SPENCER L. MURFEY, III аs Co-Trustee for the Trust for the Benefit of Spencer L. Murfey, III, under the Power of Appointment Trust of Spencer L. Murfey, Jr., u/a/d August 1, 2002 and CYNTHIA H. MURFEY as Co-Trustee for the Trust for the Benefit of Cynthia H. Murfey, under the Power of Appointment Trust of Spencer L. Murfey, Jr., u/a/d August 1, 2002, Plaintiffs Below, Appellant, v. WHC VENTURES, LLC, a Delaware limited liability company, WHC VENTURE 2009-1, L.P., a Delaware limited partnership, WHC VENTURES 2013, L.P., a Delaware limited partnership, and WHC VENTURES 2016, L.P., a Delaware limited partnership, Defendants Below, Appellee.
No. 294, 2019
IN THE SUPREME COURT OF THE STATE OF DELAWARE
Decided: July 13, 2020
Submitted: April 22, 2019. Court Below: Court of Chancery of the State of Delaware,
Upon appeal from the Court of Chancery of the State of Delaware. REVERSED and REMANDED.
Carl D. Neff, Esq. (argued), and E. Chaney Hall, Esq., Fox Rothschild LLP, Wilmington, Delaware, Counsel for Appellant.
John J. Tumilty, Esq. (argued), Morse, Barnes-Brown & Pendleton, PC, Waltham, Massachusetts; Raymond J. DiCamillo, Esq., and John M. O‘Toole, Esq., Richards, Layton & Finger, P.A., Wilmington, Delaware, Counsel for Appellee.
VALIHURA, Justice for the Majority:
This case arises from a demand for books and records of certain limited partnerships by two of their limited partners. Most of the documents demanded have been produced, but one category of documents remains in dispute—the Schedule K-1s (“K-1s“) attached to the partnerships’ tax returns. Although the limited partners are provided with their own K-1s, the limited partners seek the K-1s of the other limited partners for the purpose of valuing their ownership stake in the partnerships and in order to investigate mismanagement and wrongdoing. The partnerships have countered that the K-1s are not necessary and essential to the valuation purpose and there is no credible basis to suspect wrongdoing. The Court of Chancery, based upon its history of interpreting
I. Factual and Procedural Background
Defendant/Appellee WHC Ventures, LLC (“GP“) is the general partner of multiple Delaware limited partnerships, including Defendants/Appellees WHC Venture 2009-1, L.P., WHC Ventures 2013, L.P., and WHC Ventures 2016, L.P. (collectively, the “Partnerships,” and together with the GP, the “Appellees“). Peter Nordell, Jr. is the managing member of the GP. Substantially all of the limited partners of the Partnerships are trusts for the benefit of members, or entities owned by or for the benefit of members, of either the Murfey or the Corning families. The families have been investing with Greylock Partners since 1965, and the Partnerships were formed for the purpose of investing in specific Greylock investments.
Plaintiffs/Appellants Trust for the Benefit of Spencer L. Murfey, III (the “Spencer Trust“) and Trust for the Benefit of Cynthia H. Murfey (the “Cynthia Trust,” and with the Spencer Trust, the “Trusts” or “Plaintiffs“) are limited partners of the Partnerships. This action was filed on the Trusts’ behalf by Spencer L. Murfey, III (“Spencer“) and Cynthia H. Murfey (“Cynthia“), the beneficiaries of the Spencer Trust and Cynthia Trust, respectively. Homer Chisholm has served as trustee for the Trusts since 2007. Maria Muth served as co-trustee for the Trusts before Spencer and Cynthia replaced Muth as co-trustee for their respective trusts in 2015.
In 2011, the GP presented the limited partners of the Partnerships with two opportunities to increase their ownership stakes in WHC Venture 2009-1, L.P. (“WHC 2009“). Plaintiffs participated in only one of the opportunities. In 2011 and 2013, WHC 2009 admitted new limited partners. As a result of both the admission of new partners and the Plaintiffs’ lack of participation in the second investment opportunity, Plaintiffs’ ownership percentages in the Partnerships decreased.
On January 10, 2018, Spencer and Cynthia, on behalf of the Trusts, served a books-and-records demand on the Partnerships under
The Partnerships responded to the Demand by pointing out that Plaintiffs lacked a proper purpose and sought information not related to the alleged purposes.3 In the end, however, the Partnerships made available “all demanded documents” for inspection. In connection with the inspection, the Plaintiffs and the GP entered into a Confidentiality Agreement and Non-Disclosure Agreement Governing the Inspection of Books and Records (the “Confidentiality Agreement“).4 Spencer and Cynthia hired expert Richard Szekelyi of Phoenix Management Services to conduct the inspection.5 On July 31, 2018, Szekelyi conducted an in-person inspection of certain of the partnerships’ books and records at the office of the GP in Cleveland, Ohio.6 During the inspection, the K-1s were made available to Szekelyi to review with Nordell, but Szekelyi was not permitted to make or retain copies of the Schedule K-1s.7
Appellees subsequently agreed to make copies of the K-1s available to Szekelyi and to Plaintiffs’ counsel on the condition that the K-1s would be producеd under a “professionals’ eyes-only” designation. Plaintiffs reserved their right to pursue greater access to the documents.
The parties’ dispute culminated on September 4, 2018 when Plaintiffs filed a verified complaint. On November 19, 2018, Plaintiffs executed Amendment No. 1 to the Confidentiality Agreement.8 This amendment allowed Plaintiffs’ counsel and Szekelyi to obtain and possess copies of the K-1s on certain terms and conditions. Subsequently, Plaintiffs’ counsel and Szekelyi executed undertakings in connection with Amendment No. 1 and received copies of the K-1s.
The Court of Chancery held a trial on February 6, 2019, and the parties filed a joint schedule of evidence on March 20, 2019. The court considered whether Plaintiffs could obtain copies of the K-1s, and whether Plaintiffs’ advisors could consult with Plaintiffs concerning the information in the K-1s. The Court of Chancery issued a bench ruling on June 21, 2019. In short, despite the fact that Plaintiffs’ advisers had been given copies of the K-1s, the Court of Chancery concluded that the Plaintiffs themselves “have no right to the K-1s or the information they contain.”9
At the heart of this appeal is whether Spencer and Cynthia may make copies of the K-1s and discuss their contents and information with their advisors.10 The
In Madison Avenue Investment Partners versus American First Real Estate Investment Partners, this Court stated that a limited partner must meet three requirements to prevail on a books and records demand.11 The first two are laid out in Section 17-305(e). The demand must follow the form and manner of making demand. This is not an issue in this case.
Next, the demand must be reasonable and for a purpose reasonably related to the limited partner‘s interest as a limited partner. This requirement includes two components for the purposes the plaintiffs advance here. The party requesting records must show the documents are “necessary and essential” to accomplishing that purpose.
And to investigate potential wrongdoing, the party requesting the books and records must show “a credible basis from which the Court can infer that mismanagement, waste or wrongdoing may have occurred.” That‘s from Seinfeld versus Verizon Communications.
These requirements are where all the action is in this case.
Finally, the inspection right is subject to such reasonable standards “as may be set forth in the partnership agreement or otherwise established by the general partners.” That last part is a quote from Section 17-305(a). This is also not an issue here because the parties provided no standards established by the general partner that pertain to the analysis here.12
The Court of Chancery determined that Plaintiffs had stated two purposes—namely, valuing their partnership interests, and investigating the propriety of the Plaintiffs’ respective ownership interests in the Partnerships. Based upon the record, the court could not conclude that the Plaintiffs’ “primary purpose is something other than valuing their shares or investigating the alleged wrongful dilution.”13 It held that, “[t]hose are proper purposes under our law.”14 The court then determined that Plaintiffs were left only with the valuation of the Trusts’ ownership stakes, because it found that the Trusts “failed to demonstrate a credible basis to suspect wrongdoing in the admission of new limited partners,” and that they “also failed to establish a credible basis for suspecting wrongdoing in the context of missing an opportunity to increase investments in the WHC 2009 partnership.”15
The Court of Chancery also considered Plaintiffs’ claim that they are entitled to the K-1s under the Partnership Agreements. The relevant sections are Sections
ARTICLE XII
BOOKS AND RECORDS; ACCOUNTING; TAX ELECTIONS12.1 Books and Records. Books and records of the Partnership will be maintained at the principal office of the Partnership or at whatever other office of the Partnership as may be designated by the General Partner, and will be available for examination by any Partner or that Partner‘s duly authorized representatives at any reasonable time. The Partnership will maintain the following books and records:
12.1.1 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;
12.1.2 A copy of the Certificate of Limited Partnership and all amendments thereto filed pursuant to Section 1.2, together with executed copies of any powers of attorney pursuant to which any certificate has been executed;
12.1.3 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; and
12.1.4 Copies of this Agreement and all amendments hereto.17
Section 12.2 provides, in relevant part:
12.2 Inspection of Records.
12.2.1 Each Limited Partner has the right, on any reasonable request, and subject to whatever reasonable standards as the General Partner may from time to time establish (including standards for determining whether the purpose for the request is reasonably related to the Limited Partner‘s Interest as a Limited Partner), to obtain from the General Partner for the purposes reasonably related to the Limited Partner‘s Interest as a Limited Partner the information set forth above in Section 12.1 as well as information regarding the status of the business and financial condition of the Partnership (generally consisting of the Partnership‘s financial statements) and whatever other information regarding the affairs of the Partnership as is just and reasonable in light of the purpose related to the Limited Partner‘s Interest as a Limited Partner for which the information is sought. The General Partner may, however, keep confidential from any Limited Partner any information the disclosure of which the General Partner in good faith believes could be harmful to the business of the Partnership or is otherwise not in the best interests of the Partnership, or that the Partnership is required by law or agreement with a third party to keep confidential. Despite anything to the contrary in this Agreement or in the Act, Limited Partners will not be entitled to inspect or receive copies of the following:
- internal memoranda of any General Partner, whether relating to Partnership matters or any other matters;
- correspondence and memoranda of advice from attorneys or accountants
for the Partnership or the General Partner; or - trade secrets of the Partnership or the General Partner, investor information, financial statements of Limited Partners or similar materials, documents and correspondence.18
The court observed that the Court of Chancery “consistently has treated a contractual books and records right provided in a limited liability company‘s (“LLC“) or a limited partnership‘s (“LP“) governing instrument as independent from the relevant default statutory right.”19 It determined that Section 12.2.1 of the Partnership Agreements limits a partner‘s right by requiring a proper purpose in the very same way
Plaintiffs have not argued that they have an unconditional contractual right to inspect the partnership‘s documents. What they have argued is that upon establishing a proper purpose, all of the books and records — not some, but all — identified in Section 12.1 must be provided to the limited partner.
In other words, once they show a proper purpose, they do not need to show the requested books and records are necessary and essential to their purpose.
But Section 12.2.1 permits each limited partner to obtain the information in Section 12.1 “for purposes reasonably related to the Limited Partner‘s Interest.” The simple word “for” links the right to obtain the information in Section 12.1 to the limited partner‘s proper purpose in the very same way Section 17-305 does.
The LLC agreement in DFG Wine Co. versus Eight Estates Wine Holdings used this same language, and the Court applied Section 18-305‘s “necessary and essential” language to consider whether the member was entitled to the documents sought among those the company was required to maintain.
Plaintiffs cite no contrary case applying the proper purpose requirement without the “necessary and essential” element. Section 12.2.1 incorporates the proper purpose requirement from Section 17-305, thereby incorporating the derivative requirement that plaintiffs demonstrate the materials in Section 12.1 are necessary and essential to their valuation purpose.
Plaintiffs’ claims thus fail under the contractual provisions for the same reasons that they fail under Section 17-305.20
Plaintiffs then appealed. They raise the following issues on appeal: (1) that the
Thus, on appeal, Plaintiffs continue to press for the K-1s via two different avenues. First, they seek them pursuant to
Plaintiffs contend that the Court of Chancery‘s application of a “necessary and essential” condition overlooks the structural differences between Section 17-305 and Section 220. For еxample, Section 17-305 provides a six-item list of document categories that limited partners may obtain from the limited partnership, and each item is set off in its own sub-section.24
We do not address the interesting statutory issues Plaintiffs raise regarding Section 17-305(a). Instead, as further explained below, we hold that Plaintiffs are entitled to the K-1s under the Partnership Agreements.
II. Analysis
A. Plaintiffs Have a Contractual Right to the K-1s
As noted above, the Court of Chancery determined that Plaintiffs had stated a proper purpose, namely, valuing their respective ownership interests in the Partnerships.29 Plaintiffs contend that under the Partnership Agreements, so long as their stated purpose is reasonably related to their interests as limited partners, they are entitled to inspect the K-1s, which fall within Section 12.1, and that the Partnership Agreements do not condition a limited partner‘s inspection rights on proving that the requested documents are “necessary and essential” to their stated purpose. They say that the K-1s fall squarely within the scope of Section 12.1 because (i) they are part of the partnership tax returns, and (ii) they contain the name, address, capital contributions, and partnership perсentage of each limited partner. Thus, according to the Plaintiffs, “[u]nder the plain terms of the Partnership Agreement[s],
We agree and hold that Plaintiffs are entitled to the K-1s, which are part of the Partnerships’ tax returns. The Court of Chancery denied Plaintiffs’ request after implying a “necessary and essential” condition into the Partnership Agreements, holding that the “simple word ‘for’ links the right to obtain the information in Section 12.1 to the limited partner‘s proper purpose in the very same way Section 17-305 does,” and thus, “Section 12.2.1 incorporates the proper purpose requirement from Section 17-305, thereby incorporating the derivative requirement that plaintiffs demonstrate the materials in Section 12.1 are necessary and essential to their valuation purpose.”31
The preposition “for” does link, in a general way, the right to obtain certain information to the purpose, and in this way, the word “for” performs a certain limiting function.32 Plaintiffs sought the tax returns (including the K-1s) for the purpose of conducting their valuation exercise, and the court correctly determined that purpose was reasonably related to their interest as a limited partner. But, as we explain, that is where our agreement with the Court of Chancery ends, as we decline to import a “necessary and essential” condition into the agreements. The words “necessary” and “essential” perform an even greater limiting role than does the word “for.”33 In this context, where the requested K-1s clearly fall within two of the enumerated subsections of Section 12.1, and where the GP has chosen not to subject the right to obtain the information in Section 12.1 to any standards that are relevant here, as the court found, we decline to imply such a condition in the agreement.34
The court‘s inferring a “necessary and essential” condition raises the issue of
In Schwartzberg, the plaintiff was both a general partner and a limited partner of one defendant, and a limited partner of the other defendant. Both defendants were limited partnerships. The plaintiff sought limited partner financial information as well as lists of investors in subsidiary limited partnerships. In arguing for relief, the plaintiff asserted that he was entitled to the information under the partnership agreements, and statutorily in either his role as a general partner or his role as a limited partner.
In first summarizing its ruling against the plaintiff, the court found that the sole or predominant reason for plaintiff‘s request was to attempt to replace the limited partnerships as general partners of subsidiary partnerships, and to gain leverage over other partners with respect to litigation between them for plaintiff‘s “personal financial advantage and at considerable risk to the financial welfare of the Partnerships.”36 Because those purposes were “personal to the individual seeking access and they [were] adverse to the interests of the partnership considered jointly,” they were improper purposes.37 The court ultimately denied access on the basis of that implied defense.
In a footnote, the court observed at the start that
Chancellor Allen began his analysis of that question by observing that, “[i]t is of course generally recognized that implicit obligations consistent with the text of written obligations may, indeed under correct conditions should be inferred under both statutes and contracts.”41 But, he observed that, “[t]he conditions under which an implied
Chancellor Allen then imagined individuals negotiating a partnership agreement with respect to access to information. He noted that all investors, whether limited partners or general partners, will start with a bias in favor of access. He recognized that, “[o]ngoing information will allow assessment of the investment and inform investment decisions—minimally buy, sell or hold decisions, but also perhaps voting or other choices open to the partner.”45 Although “cheap and ready access” might be an expected default rule, he noted that there could be costs in allowing such access, which could make it preferable by some
to limit access or condition it. He concluded that in one set of circumstances, however, it seemed “rather clear that all rational investors (looking at the matter ex ante) would elect to restrict access,” namely, “when it is clearly established (by some reliable process) that the access will actually hurt the value of the joint investment.”46 He then concluded that, “there is little reason to suppose that they would not agree that access for an improper purpose should be restricted.”47 In so ruling, Chancellor Allen articulated the “improper purpose defense” by applying general contract principles regarding a court‘s ability to infer implicit obligations into a contract.
In In re Paine Webber Qualified Plan Property Fund Three, L.P. Litigation, 698 A.2d 389 (Del. Ch. 1997) followed Schwartzberg. There, the Court of Chancery held that because plaintiff limited partners lacked a proper purрose, they had no statutory right under
Other more recent cases in the alternative entity context have followed that same logic. In Grand Acquisition, LLC v. Passco Indian Springs DST, 145 A.3d 990 (Del. Ch. 2016)50 the Court of Chancery held that a beneficial owner of a statutory trust had a contractual right to inspect the trust‘s books and records independent of statutory preconditions and defenses, and that the owner‘s contractual right to inspect books and records included the right to inspect ownership records identifying other beneficial owners.
In that case, plaintiff, a beneficial owner of the Delaware statutory trust, Passco Indian Springs DST, made a demand on the trust for inspection and copies of the current list of the trust‘s beneficial owners, their contact information, and their respective ownership interests in the trust. The plaintiff contended that it was entitled to this information under both Section 5.3(c) of the trust‘s governing agreement and
The Court of Chancery, in granting the beneficial owner‘s motion for summary judgment, first focused on “whether the Trust Agreement grants the Owners an independent books and records inspection right that does not incorporate any of the preconditions or defenses in Section 3819.”51 The court observed that Section 5.3(c) of the trust agreement expressly entitles the owners to “inspect, examine and copy the Trust‘s books and records,” subject only to the condition that such inspection, examination, and copying be done “during normal business hours.”52 It then reasoned that, “[b]ecause Section 5.3(c) does not expressly include Section 3819‘s preconditions and defenses, the LLC- and LP- related case law suggests that the Trust Agreement grants the Owners an unconditional right to inspect [that trust‘s] books and records.”53
The court then determined that the owners’ right to books and records under the trust agreement included the requested
Turning to the case at hand, and using Chancellor Allen‘s sound reasoning in Schwartzberg in this context, we consider whether it is more likely than not, that the parties, had they thought to address the subject, would have agreed to create the obligation of establishing that the specific tax return information sought must be “necessary and essential” to their stated purpose of valuing their investment (which all agree is a proper purpose).
Implying terms into a written contract should be a cautious enterprise. As this Court has repeatedly observed, parties in the alternative entity context have great freedom of contract.57 As we recently said in United States v. Sanofi-Aventis U.S. LLC, 226 A.3d 1117 (Del. 2020)58 partnership agreements are a type of contract. “We, therefore, construe them in accordance with their terms to give effect to the parties’ intent.”59 Further, “[t]he parties’ intentions as reflected in the four corners of the agreement are given priority.”60 Implying terms that the parties did not expressly include risks upsetting the economic balance of rights and obligations that the contracting parties bargained for in their agreement.61 Instead, as then Vice Chancellor Steele held in Bond Purchase, L.L.C. v. Patriot Tax Credit Properties, L.P.:
it is not necessary for . . . partnership provisions to include expliсit language that they are creating contractual rights separate and independent of statutory rights in order for those provisions to in fact create a separate and independent contractual right. Rather, where a provision in a partnership agreement appears on its face to create a right separate and independent from a statutory right or a right granted in another section of the partnership agreement, the partnership agreement must explicitly state that the provision is merely clarifying or placing additional conditions on the other statutory or contractual right if in fact that is the provision‘s intended purpose. Otherwise, this Court will conclude that the parties intended the provision to create the separate and independent contractual right that the provision on its face purports to create.62
Where the parties here have disputed the inspection rights under separate statutory and agreement-based grounds, we cannot conclude, for several reasons, that such a condition should be implied in the agreements so as to preclude Plaintiffs’ access to the K-1s. First, Section 12.2.1 of the Partnership Agreements entitles limited partners “to obtain from the General Partner for purposes reasonably related to the Limited Partner‘s Interest as a Limited Partner” the information set forth in Section 12.1.63 The court correctly determined that valuing one‘s interest in the partnership is a purpose reasonably related to the Limited Partner‘s interest as a limited partner. Section 12.1 lists, as information limited partners are entitled to, “[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” under subsection 12.1.1, and “[c]opies of the Partnership‘s federal, state and local income tax or information returns and reports, if any, for the six most recent taxable years” under subsection 12.1.3.64 The specific identification of this tax return and capital contribution information highlights the importance of that particular information to investors, and the Partnerships’ recognition of that importance.
The requested K-1s fall within the scope of Section 12.1.1 because they contain the name, address, capital contributions, and partnership percentages as listed in 12.1.1. They also fall within Section 12.1.3 since they are part of the Partnerships’ tax returns,65 which can provide
Since the Partnership Agreements do not expressly condition the limited partner‘s inspection rights on satisfying a “necessary and essential” condition, and given the obvious importance of tax return and partnership capital contribution information to the Partnerships’ investors, as evidenced by the agreements, we are not persuaded that such a condition should be implied. Further, the Partnerships should not be able to cull from the tax returns only that information which they deem “necessary and essential” to the Plaintiffs’ valuation purpose when they have not set forth any standards that pertain to such inspection requests.67
Further, as a practical matter, Plaintiffs’ expert, Mr. Szekelyi, has viewed the K-1s, and in Amendment No. 1 to the Confidentiality Agreement, Appellees agreed to allow Plaintiffs’ counsel and Mr. Szekelyi to have copies of the K-1s. Plaintiffs’ advisers should be able to discuss this information with them in order to properly advise them.
Moreover, we reject the Appellees’ contentiоn that this Court could affirm on the alternative ground that Section 12.2.1(c) provides a basis for the GP to prevent Plaintiffs from having access to the K-1s.
However, we think, reading the relevant sections of the Partnership Agreements together, that the K-1s are not the type of investor information that Section 12.2.1(c) captures. This is, in part, because Section 12.1.3 entitles a limited partner to tax returns, which include the K-1s. Further, Section 12.1.1 entitles a limited partner to “[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.”70 It makes little sense to interpret Section 12.2.1(c) as restricting limited partners from inspecting or receiving copies of the very same information they are expressly allowed to examine under Sections 12.1.1 and 12.1.3. Instead, Section 12.2.1(c) is more fairly read to preclude limited partners from having access to the internal financial documents of another limited partner, e.g., the “financial statements of Limited Partners or similar materials, documents and correspondence.” K-1 forms are filed with the Partnerships’ tax returns. Thus, we agree with Plaintiffs that Section 12.2.1(c) does not provide a reasonable basis for Appellees to deny aсcess to the K-1s.
B. Confidential Treatment of the K-1s
Plaintiffs next contend that the Court of Chancery erred in determining that the K-1s and information derived therefrom were entitled to continued confidential treatment under Court of Chancery Rule 5.1. The Court of Chancery ruled that the K-1s would remain confidential pending a final ruling by this Court because allowing public access to the documents would essentially grant Plaintiffs the final relief they requested. Specifically, during the proceedings below, Appellees twice sought orders maintaining confidential treatment of certain information. In an April 24, 2019 order, the Court of Chancery denied the motions as to two categories, and granted the motion with respect to the K-1s. That order provided that:
Defendants’ Motion on the third category of information, including the identities and investment amounts of non-parties, is GRANTED, subject to a final ruling on Plaintiffs’ request for books and records. The Schedule K-1s and the information they contain are at the heart of the parties’ books and records dispute. Just as a party “cannot use the discovery process in a books and records case to gain access to the books and records ultimately at issue,” it cannot use the fact that the documents at issue were considered in the books and records proceeding to effectively obtain those documents for their own use. Allowing public access to the K-1s would allow Plaintiffs access to those same documents, and would thereby moot the parties’ dispute over whether Plaintiffs are entitled to the documents.71
Plaintiffs now request that this Court “enter an order lifting the confidentiality
Court of Chancery Rule 5.1 identifies “[e]xamples of categories of information that may qualify as Confidential Information:” “trade secrets; sensitive proprietary information; sensitive financial, business, or personnel information; sensitive personal information such as medical records; and personally identifying information such as social security numbers, financial account numbers, and the names of minor children.”73 Consistent with this Opinion, Plaintiffs should be able to examine the K-1s, and because Appellees have already agreed to give copies of the K-1s to Plaintiffs’ advisers, Plaintiffs are entitled to have copies as well. To the extent that the K-1s contain social security numbers (or partial social security numbers, e.g., the last four digits) or tax identification numbers, the Partnerships may redact those numbers. Given that the K-1s contain sensitive personal information of the other limited partners, they should continue to be treated as “Confidential Information” within the meaning of Court of Chancery Rule 5.1.74
C. Admissibility of Email Evidence
Finally, Plaintiffs contend that certain emails entered into evidence by the Partnerships were inadmissible hearsay. The emails, sent to Nordell from Homer Chisholm, reference a discussion between Maria Muth and Chisholm, the trustees of Plaintiffs at the time of the second investment opportunity, about whether to participate in that opportunity for the Trusts. As the Court of Chancery noted, these emails were relevant because “they relate to the supposed credible basis for suspecting wrongdoing.”75 But because we have concluded that Plaintiffs are entitled to the K-1s for the reasons stated above, the issues relating to the alternate proper purpose (i.e., suspecting wrongdoing) are now moot for purposes of this books and records appeal.
* * *
Finally, we respond to our dissenting colleagues. Much of their dissent focuses on the first issue raised by Plaintiffs in this appeal, namely, whether a “necessary and essential” condition should be implied in
They concede that “parties are free to contract around these limitations,” but they say that parties must expressly disavow the “necessary and essential” condition they have assumed exists in
Leaving aside the interesting issue of incorporating
point in approaching a contract dispute.”79 And there is a long history of cases that hold that limited partners’ rights of access under a partnership agreement and under the statutory scheme are distinct. There is also a long-standing policy of respecting freedom of contract in the alternative entity context.80 Notwithstanding these principles, the dissent infers that the parties intended to adopt a term limiting the limited partners’ access to the expressly enumerated categories of information in Section 12.1 based solely upon the similarity of certain phrases used in Section 12.1.2 to
First, it is axiomatic that courts cannot rewrite contracts or supply omitted provisions.81 Doing so does not respect the parties’ freedom of contract.
Aside from the fact that the assumptions upon which their conclusion is based are at best, uncertain, even the Delaware case they cite for this proposition recognizes that, “the court looks to the most objective indicia of [the parties‘] intent: the words found in the written instrument.”83 The words “necessary and essential” indisputably do not appear in the written agreements. The lead case relied upon by the dissenters is a federаl case from the United States Court of Appeals for the Fifth Circuit.84 In that case, the federal court did not add a term to the partnership agreement like the dissenters wish to do here. Rather, that court relied upon the legislative history of the Texas Uniform Limited Partnership Act to reconcile conflicting clauses in the agreement.
Although drafters of partnership agreements and operating agreements may adopt concepts from the laws of other entities, any similarity in language used in those contracts to the corresponding statutory scheme does not suggest that courts should add new terms and conditions to the contract that simply do not exist within the four corners of the agreement, particularly where the parties could have easily drafted such terms and conditions. This is especially the case here where there is a dispute as to whether “Delaware law” requires such condition to be read into
Here, the plain words, given their ordinary meaning, of the contract control—not unwritten, implied conditions that could have, but were not included.86
III. Conclusion
For the foregoing reasons, we REVERSE the Court of Chancery‘s decision below and REMAND for proceedings consistent with this Opinion.
TRAYNOR, Justice, dissenting, with MONTGOMERY-REEVES, Justice, joining:
The Majority interprets the Partnership Agreements to have expanded the scope of limited partners’ books-and-records inspections beyond what is permitted under
I. Analysis
A. The text of Section 12.2.1 of the 2009 WHC Partnership Agreement tracks Section 17-305 and thus provides for an inspection right of the same scope as the statutory right.
Section 12.2.1 of WHC 2009‘s partnership agreement87 provides that “[each Limited Partner has the right, . . . subject to whatever reasonable standards as the General Partner may from time to time establish . . ., to obtain from the General Partner for the purposes reasonably related to the Limited Partner‘s Interest as a Limited Partner,” an enumerated list of documents set forth in Section 12.1.88 The books-and-records statute for limited partnerships,
305(a)(1)-(5).92 Thus, according to Plaintiffs, because Section 12.2.1 tracks the language of
First,
As to the nature of that relationship, we agree with the Vice Chancellor—and Plaintiffs do not contest—that it is appropriate to interpret
305—which tracks the language of
305. In fact, of the cases interpreting
Section 17-305 and also citingSection 220 , none fail to mention thatSection 220 is used to interpretSection 17-305 . Notably, this count does not include the opinion below here, which would bring the tally up to more than half: eleven of twenty-one. The practice of usingSection 220 jurisprudence to interpret Section 17-305 has become so widely accepted that limited partnership treatises treat the “necessary and essential” case law fromSection 220 as applicable toSection 17-305 . ROBERT S. SAUNDERS, ET AL., FOLK ON THE DELAWARE GENERAL CORPORATION LAW Section 17-305.02 at LP-3-71–LP-3-72 (6th ed. 2019) (“[E]ven where a limited partner‘s purpose is proper, the scope of an inspection provided by the statute will typically be limited to the inspection of those books and records that are necessary and essential to the satisfaction of the stated purpose“) (internal quotation marks omitted).
Instead of addressing the statute, the Majority interprets the agreement in isolation, concluding that the language of the agreement does not explicitly require a “necessary and essential” finding and that the Court of Chancery erred in inferring the existence of that requirement in the contract. We disagree with this interpretation because it ignores the acknowledgement of both Plaintiffs and Defendants that the partnership agreement‘s text “tracks
We are also not persuaded that the Court of Chancery opinions cited by the Majority support its conclusion. In Schwartzberg v. CRITEF Assocs. Ltd. P‘ship,109 Chancellor Allen applied Katz v. Oak Industries, Inc.,110 concluding that “an obligation may be inferred when, given the terms of the express contract . . . and the circumstances of the contracting process, it is more likely than not . . . that if the parties had thought to address the subject, they would have agreed to create the obligation that is under consideration by the court ex post facto.”111 Here, given that it is undisputed that the language of the 2009 WHC Partnership Agreement “tracks
We also find In re Paine Webber Qualified Plan Property Fund Three, L.P. Litigation114 inapplicable. Notably, the partnership agreement in Paine Webber did not track the statutory text at all. The agreement provided that “[a]ny partner . . . shall be entitled to a copy of the list of the names and addresses of the Limited Partners”115—an unconditional and unqualified inspection right, whereas the statutory right requires a proper purpose. The court contrasted the contractual language with the statutory language and decided that the purposeful omission of the purpose requirement meant that the contract created a separate inspection right from the statutory inspection right. That is not the case here, where neither party disputes that the contractual provision tracks the statutory provision.
We recognize that both Grand Acquisition, LLC v. Passco Indian Springs DST116 and Bond Purchase, L.L.C. v. Patriot Tax Credit Properties, L.P.117 discuss the fact that partnership agreements can create separate and independent contractual rights for their stakeholders. But we understand “independent” and “separate” to mean that the right does not depend on the statute for its existence—they do not mean that the right necessarily is different than the statutory one in scope and application, especially when, as here, the plaintiffs have conceded that the contractual right “tracks” the statutory right. The Majority also points out that the agreement in Grand Acquisition did not expressly include the relevant statute‘s “preconditions and defenses.”118 But this is subject to the same point that we made above in our discussion about Paine Webber—the drafters of the language in that agreement did not track the statute‘s language and purposefully omitted text and conditions that were explicit in the statute. Here, the contractual language tracks the statute and, according to the Plaintiffs themselves, “Delaware law.”119 Both the similar language and the Plaintiffs’ concession lead us to conclude that the contract meant to include the deeply embedded judicial gloss on the statute‘s language.
Even when read in isolation, the 2009 WHC partnership agreement does not lend itself to a reading under which the scope of inspection bears no relationship to the stated purpose. Section 12.1 requires the partnership to maintain certain documents so that they “will be available for examination . . . at any reasonable time.”120 Section 12.2.1 provides limited partners with an inspection right that allows limited partners “to obtain . . . for the purposes reasonably related to the Limited Partner‘s Interest as a Limited Partner the information set forth above in Section 12.1.”121
The Majority notes—and we agree—that the K-1 forms fall squarely within the categories of documents listed in Section 12.1 and that the GP has not established any relevant standard for inspecting those document as permitted under Section 12.2.1. But the GP‘s failure to establish standards does not, in our view, mean—as Plaintiffs argued and the Majority appears to accept—that the limited partners have an unconditionаl right to inspect all of the documents listed in Section 12.1 upon their identification of any proper purpose. That would be inconsistent with Section 12.2.1‘s requirement that the inspection be “for purposes reasonably related to the LP‘s Interest as a Limited Partner,” which, as we understand Section 12.2.1‘s syntax, are the same “Interest” and “purposes” justifying the inspection in the first place. Indeed, to eliminate the requirement of a relationship between the purpose and the documents—as the Plaintiffs do122—would be to read the word “for” out of the provision.
Rather than granting an unconditional inspection right, Section 12.2.1, as we read it, explicitly ties inspection rights to the purpose the limited partner has identified as motivating its inspection demand. Not only that, but the linkage of the contractual inspection right to the purpose of the inspection is expressed in terms that are, practically speaking, identical to the relevant portion of
C. The email evidence was admissible.
Because we conclude that Plaintiffs are not entitled to the K-1s, we address the admissibility of email evidence—an issue that the Majority, because it reversed on other grounds, did not need to address. The emails were sent to Nordell from Homer Chisholm and reference a discussion between Maria Muth and Chisholm, the trustees of the Trusts at the time of the second investment opportunity, about whether to participate in that opportunity
II. Conclusion
We do not dispute that there might be sound reasons for allowing limited partners, either by contract or by statute, unconditional access to certain partnership documents, including the partnership‘s tax returns with all their schedules and attachments, subject, of course, to confidentiality restrictions. But
Notes
- True and full information regarding the status of the business and financial condition of the limited partnership;
- Promptly after becoming available, a copy of the limited partnership‘s federal, state and local income tax returns for each year;
- A current list of the name and last known business, residence or mailing address of each partner;
- A copy of any written partnership agreement and certificate of limited partnership and all amendments thereto, together with executed copies of any powers of attorney pursuant to which the partnership agreement and any certificate and all amendments thereto have been executed;
- True and full information regarding the amount of cash and a description and statement of the agreed value of any other property or services contributed by each partner and which each partner has agreed to contribute in the future, and the date on which each became a partner; and
- Other information regarding the affairs of the limited partnership as is just and reasonable.