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Court of Chancery Holds that Unitholders in Private Equity Fund Can Inspect Books and Records After Fund Loses 75% of Value

Forsythe v. CIBC Employee Private Equity Fund, C.A. No. 657-N, 2005 WL 1653963 (Del. Ch. July 7, 2005). Plaintiffs Forsythe and Tesche, who were unitholders in a Delaware limited partnership, brought an action to inspect the books and records. At the close of trial, two issues remained for post-trial briefing: (1) whether the plaintiffs stated a proper purpose; and (2) whether plaintiffs had a right to demand inspection of documents held or under the control of an entity other than the general partner. Forsythe and Tesche were employees of the Canadian Imperial Bank of Commerce ("CIBC") and limited partners of the CIBC Employee Private Equity Fund ("Fund"). CIBC created the Fund to allow employees to invest alongside CIBC. The Fund was managed by a legal entity separate from CIBC (though several senior CIBC executives who served on the CIBC investment committee were also members of the Fund's investment advisor), but it was limited to making investments in which CIBC had also invested. In a few years time, the Fund lost over 75% of its initial value. As a result of the substantial decline in the Fund's assets, plaintiffs brought an action to inspect the books and records, stating that their purposes were (1) to determine the value of certain assets in the fund and (2) to investigate wrongdoing by management. The court held that both of these were proper purposes. Specifically, the court noted that plaintiffs provided a credible basis for alleging mismanagement of the Fund, as the Fund's value fell significantly over several years while the general partner and special limited partner, who advised the fund, made substantial fees, and CIBC made highly profitable investments that the fund did not participate in. In addition, the court found that plaintiffs had good reasons for wanting to properly value their interests, as the Fund depreciated by 75% and had several investments that were difficult to value. The court also held that plaintiffs were not entitled to the books and records of CIBC, as plaintiffs were only entitled to the books and records of the company in which they owned shares or units. Authored by: R. Christian Walker 302-888-6974 rwalker@morrisjames.com