Reed Smith Client Alerts

In Pearl City Elevator, Inc. v. Gieseke, the Delaware Court of Chancery recently held that an LLC member had standing to assert its board designees’ discovery rights against the LLC’s counsel, which included obtaining discovery of privileged documents concerning a control dispute over the LLC’s board, but did not include discovery of the LLC counsel’s retention and billings records – which were not sufficiently relevant in the summary proceeding – or discovery in connection with the LLC member’s contractual dispute with the LLC.

In Pearl City Elevator, Inc. v. Gieseke, C.A. No. 2020-0419-JRS, letter op. (Del. Ch. Sept. 21, 2020), the plaintiff, Pearl City Elevator, purported to own more than 56 percent of the equity in nominal defendant Adkins Energy, LLC (Adkins or the Company) and filed suit under Del. Code Ann. tit. 6, section 18-110 seeking a declaration that it had authority under Adkins’ operating agreement to designate an extra board member to Adkins’ board.

Section 5.15 of the operating agreement deemed transactions between a board member and Adkins “related,” and prevented interested board members from discussing or voting on such transactions or accessing materials related to them. The operating agreement gave the plaintiff authority to designate three members (the Pearl City Governors) to the company’s six-member board of governors, and also gave the company’s General Members the authority to designate three General Governors. In the event that any member acquired more than 56 percent of the company’s membership units, such member would gain the right to designate a seventh governor. The plaintiff purported to have attained that ownership level through acquisitions that the other members question. A dispute had previously arisen among plaintiff and the General Governors regarding a contract between plaintiff and Adkins (the Grain Delivery Agreement). The General Governors contend that plaintiff had not performed to the standards of that agreement and that it largely sought board control in order to prevent Adkins from cancelling it.