Madison Real Estate Immobilien-Anlagegesellschaft Beschrankt Haftende Kg v. Kanam USA XIX Ltd. Partnership, 2008 WL 1913237 (Del.Ch., May 01, 2008), read opinion here. (Yes, that is the correct spelling of the unusual and long case name.) Before I address the substantive parts of the opinion, allow me three brief introductory comments about this recent Chancery Court decision involving the denial, after trial, of a demand by a limited partner for books and records of a limited partnership. ( This opinion may not have the type of sexy issues that makes headlines like the recent Yahoo and Microsoft dance, but this case provides answers to the type of quotidian issues that most business litigators need to have in their toolbox.)
First, unlike most cases under DGCL Section 220, an added dimension of "books and records demands" involving alternative entities, as in this case, is the separate governing agreement that often provides a separate basis to demand documents–separate from any statutory right. Delaware cases have established that those agreements may appropriately either expand or expressly limit statutory rights to books and records, but here is the burning question for inquiring minds:
If the claim is based entirely on an agreement, and not the statute, must the requesting party still have a "proper purpose" which is a requirement of the statute, even if it is not stated as a prerequisite in the agreement? In this case, the court presented both sides of the argument thusly:
Here, the Partnership Agreement does not impose a proper purpose requirement on a limited partner’s inspection right. Therefore, Madison generally need not state a proper purpose to enforce its contractual inspection right.
However, the Chancery Court in this case goes on to allow that:
Under the “improper purpose defense,” however, a court may deny a partner’s request for access to a partnership’s records when:
(i) neither the explicit contractual provision in a partnership agreement nor statutory language negate the notion that a partner must have a proper purpose, and (ii) the partner denying another partner access to partnership business records can show that the partner seeking access is doing so for a purpose personal to that partner and adverse to the interests of the partnership considered jointly. FN96
FN96. Bond Purchase, L.L.C. v. Patriot Tax Credit Props., L.P., 746 A.2d 842, 857 (Del. Ch.1992).
See also footnote 36 and related text in this opinion for the court’s reliance on Section 220 cases by analogy in order to determine proper purpose. Accord, Donald Wolfe and Michael Pittenger, Corporate and Commercial Practice in the Delaware Court of Chancery, at 8-107, Section 8-6[a] (2007).
Second, as was mentioned in a recent Chancery opinion here, there are not as many Delaware decisions regarding "books and records demands" involving alternative entities, as compared with those under Section 220 for corporations. Thus, this opinion should be noted for its membership among a relatively sparse population. Professor Larry Ribstein, one of the nation’s leading scholars on alternative entities, has written extensively on the topic of "uncorporations" in general and comparisons with the corporate form in particular. See, e.g., here.
Third, it is notable that after a trial and extensive briefing (read: considerable expense), the request for books and records in this case was denied. As has been mentioned on these pages frequently, one should not assume that a request for books and records will be either inexpensive or easy. See generally, Professor Bainbridge’s comments here about recent proposed legislation in the U.S. Congress that would require states to make more information publicly available about the ownership of all entities.
Now, onward to more specifics of this case with apologies if my introductory remarks dwarf my discussion of the details of the opinion. This demand for books and records in this case was based on both Section 17-305 of the Delaware Revised Uniform Limited Partnership Act as well as the terms of the Partnership Agreement itself.
The court relied extensively on two prior cases to address the issue of whether the plaintiff in this case had a "proper purpose" for requesting the documents. Madison Ave. Inv. Partners, LLC v. Am. First Real Estate Inv. Partners, L. P. (Madison I ), 806 A.2d 165 (Del. Ch.2002) and BBC Acquisition Corp. v. Durr-Fillauer Medical, Inc., 623 A.2d 85 (Del. Ch.1992).
One of the issues in this case was whether the primary purpose for the records was to prepare for a tender offer. The court found the BBC case, supra, to be closer to the facts of this case and determinative of the outcome. The plaintiff in this case was an investment vehicle comprised mostly of German nationals who invested in retail real estate, often for the purpose of making tender offers. The prior Chancery Court decision in Madison I, supra, ruled that the simple fact that a limited partner is in the business of making tenders offers, does not , ipso facto, disqualify that party from establishing a proper purpose.
Contrariwise, however, the prior Chancery Court decision in BBC, supra, held that where the primary purpose was not to value one’s own current interest, but rather to determine whether to increase an offering price to buy the whole company, and if so, by how much–that primary purpose was not reasonably related to one’s interest as a shareholder, and thus, was not a "proper purpose" as is required in order to successfully pursue a books and records claim.
So too, in this case, the court concluded that the evidence demonstrated that the primary purpose for seeking books and records was for the purpose of making a tender offer, which was not a proper purpose, based on the BBC case, supra.
The court also relied on the defenses available at Section 17-305(b) which allows documents to be withheld if they are trade secrets and/or if they are the subject of confidentiality agreements with third-parties (even if, as here, they are oral agreements).
As for the strictly contract claim discussed above, the court determined that the language relied upon was not ambiguous enough to resolve doubts against the drafter, but that the language in the document providing for "books and accounts" did not include the documents sought by the plaintiff–even if a "proper purpose" requirement was not superimposed on the contract claim.
In any event, some classic contract interpretation principles were reiterated and warrant quotation:
Limited partnership agreements are contracts the courts construe like any other contract.FN80 Under Delaware law, contract construction is a question of law.FN81 When interpreting a contact, the court strives to determine the parties’ shared intent, “looking first at the relevant document, read as a whole, in order to divine that intent.”FN82 As part of that review, the court interprets the words “using their common or ordinary meaning, unless the contract clearly shows that the parties’ intent was otherwise.”FN83 If the contractual language is “clear and unambiguous,” the ordinary meaning of the language generally will establish the parties’ intent.FN84 A contract is ambiguous, however, when the language “in controversy [is] reasonably or fairly susceptible of different interpretations or may have two or more different meanings.”FN85 Under the doctrine of contra proferentem, ambiguities in a contract will be resolved against the drafter. FN86
FN80.See Arbor Place, 2002 WL 205681, at *3. The court in Arbor Place cited Elf Atochem N. Am., Inc. v. Jaffari, 727 A .2d 286, 290-91 (Del.1999), for the proposition that: “ ‘The policy of freedom to contract underlies both the [LLC] Act and the LP Act…. The basic approach of the [LLC] Act is to provide members with broad discretion in drafting the Agreement and to furnish default provisions when the members’ agreement is silent.’ “ Id.
FN81.Rhone-Poulenc Basic Chems. Co. v. Amer. Motorists Ins. Co., 616 A.2d 1192, 1195 (Del.1992).
FN82.Matulich v. Aegis Comm’ns Group, Inc., 2007 WL 1662667, at *4 (Del. Ch. May 31, 2007) (citing Kaiser Aluminum Corp. v. Matheson, 681 A.2d 392, 395 (Del.1996)); Brandywine River Prop., Inc. v. Maffet, 2007 WL 4327780, at *3 (Del. Ch. Dec. 5, 2007).
FN83.Cove on Herring Creek Homeowners’ Ass’n v. Riggs, 2005 WL 1252399, at *1 (Del. Ch. May 19, 2005) (quoting Paxson Commc’ns Corp. v. NBC Universal, Inc., 2005 WL 1038997, at *9 (Del. Ch. Apr. 29, 2005)).
FN84.Brandywine River, 2007 WL 4327780, at *3.
FN85.Rhone-Poulenc, 616 A.2d at 1196. Ambiguity does not exist simply because the parties do not agree on a contract’s proper construction. United Rentals, Inc. v. Ram Holdings, Inc., 2007 WL 4496338, at *15 (Del. Ch. Dec. 21, 2007).
FN86.See Twin City Fire Ins. Co. v. Delaware Racing Ass’n, 840 A.2d 624, 630 (Del.2003); Bond Purchase, L.L.C. v. Patriot Tax Credit Props., L.P., 1999 WL 669358, at *3 (Del. Ch. Aug. 16, 1999).
UPDATE: Here is a scholarly analysis of the case and related commentary by Professor Larry Ribstein, one of the leading experts in the country on LLCs and other "uncorporations".