/>iBut in Illinois, the attorney-client privilege may not protect communications between the managers of a limited liability company (LLC) and the company’s attorneys (including emails) when those communications are sought by the LLC’s minority members. Rather, a minority member may be able to access those otherwise-privileged communications even when their subject matter is at issue in litigation between the LLC and a minority member.
Those with ownership stakes in privately held businesses, partnerships, or family offices need to closely collaborate with and trust others. When disagreements and disputes over rights and responsibilities arise, individual emotions and personalities can complicate matters. This ongoing series will help owners anticipate potential problems when structuring their businesses and find solutions to issues that commonly arise among owners of privately held businesses, both before and during litigation.
LLC Members Have the Right to Inspect Company Records
An LLC is a common corporate structure for a privately owned business. LLCs are owned by members, who either appoint managers to manage the business (which is “manager managed”) or manage the business themselves (which is “member managed”).
The Illinois Limited Liability Company Act establishes default rules that can generally be superseded by an LLC’s operating agreement. Under the Illinois LLC Act, members of an LLC have broad default rights to inspect their company’s “books and records,” including those concerning the company’s activities, finances, and “other circumstances concerning the company’s business.” While an operating agreement can restrict a member’s access to the LLC’s records to certain categories or certain situations, any restriction must be reasonable.
The term “books and records” is expansive. It even includes communications between an LLC’s managers and its attorneys. Accordingly, when an LLC’s operating agreement does not restrict members’ rights to inspect the company’s records, a member likely has the right to obtain the company’s attorney-client communications.[1]
A Minority Member May Be Able to Access Otherwise Privileged Communications Between the LLC and its Attorney
Imagine a business divorce in which the controlling LLC members have decided to investigate or force out a non-controlling member. This situation is not uncommon, and it may lead to litigation between the LLC and the non-controlling member.
In this circumstance, under Illinois law, the non-controlling member may be able to obtain communications between the company and its attorneys regarding the subject of the dispute.
Ordinarily, an LLC’s manager expects that communications with the LLC’s attorneys seeking legal advice will be protected from disclosure by the attorney-client privilege. But the privilege applies only to communications in which the manager both (a) seeks legal advice and (b) reasonably expects that the communications are made in confidence. When a non-controlling member has the right to access certain records — including communications between the company and its lawyers — under the LLC Act, the company likely does not have any reasonable expectation that its communications with the lawyers were made in confidence. The company therefore probably cannot invoke the attorney-client privilege to conceal those records from its members. This analysis does not change depending on the subject matter of the communications or the subject matter of the dispute between the company and the non-controlling member.
The result is that, in certain circumstances, many members of Illinois LLCs may have the right to view otherwise privileged communications, even when the communication concerns the subject of a dispute between the non-controlling member and the LLC itself.[2] In an attempt to obtain otherwise privileged communications, the non-controlling member should request in discovery any communications between the company’s representatives and the company’s attorneys regarding the subject of the litigation. If the LLC’s operating agreement does not restrict the member’s right to inspect company records, the member may be able to obtain emails that the company’s management had previously assumed would be protected by the attorney-client privilege.
The practical effect of this result is potentially significant. Clients often speak more candidly within the presence of their attorneys. This candor results from the clients’ belief that their communications will be protected by the attorney-client privilege and therefore will not be disclosed in discovery. This makes sense because candor is exactly what the attorney-client privilege is meant to incentivize. But if the subject of that candor is relevant to the dispute between the company and the non-controlling member and the communication is disclosed in a books and records request or in litigation, the candid statements may be embarrassing to the company or even harmful to the company’s litigation position.
Companies and majority owners are not powerless to protect themselves from this result, though. In a future post, we will explain steps that companies and majority owners can take to protect their attorney-client communications from disclosure.
[1] See Janousek v. Slotky, 2012 IL App (1st) 113432, ¶ 24 (“Because the operating agreement and the Act granted members of [the LLC] the right to inspect its books and records, defendants and their counsel could not have reasonably believed that records of communications regarding [the LLC’s] business could have been kept confidential from Janousek.”).
[2] If the non-controlling member is able to access the LLC’s privileged communications, those communications probably can be used as evidence at trial.
