C.A. No. 2024-0782-SEM
Del. Ch.Apr 1, 2025Background
- Plaintiff Michael B. Garner, an investor in Authenticity.AI Investors, LLC (the “Defendant”), sought inspection of 30 categories of books and records under Delaware LLC law, mostly to value his investment and investigate potential mismanagement.
- The Defendant is a feeder entity that owns stock in Authenticity.AI Corp., has little in the way of business operations or formal recordkeeping, and largely communicates and manages information informally.
- Garner made repeated, escalating demands for information, expressing concerns about valuation, management changes, and potential shareholder dilution. The Defendant provided some documents but refused the full scope of requests, arguing sufficiency and propriety.
- The Plaintiff formally demanded inspection under Section 18-305 of the Delaware LLC Act, which allows member inspection for proper purposes.
- Plaintiff then filed this action in the Delaware Court of Chancery after being dissatisfied with Defendant’s production. Trial was limited to a final decision by a magistrate, subject only to direct appeal.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Entitlement to broad inspection for valuation | Needs all requested documents to properly value investment | Already has sufficient information; request is overbroad | Valuation is a proper purpose, but only limited, essential records not yet produced must be turned over |
| Investigation of mismanagement | Needs all records to investigate waste, self-dealing, wrongdoing | No credible basis; request is vague and a fishing expedition | Only one narrow issue (stock issuance discrepancy) has a credible basis for investigation; rest are denied |
| Sufficiency of prior production | Plaintiff claims gaps remain in compensation, governance, and financials | Defendant asserts all necessary documents provided | Some limited additional documents (financial/accounting, stock issuance specifics) must be produced |
| Fee and cost shifting | Defendant should pay Plaintiff’s fees/costs for obstructive conduct | Defendant is overall the prevailing party | Each side bears own fees; costs shifted in Defendant’s favor as prevailing party |
Key Cases Cited
- Sanders v. Ohmite Hldgs., LLC, 17 A.3d 1186 (Del. Ch. 2011) (A member must prove by preponderance that a proper purpose for books and records inspection exists.)
- Woods Tr. of Avery L. Woods Tr. v. Sahara Enters., Inc., 238 A.3d 879 (Del. Ch. 2020) (Valuation of a membership interest in a closely held company is a proper purpose for inspection.)
- Saito v. McKesson HBOC, Inc., 806 A.2d 113 (Del. 2002) (Stockholders are entitled to information needed to address credible issues of wrongdoing.)