The Delaware Supreme Court recently issued a 50-page written opinion in Murfey, et al. v. WHC Ventures, LLC, et al., Del. Supr., No 294, 2019 (July 13, 2020), granting the limited partners’ demand for the K-1 tax returns issued to other limited partners, and overturning the Delaware Court of Chancery’s denial of such a request. This decision is an important read for any litigant making a demand for books and records when those rights are governed by contract.
The limited partnership agreements of the Limited Partnerships provided that limited partners could inspect, upon a showing of a proper purpose, the following documents (among others):
- the partnership tax returns, and
- information related to the name, address, capital contributions, and partnership percentage of each limited partner.
Plaintiffs below, appellants, set forth two purposes in their demand letter: valuation of their limited partnership interests, and to investigate mismanagement and wrongdoing. While the General Partner of the Limited Partnerships made various financials of such entities available for inspection, the General Partner would not make available K-1s issued to other limited partners to the Plaintiffs The K-1s were the only documents that would reflect the ownership interests of other limited partners of the Limited Partnerships. The General Partner argued, among other things, that the K-1s were not “necessary and essential” for the Plaintiffs to value their respective interests in the Limited Partnerships.
The Delaware Supreme Court rejected the General Partner’s argument that the requested documents needed to be “necessary and essential”, finding that the requested K-1s were within the scope of the limited partnership agreements. That condition was not expressly conditioned by the partnership agreements. Rather, such documents permitted the General Partner to argue that providing inspection of certain documents was not in the best interests of the Partnerships, but the General Partner did not make that argument.
The dissent took a different view, stating that language of the limiter partnership agreements at issue closely tracked Section 17-305 of the Delaware Revised Uniform Limited Partnership Act (“Section 17-305”), and because a “necessary and essential” standard is imposed in an analogous books and records statute, Section 220 of the Delaware General Corporation Law, a similar standard should be applied in this instance.
Interestingly, the written opinion does not address whether, under the plain terms of Section 17-305, a limited partner must demonstrate that the records specifically identified in that statute are “necessary and essential” to a stated purpose in the demand. The High Court held that because appellants’ demand for inspection were governed by the partnership agreements at issue, it did not need to address that issue.
N.B. The author of this blog represented the Plaintiffs/Appellants in this matter.