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Chancery Rejects Argument that Books and Records Plaintiff Could “Retroactively” Comply with Statutory Demand Requirements

Martinez v. GPB Capital Holdings, LLC, C.A. No. 2019-1005-SG (Del. Ch. June 9, 2020)

The Delaware Court of Chancery largely entered judgment on the pleadings in favor of GPB Capital Holdings, LLC (“Defendant”), the general partner to four limited partnerships, holding that the plaintiffs had failed to meet the statutory requirements of 6 Del. C. §17-305 (Delaware’s statute pertaining to access to the books and records of limited partnerships). 

The plaintiffs included a limited partner of one of the four partnerships (the “Limited Partner Plaintiff”), as well as an investment advisor to various limited partners (the “Investment Advisor” and collectively “Plaintiffs”). After becoming concerned about fund performance and Defendant’s purported failure to timely file financial information, the Investment Advisor sent a demand letter on behalf of its clients requesting information relating to these concerns, purportedly acting pursuant its rights under the limited partnership agreements and under Section 17-305. 

After Defendant provided only limited information, Plaintiffs sent two more demand letters, each time responding to Defendant’s assertions that the demands were for an improper purpose and did not comport with statutory requirements. Specifically, Defendant argued that the Investment Advisor did not have standing under Delaware’s Limited Partnership Act to seek this information and did not, as a third party, have the contractual right to enforce the limited partnership agreements. Defendant also argued that the requests did not comport with Section 17-305’s requirements in requesting the information because it did not submit a power of attorney or other writing authorizing the Investment Advisor to act on behalf of the Limited Partner Plaintiff.

The Court agreed with Defendant, finding that the Investment Advisor was neither a party to the limited partnership agreements nor a third-party beneficiary, and thus could not seek specific performance of the contracts. Additionally, the Court held that it must strictly construe the terms of Section 17-305, which empowers only limited partners to bring such actions. The Court explained: “One of the fundamental rules of statutory construction is that the words in a statute must be given their ordinary meaning. If the language is clear and unambiguous, courts may not interpret the statute to mean other than what it says. [The Investment Advisor] is not a limited partner of any of [Defendant’s] Funds.  Consequently, [it] lacks standing to pursue the right of inspection under § 17-305.” (internal quotations omitted).

As to the Limited Partner Plaintiff, although it had standing to enforce inspection rights, it failed to adhere to Section 17-305’s requirements because neither of the demand letters from the Investment Advisor, purporting to act on behalf of the Limited Partner Plaintiff, was “accompanied by” a power of attorney or other writing establishing such authority at the time it was sent. The Court explained that “[w]hen applying the statutory requirements as to the form of a stockholder demand under 8 Del. C. § 220—the corporate analogue to § 17–305—our law requires ‘strict adherence.’ The intent of this rule is to ensure that the entity can respond appropriately to a valid demand, and avoid thereby the burden of litigation.” In addition, the Delaware Supreme Court, in Central Laborers Pension Fund v. News Corp. 45 A.3d 139 (Del. 2012), strictly construed an analogous statutory requirement that a demand be “accompanied by documentary evidence of beneficial ownership[,]” and reasoned that, where none was provided, then a new or amended demand was required. The Court thus determined that the affidavit at-issue, while purporting to have retroactive effect, could not render the earlier request compliant.

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