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Delaware Supreme Court Holds That Limited Partnership Agreement That Includes Certain Books and Records Language From Section 17-305 of Limited Partnership Act Does Not Automatically Incorporate Judicial Interpretations of Section 17-305

Murfrey v. WHC Ventures, LLC, App. No. 294, 2019 (Del. Supr. Jul. 13, 2020)

Drafters of alternative entity agreements frequently cite to, or quote, statutory language to describe the parties’ obligations. But, the Delaware Supreme Court has concluded that when drafters do so, the drafters should be explicit in whether they also intend to incorporate judicial interpretations of that language, too. Here, because the governing limited partnership agreements (the “Agreements”) did not include an express requirement limiting books and records rights to those “necessary and essential” to a proper purpose, the Supreme Court declined to imply one.

Plaintiffs/Limited Partners sought K-1s attached to Defendants/Partnerships’ tax returns for the primary purpose of valuing their partnership interests and the alternative purpose of investigating suspected wrongdoing. Defendants refused on the grounds that the K-1s were not necessary and essential for the primary purpose. Before the Court of Chancery, Plaintiffs asserted that they were entitled to K-1s under Section 17-305(a) of Delaware’s Revised Uniform Limited Partnership Act (“DRULPA”) and also under the terms of the Agreements.

Although the Court of Chancery recognized that a contractual right to books and records is independent from a statutory right to books and records, the Court of Chancery concluded that in this case there was no functional difference. In an action for corporate books and records under Section 220 of the DGCL, the plaintiff must show a proper purpose for the request and further, that the documents sought are necessary and essential to achieving that purpose. Numerous decisions of the Court of Chancery have also applied that “necessary and essential” standard to Section 220’s analogue in the limited partnership context, Section 17-305(a).

Here, certain of the Agreements’ language tracked Section 17-305(a), and as a result, the Court of Chancery concluded the Agreements incorporate Section 17-305(a)’s proper purpose requirement. Going a step further, the Court of Chancery concluded that the Agreement also implies a “necessary and essential” requirement, despite the absence of express language stating such a requirement. The Court of Chancery noted that the proper purpose requirement and “necessary and essential” element always appear together in the case law, and some Court of Chancery precedent interpreting similar contractual language had implied a “necessary and essential” requirement. Because Plaintiffs did not show that the K-1s were necessary and essential to their stated purpose, the Court of Chancery denied their request for the K-1s.

On appeal, Plaintiffs again contended that they did not need to show that the requested information was “necessary and essential” to their request -- regardless of whether their request was evaluated under Section 17-305(a) or the Agreements. In part, Plaintiffs asserted the novel argument that, at most, the “necessary and essential” element applies only to Section 17-305(a)(6)’s catch-all provision, not to Section 17-305(a)(1-5), which enumerate specific document categories. The Supreme Court acknowledged that Plaintiffs’ statutory argument presented a novel perspective and also that the Court had never decided “the interesting issue” of whether Section 17-305(a) incorporates Section 220 conditions.

But ultimately, the Court declined to reach the statutory question because the Court determined that Plaintiffs were entitled to the requested records under the Agreements. The express terms of the Agreements permit limited partners to inspect partnership tax returns and documents showing the name, address, capital contributions and partnership percentage of each limited partner. By contrast, the Agreements impose no “necessary and essential” condition. To the Court’s view, how lower courts have construed Section 17-305(a) was largely immaterial because the Supreme Court had always distinguished between statutory and contractual rights to information.

And in dealing with the latter, the Court’s duty was to apply the Agreement’s express language. Beginning with Schwartzberg v. CRITEF, 685 A.2d 365 (Del. Ch. 1996), the Court discussed several cases to define the contours of when it is appropriate for a court to infer additional obligations from a limited partnership agreement. In short, a court may infer an obligation only if it concludes that, had the parties considered the issue, it is more likely than not they would have agreed to create the obligation. But, given the greater freedom of contract in the alternative entities context, courts must be wary of implying terms, lest the court “upset[] the economic balance of rights and obligations that the contracting parties bargained for ... .” Thus, the analysis must start from the presumption that if a contractual right appears to differ from a statutory right, then a court should conclude the contractual right is separate and independent from the statutory right unless the agreement expressly states that the contractual provision merely clarifies or limits the statutory right.

Applying this standard, the Court was not persuaded to imply a “necessary and essential” limitation given that the Agreements created an express contractual right to tax return and partnership capital contribution information that was of importance to limited partners.  Accordingly, the Supreme Court reversed the Court of Chancery.

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