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Madison Real Estate v. Kanam, Del. Ch., No. 2863, V.C. Parsons (May 1, 2008)

May 1, 2008

In this case, the Court denied a books and records demand made by a limited partner under both the terms of a partnership agreement and of DRULPA 17-305. Plaintiff, in its capacity as a limited partner of the Partnership, sought to compel access to the books and records of the defendant partnership, KanAm US XIX Limited Partnership (the “Partnership”). Plaintiff’s business involves investing in partnerships and then making tender offers for additional interests in such partnerships. Plaintiff had made several written requests to the general partner, KanAm USA Management XIX Limited Partnership (“KanAm”), seeking detailed information on properties in which the Partnership indirectly invests, and all of those requests were denied by KanAm because the information being requested was “proprietary, confidential, and in the nature of trade secrets.” Madison claimed that KanAm’s failure to provide the information requested (the “Requested Information”) violated Section 17-305 of the Delaware Revised Uniform Limited Partnership Act (the “Act”) and the partnership agreement.

Plaintiff’s stated purposes for requesting the Requested Information were (1) to determine the value of the Partnership as a whole to aid it in making a tender offer and (2) to value its existing investment. Under Delaware Law, plaintiff bears the burden of showing its primary purpose for access to books and records is proper; a merely secondary proper purpose is insufficient. While valuing a current interest is a proper purpose, in this instance it was not plaintiff’s primary purpose, and is therefore irrelevant in respect of the Court’s determination. The Court examined prior cases involving Section 17-305 of DRULPA and the corresponding section of the Delaware General Corporation Law, Section 220. The Court found that that plaintiff’s primary purpose was to determine whether or not to make a tender offer and if so on what terms, and that plaintiff’s “relatively small interest in [the Partnership] of $30,000 is not what this inspection dispute is about.” The Court found that Madison’s business of making tender offers was not sufficient evidence alone to demonstrate an improper purpose; however, because Madison’s primary purpose in making the request was to obtain information for purposes of making a tender offer, the Court likened Madison’s status to a bidder contemplating the price of its opening bid rather than an investor valuing its current interest, and therefore found that such purpose was not reasonably related to its interest as a limited partner, thereby constituting an improper purpose.

As “an alternative ground for denying access to documents” (and therefore dicta), the Court discussed additional defenses available. First, “Section 17-305(b) provides, in part, that ‘[a] general partner shall have the right to keep confidential from limited partners . . . any information which the limited partnership is required by law or by agreement with a third party to keep confidential.’” The Court found that the Requested Information was required to be kept confidential under a separate agreement between the Partnership and a third party. Second, “Section 17-305(b) further provides that ‘[a] general partner shall have the right to keep confidential from limited partners . . . any information which the general partner reasonably believes to be in the nature of trade secrets . . .’” (emphasis added by Court). The Court explained that the scope of protection, that is, “reasonable belief,” is larger than what may actually be a trade secret. The Court found support for KanAm’s argument that it reasonably believed the information to be in the nature of trade secrets because the Required Information was provided to KanAm by one of its partners with the understanding that such information was proprietary and confidential and the Requested Information was not otherwise available from public sources.  This understanding was sufficient to prove that KanAm’s belief that the Requested Information was in the nature of trade secrets was reasonable. Factors that supported the Court’s conclusion that the information was confidential and in the nature of trade secrets included (i) an agreement with a third-party to treat the information as confidential, (ii) a password-protected website, (iii) instructions to employees to keep the information confidential, (iv) confidentiality legends on the information, and (v) inability of plaintiff to find the information from public sources. Third, the Court mentioned but did not address whether disclosure was “not in the best interest of” the Partnership or “could damage” it or its business.

The Court also addressed a contract claim based on a “nebulous term” used in the Partnership Agreement: “books of account.” The partnership agreement requires the Partnership to make the “books of account” of the Partnership available for inspection. Madison claimed that “books of account” was broad enough to encompass the Requested Information. Applying normal principles of contract construction, and adopting KanAm’s narrower interpretation of “books of account” as defined in Black’s Law Dictionary, the Court found that the term “books of account” was not the same as “books and records,” and held that the Requested Information “falls outside the scope of the books of account referred to” in the partnership agreement. What did fall within that definition, according to the Court, was the partnership’s general ledger and related financial statements.

The full opinion is available here