Parkcentral Global, L.P. v. Brown Investment Management, L.P., No. 288, 2010 (Del. Supr., Aug. 12, 2010), read opinion here.
This Delaware Supreme Court decision affirmed a ruling of the Court of Chancery which allowed a limited partner to demand a list of other limited partners in a hedge fund formed as a limited partnership. (Compare: Delaware Supreme Court decision issued the day before this decision, summarized here, that denied a shareholder’s demand for books and records.)
Within three months of filing a complaint to seek books and records, the Court of Chancery held a trial and determined that pursuant to § 17-305 of the Delaware Revised Uniform Limited Partnership Act (DRULPA), as well as the terms of the partnership agreement, the general partner was required to produce a list of limited partners’ names and their last known business, residence or mailing address. The affirmed Chancery decision was highlighted here. Although the Court of Chancery refused to grant a stay pending appeal, on May 27, 2010, shortly after the Chancery opinion, the Supreme Court did grant a stay pending an appeal
DRULPA Section 17-305 entitles limited partners to access partner information and records if they make a demand for a purpose reasonably related to their interest as a limited partner. Subsection (a) allows a general partner to establish reasonable standards governing the right to access information. Subsection (f) allows a general partner to restrict the rights of a limited partner to obtain information under Section 17-305.
The stated purpose for which the limited partner sought the data, and which the Supreme Court upheld as a proper purpose, was quoted in the opinion as follows:
“(a) contact other limited partners in order to investigate claims of the general partner’s mismanagement or breaches of fiduciary duty;
(b) contact other limited partners to investigate the allegations made in [other] pending litigation;
(c) contact other limited partners to bring their attention to the [other] litigation….;
(d) contact other limited partners to investigate potential direct and derivative claims against the partnership’s auditor;
(e) contact other limited partners to discuss whether any of them would desire to pursue a derivative and/or a direct claim against the partnership’s auditors.”
Parkcentral argued that federal regulations preempted Delaware law and prohibited disclosure of the shareholder list. It referred to the Gramm-Leach-Bliley Financial Modernization Act of 1999, which provided privacy protections for customers of financial institutions. Pursuant to the Act, several federal agencies including the SEC adopted rules designed to protect the privacy interests of individuals.
Although federal agencies, acting within the scope of their Congressionally delegated authority, may preempt state law, the Court determined that the regulations at issue in this case did not preempt Delaware law.
First, the Court reasoned that one may comply with both § 17-305 and the federal regulations. See Arbor Place, L.P. v. Encore Opportunity Fund, L.L.C., 2002 WL 205681 (Del. Ch. January 29, 2002) (reviewing § 18-305 of the Delaware LLC Act, a parallel to § 17-305, the Chancellor ruled that SEC regulations did not preclude disclosure because they contained an exception to the notice and opt-out requirements in order to comply with state law.)
The Court reviewed the regulations involved which allowed for an exception when necessary to comply with state law. See citations to federal regulations at footnote 23.
The Court also rejected the argument that the partnership agreement allowed Parkcentral to keep the list of names and addresses of the other partners from disclosure. First, the Court reasoned that Parkcentral did not demonstrate that it had a good faith belief that providing a list of names and addresses would harm the partnership. See footnote 25. The Supreme Court agreed with the finding of the Vice Chancellor after trial that the general partner did not possess a good faith belief that disclosure would harm the partnership. In addition, the Delaware Supreme Court determined that there was no agreement with a third party that would require Parkcentral to keep the information confidential.
SUPPLEMENT: Law.com provides highlights of the case here.