Company to produce and send certain books and records to members without the need for any demand, while other documents under the Operating Agreement require members to show a proper purpose for inspection. I address these two categories separately.

         A. Books and Records that Require No Demand for Inspection

         Aloha seeks to inspect certain books and records that require no demand for inspection under four provisions of the Operating Agreement. First, Aloha seeks copies of the Company's balance sheet, income statement, and statement of changes in financial position from 2011 to 2017. Section 8.3.1 of the Operating Agreement provides:

The Governing Members shall cause the Company to cause financial statements prepared in accordance with generally accepted accounting principles to be sent to each of the Members not later than ninety (90) days (or such other period as the Governing Members shall select) after the close of the Fiscal Year. The report shall contain a balance sheet as of the end of the Fiscal Year and an income statement and statement of changes in financial position for the Fiscal Year. Such financial statements shall be accompanied by the report thereon, of the independent accountants engaged by the Company.[8]

         Section 8.3.1 requires production of these documents without the need for a demand. Thus, Aloha is entitled to inspect the books and records listed in Section 8.3.1 of the Operating Agreement from 2011 to 2017.

         Second, Aloha seeks the information that is necessary for Aloha to complete its federal and state income tax or information returns and a copy of the Company's federal, state, and local income tax or information returns from 2011 to 2017. Section 8.3.2 provides:

The Governing Members shall cause the Company to cause to be prepared at least annually, at Company expense, information necessary for the preparation of the Member's federal and state income tax returns. The Governing Members shall send or cause to be sent to each Member within ninety (90) days (or such other period as the Governing Members shall select) after the end of each taxable year such information as is necessary to complete federal and state income tax or information returns, and a copy of the Company's federal, state, and local income tax or information returns for that year. On or before November 15 of each year, the Governing Members shall provide each Member with the following: (i) a statement showing each Member's Capital Account as of the immediately preceding October 31; (ii) an estimate of each Member's taxable income for the current Fiscal Year; and (iii) each Member's share of allocated non-recourse debt.[9]

         Section 8.3.2 requires production of these documents without the need for a demand. Thus, Aloha is entitled to inspect the books and records listed in Section 8.3.2 of the Operating Agreement from 2011 to 2017 that have not already been provided. The Company shall certify that such documents are complete and accurate.[10]

         Third, Aloha seeks minutes of all meetings of the members as described in Section 5.3.[11] The amendment to Section 5.3 of the Operating Agreement provides that "[t]he Governing Members or their designee shall prepare and distribute to all Members minutes of all meetings."[12] Section 5.3 requires production of such minutes without the need for a demand. Thus, Aloha is entitled to inspect the minutes of the meetings of the members called by governing members pursuant to Section 5.3 from 2011 to 2017.

         Fourth and finally, Aloha seeks copies of any powers of attorney pursuant to which the Operating Agreement or any amendments thereto have been executed. Section 8.2.4 states that the "Governing Members shall promptly furnish to a Member a copy of any amendment to the . . . [Operating] Agreement executed by the Governing Members pursuant to a power of attorney from the Member."[13] On May 3, 2017, Regenesis provided Aloha copies of the Operating Agreement and its two amendments, [14] but the Company provided no copies of any related powers of attorney. Section 8.2.4 requires production of these documents without the need for a demand. Thus, Aloha is entitled to copies of any related powers of attorney under Section 8.2.4 of the Operating Agreement.

         B. Books and Records that Require a Proper Purpose for Inspection

         Similar to 6 Del. C. § 18-305(a), Section 8.2 of the Operating Agreement permits Aloha to access certain books and records "for purposes reasonably related to the interest" of Aloha as a member of the Company.[15] "Once a member demonstrates that its primary purpose is proper, any secondary purpose, whether proper or improper, is irrelevant."[16] "Any number of purposes may be proper, depending on the context of a particular case, but a stockholder's purpose must not be adverse to the company, unrelated to a legitimate interest of the stockholder, or intended to harass the corporation."[17] And a stockholder's entitlement to inspection "is not open-ended; it is restricted to inspection of the books and records needed to perform the task. Accordingly, inspection is limited to those documents that are necessary, essential, and sufficient for the shareholders' purpose."[18]

         In order for Aloha to inspect the books and records that require a proper purpose under Section 8 of the Operating Agreement, Aloha alleges a host of proper purposes, which I divide into three categories: (1) to value its membership interest; (2) to understand the dilution of its membership interest; and (3) to investigate mismanagement.[19]

         Regenesis argues that Aloha is barred from inspecting any books and records. Regenesis insists that none of Aloha's purported proper purposes reflect its actual purpose, which Regenesis claims is to harass the Company.[20] Regenesis's primary evidence in support of its argument is a 2009 lawsuit between the parties in California, in which Regenesis prevailed. While it is apparent that the parties have mutual hostility between them, the evidence at trial did not show that Aloha's ...


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