Murfey v. WHC Ventures, LLC, No. 294, 2019 (Del. July 13, 2020) (Valihura, J.)
In a 3-2 opinion, the Delaware Supreme Court reversed a Court of Chancery decision that limited partners were not entitled to certain limited partnership books and records because the books and records were not “necessary and essential” to the purpose of valuing the limited partners’ ownership stakes in the partnerships. The Supreme Court held that the limited partners were contractually entitled to the books and records under the governing partnership agreements, without regard as to whether they also would have been entitled to the documents under 6 Del. C. § 17-305 or any showing that the documents were “necessary and essential” to the limited partners’ stated purpose.
Plaintiffs/Appellants were limited partners in each of WHC Venture 2009-1, L.P., WHC Ventures 2013, L.P., and WHC Ventures 2016, L.P. (the “Partnerships”) and demanded books and records of the Partnerships under 6 Del. C. § 17-305 and the Partnership’s governing operating agreements (the “Partnership Agreements”) for the purpose of valuing their ownership interests in the Partnerships and to investigate possible mismanagement and wrongdoing. The Partnerships agreed to make all of the demanded documents, including Schedule K-1s (“K-1s”) attached to the Partnerships’ tax returns, available for inspection by the limited partners’ expert on the condition that the expert not be permitted to make or retain copies of the K-1s or share access to the K-1s with the limited partners. After trial, the Court of Chancery determined that there was no credible basis to suspect wrongdoing by the Partnerships but that the limited partners’ stated purpose of valuing their ownership interests was proper. The Court of Chancery further held, however, that the applicable provisions in the Partnership Agreements incorporated the proper purpose requirement from Section 17-305, and the corresponding requirement that the requested documents must be “necessary and essential” to the stated purpose, which the court attributed to Section 17-305 based on caselaw applying the analogous statutory provision governing books and records inspections under the Delaware General Corporation Law, 8 Del. C. § 220. The Court of Chancery found that the limited partners failed to show that the K-1s were “necessary and essential” to their purpose and, therefore, failed to demonstrate their entitlement to the K-1s.
The Supreme Court in its majority opinion concluded that the limited partners were entitled to the K-1s under the Partnership Agreements. Because the limited partners were entitled to the K-1s under the Partnership Agreements, the Court did not address whether the limited partners would have been entitled to the K-1s under Section 17-305 or whether Section 17-305(a) incorporated the “necessary and essential” requirement from 8 Del. C. § 220. In its opinion, the Supreme Court specifically noted that whether a “necessary and essential” condition should be implied to Section 17-305(a) was an issue of first impression and no Supreme Court case had applied the “necessary and essential” requirement of 8 Del. C. § 220 in the alternative entity context.
The Partnership Agreements all included nearly identical language that the Partnerships would maintain the following books and records and that the books and records would be available for examination by any partner: (i) a current list of the full name and last known business or residence address of each partner, together with the capital contributions and partnership percentage of each of those partners and (ii) copies of the partnership’s federal, state, and local income tax or information returns and reports, if any, for the six most recent taxable years. The Partnership Agreements also provided that limited partners may inspect the books and record of the applicable Partnership upon reasonable request and subject to any reasonable standards the general partner of such Partnership may establish, for purposes reasonably related to such limited partner’s interest as a limited partner. The parties did not dispute that the language in the Partnership Agreements tracks the language in Section 17-305(a).
The majority opinion refused to imply a “necessary and essential” condition to obtaining books and records under the Partnership Agreements.
The Partnership Agreements permitted limited partners to obtain books and records for purposes reasonably related to the limited partner’s interest as a limited partner and did not expressly condition the rights of the limited partners on satisfaction of a “necessary and essential” condition. The Partnership Agreements specifically provided that limited partners were entitled to a list of full names and last known addresses of each partner as well as capital contributions and partnership interests of each partner and federal, state, and local income tax information of the Partnerships. The specific identification of tax returns and capital contributions in the Partnership Agreements highlighted the importance of such information, and the Court determined that the requested K-1s fell within the scope of the specifically enumerated categories of documents set forth in the Partnership Agreements.
In the context of inspecting the K-1s, which clearly fell within the documents identified in the Partnership Agreements, the Supreme Court determined that it would not imply a “necessary and essential” condition because the Partnership Agreements did not expressly condition the limited partners’ inspection rights on satisfying a “necessary and essential” condition and the general partner of the Partnerships chose not to subject the inspection of books and records to any standards.
Justices Traynor and Montgomery-Reeves dissented. They believed the meaning of the language in the Partnership Agreements that tracked Section 17-305 had to be interpreted in accordance with that statutory language as, in the dissenting Justices’ view, the parties would have expected that using the statute’s language in the Partnership Agreements would lead to the same, not different, rights. As the Justices reasoned, Section 17-305 itself tracks the language of 8 Del. C. § 220, and the Court of Chancery had interpreted Section 17-305 by referencing Section 220 for over two decades. The parties therefore would have understood Section 220’s “necessary and essential” condition applied to Section 17-305 and to the terms of the Partnership Agreements by use of Section 17-305’s language. The dissenting Justices disagreed with the majority that the “necessary and essential” condition did not apply to categories of documents set forth in the Partnership Agreement because such a reading would provide the limited partners with an unconditional right to all of the documents listed for any proper purpose regardless of whether the documents were related to such purpose. Finally, they disagreed that general partner’s decision not to establish standards for inspection of books and records provided the limited partners with an unconditional right to inspect documents for any proper purpose because it would be inconsistent with the requirement that the inspection be “for purposes reasonably related to the LP’s Interest as a Limited Partner,” which justified the inspection in the first instance. To eliminate the requirement that the books and records be related to the stated purpose, Justices Traynor and Montgomery-Reeves concluded, would be to read the word “for” out of the provision.