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.
- Under rules governing many privately owned businesses in Illinois, minority owners of Illinois companies may be able to obtain copies of communications exchanged between the company and its attorneys, notwithstanding the attorney-client privilege, which would typically shield those communications from disclosure to third parties.
- Moreover, a minority owner may also be able to use those emails in litigation against the company.
Business divorces are often messy. Those who individually or collectively control a private business sometimes seek to force out owners of non-controlling shares. The reasons vary – personality-driven disputes, disagreements over business direction, or timing and distribution of earnings. In other circumstances, controlling shareholders may want to push out a non-controlling owner because of alleged misconduct, including embezzlement, fraud, or self-dealing. When majority owners seek the legal advice of the company’s attorney to formulate and execute a plan to force out a minority owner, the company wants and expects this advice to be covered by the attorney-client privilege and therefore shielded from disclosure.
But in Illinois, minority members of limited liability companies (LLCs) may be able to obtain copies of communications between the LLC’s managers and its attorneys (including emails) – even when the subject matter of the emails is at issue in litigation between the LLC and a minority member.
This first post explains how minority members of Illinois LLCs may be able to obtain these otherwise privileged communications. (Our next posts will address ways that Illinois LLCs and their other members can prevent a minority member from obtaining privileged communications and will explain the rules that apply to Illinois corporations and business entities organized under other state laws.)
LLC Members Have the Right to Inspect Company Records
An LLC is a common structure used to organize a privately owned business. LLCs are owned by members, who either appoint managers to manage the business or manage the business themselves (effectively functioning as managers).
The Illinois Limited Liability Company Act establishes default rules, which can generally be superseded by an LLC’s operating agreement. Under the Illinois LLC Act, members of an LLC have the right to inspect the company’s “books and records.” And while an operating agreement can restrict a member’s access to the LLC’s records to certain categories, the restrictions must be reasonable. The default rule, though, is that members have broad rights to demand records concerning the company’s activities, finances, and “other circumstances concerning the company’s business.”
The term “books and records” is defined broadly and 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.
A Minority Member May Be Able to Access Otherwise Privileged Communications Between the LLC and its Attorney
In the scenario that we have been discussing, the controlling LLC members have decided to investigate or force out a non-controlling member. The result will sometimes be litigation between the LLC and the member. In this circumstance, the 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 that both (a) seek legal advice and (b) are not shared with third parties. When a non-controlling member has the right to access certain records under the LLC Act, the company probably cannot invoke the attorney-client privilege to conceal those records from its members. The result is that, in certain circumstances, many members of Illinois LLCs may have the right to view otherwise privileged communications, even when the nature of the communication concerns a dispute between the non-controlling member and the LLC itself.
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.
 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.”).
 If the non-controlling member is able to access the LLC’s privileged communications, those communications typically will remain privileged as to outsiders (persons who are not members of the LLC) because the non-controlling member cannot waive the LLC’s privilege.