Delaware Supreme Court Clarifies Contractual Inspection Rights in Private Fund Documents

The Delaware Supreme Court has clarified, in Murfey v. WHC Ventures, LLC, the standard that may govern a Delaware limited partnership’s obligations to produce books and records. Borrowing from the familiar standards that govern demands for corporate books and records under 8 Del. C. § 220, Delaware courts have long held that statutory demands for a limited partnership’s books and records under 6 Del. C. § 17-305 must be accompanied by a showing that each such request is “necessary and essential” to the demanding party’s stated purpose. In this split decision, however, the Delaware Supreme Court held that limited partners seeking books and records under a contractual provision in a partnership agreement (as opposed to 6 Del. C. § 17-305) need not make the “necessary and essential” showing where the partnership agreement does not “expressly condition” the inspection right upon satisfying the “necessary and essential” standard.   

Murfey reaffirms Delaware’s strong policy favoring freedom of contract in the alternative entity context, where sophisticated parties are (generally) free to modify default rules set forth in the Delaware Code and presumed to intend the plain meaning of their words. Investment managers should consider the holding of this opinion when negotiating fund documents going forward.  

Background and the Delaware Court of Chancery Decision

The decision arose from a books-and-records demand made by two trusts whose ownership interest in certain limited partnerships had decreased over time as new investors participated and were added as limited partners. The trusts sought to inspect the limited partnerships’ books and records (specifically, to obtain copies of Schedule K-1s sent to other limited partners over a six-year period) to assist the trusts in valuing their interests in the limited partnerships, among other things, which the Court of Chancery recognized was a “proper purpose” under 6 Del. C. § 17-305. For over two decades, the Court of Chancery has further required that a limited partner seeking statutory books and records show not only a “proper purpose” but also that the records are “necessary and essential” to accomplishing that purpose. Largely as a result of this background, the Chancery Court concluded that the partnership agreements at issue — which were couched in the same language as 6 Del. C. § 17-305 — also incorporated that requirement. Because it found that the K-1s were not necessary and essential to the trusts’ valuation purpose, the Court of Chancery held that the trusts were not entitled to the K-1s under either a statutory or a contractual inspection right.  

Delaware Supreme Court Reverses and Clarifies Limited Partner Inspection Rights

The Delaware Supreme Court reversed, holding by a majority (over two dissenters) that the trusts were entitled to the K-1s under the terms of the partnership agreements. After noting that the Delaware Supreme Court had never applied the “necessary and essential” requirement when evaluating statutory inspection rights in the alternative entity context, the majority declined to reach the statutory issue and held that the partnership agreements did not evince a sufficiently clear intent to adopt that requirement. Instead, the plain language required only that the trusts’ valuation purpose be “reasonably related” to their interests as limited partners, and the K-1s fell within the scope of information the trusts were entitled to upon such a showing. Notwithstanding the dissenters’ point that the text of the agreements mirrored 6 Del. C. § 17-305, which the Court of Chancery had long held requires a “necessary and essential” showing, the majority refused to import such a condition into the partnership agreements, stressing Delaware’s longstanding policy of respecting freedom of contract in the alternative entity context and the court’s corresponding obligation to enforce agreements as written to effectuate the parties’ intent rather than implying conditions that could have been, but were not, included. Further, the majority emphasized that the partnerships should not be able to cull only the information they deem “necessary and essential” to the limited partners’ purpose when they “have not set forth any standards that pertain to such inspection requests.”  

Murfey’s Implications

After Murfey, those engaged in negotiating investment fund documents should carefully consider contractual language concerning limited partner inspection rights. Murfey’s implications may similarly apply to other private fund vehicles, including limited liability companies. In practice, investment managers should discuss with their counsel the intended scope of any contractual inspection right afforded to investors, including the extent to which it may seek to abridge or expand any statutory inspection right.