Delaware court ruling may put LP rights in question

As a result of the decision of the Supreme Court of Delaware in Parkcentral Global LP, vs. Brown Investment Management LP, the general consensus by the legal and financial communities appears to be that general partners who wish to bar access to confidential information between limited partners can do so by simply inserting appropriate wording into the original or even an amended limited partner agreement.

If the reasoning for this consensus is limited to a reading of the P-G case, there would be no reason to disagree. However, when you compare the statutory wording with the court's decision, you should reach a more cautionary conclusion about rewriting an LPA. The issue is not cut and dried. General partners and authors of limited partnership agreements should not assume that LPs can be denied all access to information about other LPs.

Nothing found in the statute serves to completely deny the right of access. It simply allows for the imposition of reasonable “restrictions” on that right. So how does the statute align with the P-G case? This critical answer was not addressed by the court; consequently, it would be a mistake to assume the P-G decision permits general partners and/or authors of LPAs to write wording into the LPA that prohibits access to limited partner information by other LPs of the fund.

Keep in mind that the court rejected all of the arguments posited for denying or barring access to information by limited partners under the guise of “reasonable restrictions”; so the case remains a victory for LPs who wish to exercise their statutory right of access to information. Furthermore, setting aside the court's incidental reference about denying access to information by way of inserting more explicit wording in partnership agreements, the decision still stands for the proposition that the court took the right of access seriously and will apply a presumption in favor of the right.

The problem with the decision in the P-G case is not about the evidence presented at trial, or the arguments raised on appeal; rather, it resides in the court's incidental wording, and the potential for misinterpreting the law by assuming that the court opened the door for effectively eviscerating the statutorily created right in the future by simply allowing for the insertion of more explicit wording in partnership agreements so as to deny LPs the right of access to certain information.

In what should be more appropriately interpreted as obiter dictum (an incidental or passing remark), the court, after rejecting one of the arguments for denying access on the basis that “The general partner's policy (went) beyond reasonably governing access to information; (because) it purports to deny completely a right granted in the partnership agreement.” The court then injected the unnecessary comment that “(i)f the general partner wished to bar access to the names and addresses of partners, it could have done so explicitly in the partnership agreement under 17-305(f)” of the statute. However, nothing in Section 17-305(f) of the statute provides for the specific denial of such information and, it certainly does not provide for the complete denial of access to a basic right created by the General Assembly.

If the court's comment is taken as authoritative and controlling, then what previously seemed to be a clearly worded substantive right has now been made illusory because it can be easily voided by the mere “stroke of the pen” when writing an LP agreement. Under the circumstances, it is not reasonable to assume that Delaware's General Assembly would agree that it was their intent, after first articulating the right in one provision of the statute, to allow it to be so easily taken away through a series of purportedly reasonable “restrictions” found in another provision of the same statute? This writer does not think the P-G decision stands for such a sweeping interpretation.

“Delaware's rules of statutory construction are straightforward. A court must first determine whether or not the statute is ambiguous. If the statute is found to be clear and unambiguous, then the plain meaning of the statutory language controls. The fact that the parties disagree does not create ambiguity. Rather, a statute is ambiguous only if it is reasonably susceptible to different interpretations, or if a literal reading of the statute would lead to an unreasonable or absurd result not contemplated by the Legislature. When confronting an ambiguous statute, a court should construe it in a way that will promote its apparent purpose and harmonize (it) with other statutes within the statutory scheme.” See Insurance Commissioner of the State of Delaware vs. Sun Life Assurance Company of Canada (U.S.), S. Ct. of Delaware (May 13, 2011).

As discussed above, the statute unambiguously created a right of access, subject only to reasonable standards or restrictions. When the issue of whether the right could be completely barred or denied reached the courts, all of the arguments presented for denying access were rejected. Furthermore, the court never reached the issue raised by its own incidental comment because there was no explicit wording barring access to information in the partnership agreement. In other words, the court merely offered a hypothetical that had no actual bearing on the facts and arguments necessary to reach its decision.

In conclusion, practitioners involved in writing or interpreting partnership agreements need to consider and decide how to deal with the court's incidental remark in the P-G case. If the wording is not viewed as merely an incidental observation that is not legally binding (obiter dictum), then it is difficult to see how one can square the competing authorities because the court's decision doesn't supply the reasoning for such an apparent non sequitur.

The better course is to embrace the P-G decision as one that stands for protecting and defending the statutory right; not eviscerating it. Reasonable restrictions on access to information between LPs are certainly permissible to protect the confidentiality of information, but when such restrictions effectively deny any and all access by and between LPs, the partnership agreement may very well violate the statutorily created right of access that remains the law in Delaware. Consequently, general partners and/or authors of LP agreements should not assume that LPs can be denied access to information about other LPs by simply drafting more specific wording in the LP agreement. “Reasonable restrictions” on providing access to information by and between LPs is permissible, but not the total denial of all access to such information.

James C. Brennan is a partner at Capital Management Services Group, providing risk analysis and other advice and professional services to the global hedge fund community. An experienced trial attorney in practice for 30 years, he served with the United States Department of Justice in Washington, as a trial attorney from 1982 through 2006.