LAMB, Vice Chancellor.
A disgruntled investor, who owns an indirect interest in a Delaware limited liability company, brings an action to inspect that entity's books and records pursuant to contractual provisions in the organizational document of the LLC which, the investor believes, grant it an unrestricted right of access to sensitive and proprietary information concerning the entity's operations. A proper reading of those contractual provisions, however, illustrates that the defendant, as one of the managing members of the LLC, retains substantial discretion to determine the scope and conditions of the investor's access, and enjoys the power to limit the classes of documents available and to insist upon the investor's execution of an appropriate confidentiality agreement before such access is granted. Therefore, with one minor exception, the court concludes that the managing member has acted within its contractual mandate thus far by preventing the investor from obtaining documents that have the potential to damage the LLC's interests if misappropriated or misused.
A. The Parties
The plaintiff is NAMA Holdings, LLC, a limited liability company organized under Nevada law. Nigel Alliance and Mousa Alliance are NAMA's principals. The defendant is World Market Center Venture, LLC, a Delaware limited liability company ("Venture").
B. The Facts
1. The Parties' Relationship
This case involves the World Market Center ("WMC"), a multi-phase real estate development project in downtown Las Vegas, Nevada. The site is an extensive 57-acre showroom and convention complex that caters to the home furnishings industry. Twice a year, WMC hosts the Las Vegas Market, an international trade show for retail furniture and design merchants.
WMC is owned and operated by Venture. Venture is jointly owned and jointly managed by two entities: Related World Market Center, LLC ("Related") and Network World Market Center, LLC ("Network"), both Delaware limited liability
Prime has two 50% owners: Shawn Samson and Jack Kashani. As originally drafted, the manager-managed operating agreement of Alliance Network (the "Alliance Operating Agreement") provided that Samson and Kashani were to act as Alliance Network's co-managers. Their joint consent was required for the implementation of any managerial decision. However, NAMA, as the majority member of Alliance Network, possessed veto rights over certain major decisions, including project financing and the purchase or sale of real property.
Alliance Network acted as the sole owner of WMC for several years. In 2003, however, a search began for additional investors to help fund future phases of the project, partly as a result of NAMA's refusal to contribute any more capital to the endeavor. The Related Companies, a major real estate developer, expressed interest in the business, and subsequently formed Related in order to join with Alliance Network in operating WMC. To that end, Venture was created to own, operate, and develop WMC.
Venture is governed by the amended and restated operating agreement of World Market Center Venture (the "Venture Agreement"), which provides Related, in exchange for a substantial amount of capital, with a one-third equity interest in the first phase of WMC and a one-half interest in all future phases of the project. Upon execution of the Venture Agreement, the equity interest of Alliance Network in WMC, through its 100% stake in Network, was reduced accordingly. Around this same time, the Alliance Operating Agreement was significantly amended to eliminate NAMA's veto rights over Alliance Network. Those veto rights were unacceptable to Related, which wanted to have, along with Samson and Kashani (as the co-managers of Alliance Network), unfettered discretion over financing the project and allowing new members to invest in future phases of WMC. NAMA conceded, and, in return, obtained certain rights of inspection and access to Venture's books and records, the nuances of which form the basis of the present dispute.
2. The Nature Of The Industry
As Samson testified at trial, the dynamics of the home furnishings showroom industry are as straightforward as they are cut-throat. For many years, the furniture market in High Point, North Carolina enjoyed a virtual monopoly on providing showroom services. As a result of High Point's long dominance and substantial size, the barriers to market entry are formidable. An entrant must have massive floor space available to accommodate furniture manufacturers, so as to provide retail purchasers with a broad spectrum of product lines from which to choose prospective inventory for the next six months. To provide the necessary showroom area, an enormous amount of capital is required. Upon completion of the first three phases of WMC, investors will have poured approximately $1 billion into the project.
Because WMC's entry into this industry involves substantial monetary risk, its business plan is to develop and expand its
At trial, Samson painted a picture of High Point as a hawkish competitor, supported by 150 different owners and backed by the State of North Carolina, willing to take whatever steps are necessary to ensure that WMC does not supplant its market dominance. In such an environment, the strict confidentiality of WMC's business records is critical to success. A market entrant's proprietary information such as lease agreements, financing documents, and strategic planning memoranda would be of immeasurable value to an industry leader such as High Point. If not protected, such information could spell disaster for the smaller and less-established newcomer who has narrower operating margins and more limited resources with which to compete. Indeed, Mousa Alliance, during his trial testimony, admitted that this type of information is highly confidential and potentially damaging to WMC if it were to find its way into the wrong hands.
3. NAMA Attempts To Exercise Its Inspection Rights
The parties' current dispute began in October 2006, when Related issued a proposed funding notice for phase three of WMC. Shortly thereafter, Prime, acting as the Alliance Network manager, sent a capital call notice to the Alliance Network members. The notice required a $41.5 million investment from NAMA and Crescent if they wished to fully participate in the phase.
NAMA strenuously objected to the capital call. NAMA voiced its belief that Prime wrongfully planned to use a substantial amount of the capital call to collateralize a construction loan, to unnecessarily increase the size of the loan, and then to pay itself bloated management fees from the excess loan proceeds. NAMA also accused Prime of improperly withholding $19 million of proceeds from a loan refinancing that NAMA thought should have been distributed to the Alliance Network members. As a result, the discussions between Kashani, Samson, and Mousa Alliance regarding the capital call became heated, with Alliance eventually threatening to sell his interest in the project to High Point and thereby share WMC's sensitive information with its sole competitor.
On November 3, 2006, NAMA informed Kashani and Samson of its intention, pursuant to certain provisions of the Alliance Operating Agreement which are not at issue in this litigation, to inspect the books and records of Alliance Network, Alliance Holdings, and Prime (as well as its subsidiaries and affiliates) at the Alliance Network offices in Beverly Hills, California on November 13, 2006.
On November 8, 2006, NAMA informed Kashani and Samson that Bruce Gamble of Alvarez & Marshal Real Estate Advisory Services, as NAMA's authorized representative, would appear in Las Vegas on November 13 to inspect and copy Venture's books and records. NAMA stated that its representative would copy and retain, among other things, lease agreements with tenants, appraisals for all assets owned by Venture, and all communications between Venture and its managers, attorneys, and/or accountants.
Venture immediately expressed concern about NAMA's intentions because, in its view, certain of the information and material sought by NAMA was "highly proprietary," "confidential," and "entitled to trade secret protection."
4. NAMA Sues To Enforce Its Inspection Rights
When Gamble appeared at Venture's Las Vegas offices on November 13, he was
In support of its position, NAMA relied upon several interrelated provisions of the Venture Agreement which were specifically included for its benefit.
Section 9.1 defines the categories of documents which a member may access:
Unable to amicably resolve their differing interpretations of the relevant contractual provisions for several months, NAMA filed this suit against Venture on February 27, 2007.
NAMA insists that the plain text of section 12.18(e) does not afford Venture any discretion whatsoever, despite Related's and Network's status as the co-managers of the entity, to place limitations on NAMA's right to inspect Venture's books and records. In arguing for what it believes is an unconditional right of access, NAMA claims that its rights of inspection are equivalent to those enjoyed by Venture's managing members. Because Related and Network presently are Venture's only members, and because those two entities have never had any restrictions placed on their access rights, NAMA says that it too is entitled to review any materials ever created for Venture's business or that of Venture's subsidiaries, not just the documents enumerated in section 9.1 of the Venture Agreement.
Moreover, NAMA argues that this unfettered access necessarily includes a right to copy and remove the books and records, as well a right to designate representatives to execute these tasks on NAMA's behalf. NAMA also claims that it cannot be forced to execute any sort of confidentiality agreement as a predicate to exercising its inspection powers. In sum, NAMA says its contractual right under the Venture Agreement is in no way concomitant, and, indeed, is much broader, than an LLC member's typical statutory right of access, which, NAMA admits, grants an LLC's manager substantial discretion to protect an entity's confidential and sensitive written materials.
In response, Venture also focuses on the plain language of the Venture Agreement. First, Venture claims that NAMA may access only those types of documents specifically enumerated in section 9.1. However, section 9.1, so Venture says, is a contractual ceiling on NAMA's inspection rights. In Venture's view, section 12.18(e) grants Related and Network, as its managing members, the ability to impose reasonable limitations not only upon the types of documents available to NAMA under section 9.1, but also upon the terms and conditions of access to those documents. In support of its position, Venture notes that, subject to an appropriate confidentiality agreement, it always has been willing to provide NAMA with the company's financial statements, tax returns, contribution lists, federal income tax filings, and organizational documents, as well as "any document
Venture further argues that the managerial discretion afforded by section 12.18(e) is wholly consistent with the default scheme of informational control codified in 6 Del. C. § 18-305(c). Given NAMA's unrelenting quest for highly sensitive information and given Mousa Alliance's threats to make that information available to persons who could damage WMC, Venture says that the restrictions it imposed-both as to the scope of documents available for review, and as to its dictates on a confidentiality agreement, copying, and the use of representatives-were completely reasonable in the circumstances.
A. Section 12.18(e) Gives Venture The Authority To Limit NAMA's Inspection Rights In Section 9.1
The legal principles the court must apply to decide this case involve well-settled precepts of contract interpretation under Delaware law.
Indisputable proof of the unambiguous meaning of section 12.18(e), the operative provision which creates NAMA's right of inspection, is found in the use that provision makes of the words "reasonable
First, the mere inclusion of the term "reasonable" in section 12.18(e) means that the parties to the contract intended a more restrictive view of NAMA's ability to inspect than the unconditional and mandatory right of access which NAMA advocates. Contractual interpretation operates under the assumption that the parties never include superfluous verbiage in their agreement, and that each word should be given meaning and effect by the court.
Second, as a matter of fundamental logic, the use of the term "reasonable" in section 12.18(e) to describe the scope of access NAMA may enjoy with respect to the categories of documents listed in section 9.1 means that the parties contemplated someone making a judgment call as to exactly what limitations constitute "reasonable access." When the Venture Agreement is viewed in context, it is clear that Related and Network, not NAMA, are the parties charged with this discretionary authority.
As is typical of a manager-managed limited liability company, Network and Related, as Venture's managing members, are vested with both the power and the obligation to do "any and all things necessary, proper, convenient or advisable to manage the assets and affairs of [Venture] in accordance with and subject to the limitations of [the Venture Agreement]. . . ."
Finally, the court turns to why, in the context of the Venture Agreement, NAMA's argument that it is entitled to the same rights of informational access as the managing members of Venture fails to withstand scrutiny. Throughout, the contract differentiates between "Members" and "Managing Members." Both are defined terms in a contract that specifically contemplates a process by which new Members may be admitted in the future.
B. The Limitations Venture Imposed Upon NAMA's Inspection Were, For The Most Part, Reasonable Limitations
Venture's compliance with section 12.18(e) must be evaluated in the context of the unique nature of the facts and circumstances it faced.
Unlike Venture's positions with respect to the scope of the inspection, the confidentiality agreement, and the copying limitation, its insistence that Mousa Alliance alone conduct the inspection, rather than a duly-authorized NAMA representative, was unreasonable. In an analogous situation in the corporate context, this court has held that a stockholder who is granted a right of access to the books and records of a corporation pursuant to a stockholder's agreement may utilize "duly constituted agent[s]" such as attorneys, accountants, or clerks to conduct an inspection even though the agreement does not specifically provide for such delegation.
In this regard, Venture has failed to substantiate its contention that Gamble has a conflict of interest which should bar him from acting on NAMA's behalf. Gamble represented a former client, Simmons Mattress, in lease negotiations with Venture approximately four years ago.
For the foregoing reasons, the court finds that section 12.18(e) of the Venture Agreement grants Venture the power to impose reasonable terms and conditions upon NAMA's right to inspect the documents listed in section 9.1 of that contract. With the exception of requiring Mousa Alliance to carry out the inspection, Venture has otherwise complied with its contractual obligations thus far by acting reasonably in light of the facts and circumstances it faced. Counsel for Venture is directed to submit a form of final order and judgment, on notice, within ten days.