Delaware Supreme Court Refuses to Apply Corporate Test in Limited Partnership Books and Records Case
The recent Delaware Supreme Court case of Murfey v. WHC Ventures, LLC serves as a reminder that limited partnerships are contractual in nature and therefore in a books and records demand, legal standards applicable to Delaware corporations may not be applicable.
In the Murfey case, limited partners of multiple limited partnerships demanded access to Schedule K-1s of other limited partners for the purpose of valuing their partnership interests. After their access was restricted, the limited partners brought their demand to the Court of Chancery under both § 17-305 of the Delaware Revised Uniform Limited Partnership Act (the “LP Act”) and their contractual rights in the LP agreements.
The Chancery Court followed Delaware precedent where courts interpreting these requests under the LP Act have applied traditional corporate standards because of the similarities in the LP Act and the Delaware General Corporation law (the “DGCL”). This included requiring that the requesting party not only have a proper purpose, but that the documents sought must also be “necessary and essential” to achieving that purpose. The Chancery Court found that the “necessary and essential” test was not met for the K-1s.
In its reversal, the Supreme Court acknowledged the similarities between the LP Act and the DGCL on this issue, but concluded that it did not need to address the “interesting statutory issues” raised regarding the statutory standards because it instead looked to the terms of the LP agreements. The Court focused on terms of the LP agreements and found that they provided the limited partners with the right to review the K-1s. The Court refused to apply the “necessary and essential” requirement because it was not contractually provided in the LP agreements.
The Court notably treated limited partnerships differently from corporations, despite statutory similarities, and focused on the fact that limited partnerships are creatures of contract. This case is also an important reminder to focus on books and records provisions in LP agreements and to the extent that parties want the corporate “necessary and essential” test or any other specific condition to apply, it should be explicitly provided in the agreement. Further, to the extent that parties can agree when an LP agreement is being drafted that access to certain documents, such as K-1s, should be restricted, this should also be explicitly provided.