Buzz

Delaware Supreme Court Upholds Limited Partner's Right to Obtain Access to Identities of Other LPs

Robert S. Reder and Nehal M. Siddiqui of Milbank, Tweed, Hadley & McCloy LLP


Adopts narrow construction of confidentiality provisions of partnership agreement and concludes that federal privacy laws do not pre-empt state access law

In Parkcentral Global, L.P. v. Brown Investment Management, L.P., the Delaware Supreme Court recently affirmed a Court of Chancery decision ordering a limited partnership to provide a list of its limited partners to one of those limited partners. The Court found that a limited partner who complies with the procedures set forth in the partnership agreement to obtain partnership information may not be denied access pursuant to a privacy policy unilaterally issued by the general partner. The Court also concluded that applicable federal privacy laws do not pre-empt provisions of the Delaware Revised Uniform Limited Partnership Act ("DRULPA") which grant limited partners access to partnership records (including the names of limited partners).

Background

In November 2008, Parkcentral Global, L.P. a hedge fund organized as a Delaware limited partnership, was liquidated following large losses that "wiped out investors' capital." With no prospects for future investment operations, Parkcentral's "only activity [became to] defend lawsuits against it." One such lawsuit was brought by limited partner Brown Investment Management, L.P., which filed a complaint in the Court of Chancery on February 4, 2010 "seeking an order that Parkcentral provide Brown with the name and address of each partner."

Brown's lawsuit followed a series of requests for such information directed by Brown to the general partner of Parkcentral pursuant to procedures set forth in the partnership agreement (described below). Brown's expressed purpose in making these requests was to contact other limited partners to investigate various potential claims against Parkcentral's general partner and auditors. The general partner denied access on the grounds that Brown "failed to state a proper purpose," as required by the partnership agreement, and that "applicable law' and Parkcentral's privacy policies purportedly prohibited the disclosure of non-public information." These privacy policies are described in a private placement memorandum ("PPM") typically issued to prospective investors which advises them that "confidentiality concerns will limit their access to partnership information." The PPM also contains a "Privacy Policy " which states that the general partner "does not disclose non-public personal information about ... clients/investors or former clients/investors to third parties" or "otherwise provide any non-public personal information about investors to outside firms, organizations or individuals, except as permitted by law." All investors, including Brown, are required to acknowledge in writing that they "reviewed the General Partner's privacy policy."

In response to Brown's lawsuit, the Vice Chancellor ordered Parkcentral to produce the list, noting that "Parkcentral had not placed restrictions to limited partners' rights in the Partnership Agreement." At the same time, the Vice Chancellor ordered Brown to preserve the confidentiality of the list and to use the information solely for the purposes set forth in its request letters. Parkcentral appealed this order to the Delaware Supreme Court.

The Court's Analysis

The Court began its analysis by underscoring that the principle of freedom of contract provides parties to a Delaware limited partnership with "broad discretion when drafting their partnership agreement." Although DRULPA õ17-305 entitles limited partners to access partnership information "if they make a reasonable demand for a purpose reasonably related to their interest as a limited partner," this section also "allows the general partner to establish reasonable standards governing the right to access information in the partnership agreement or otherwise" and "to restrict the rights of a limited partner to obtain information ... in the partnership agreement."

Against this backdrop, the Court analyzed the three arguments offered by Parkcentral in support of its refusal to disclose the partner list to Brown:

  • First, Parkcentral's partnership agreement gives each partner the right "to obtain records, including a current list of partners' names and addresses, upon reasonable demand," but subject to "reasonable standards established by the General Partner." This provision mirrors the language of DRULPA õ17-305. The Court rejected Parkcentral's assertion that the "Privacy Notice" contained in the PPM constitutes "reasonably restrictive standards" for purposes of both the partnership agreement and DRULPA that would permit the general partner to deny Brown's request. Pointing to the partnership agreement as a source of the limited partners' right to access the information requested by Brown, the Court stated that "[t]he General Partner may not eliminate that right through unilaterally issued Privacy Notices." Indeed, the Court found that the general partner's privacy policy "goes beyond reasonably governing access to information; it purports to deny completely a right granted in the Partnership Agreement. If the General Partner wished to bar access to the names and addresses of partners, it could have done so explicitly in the Partnership Agreement ..."
  • Next, federal regulations prohibit disclosure by financial institutions to a non-affiliated third party of non-public personal information about consumers (subject to an opt-out provision). [1] In response to Parkcentral's argument that these federal privacy regulations pre-empt Delaware law and therefore prohibit disclosure of the names of the other limited partners to Brown, the Court concluded that the federal privacy regulations "do not pre-empt Delaware law, nor ... apply to the partner list." For pre-emption to occur, the Court explained, Congress must express "a clear intent to pre-empt state law." In this case, the Court could find no such intent. To the contrary, the Court pointed out that the federal regulations contain an exception permitting disclosures by financial institutions where necessary "[t]o comply with Federal, State, or local laws, rules and other applicable legal requirements." In the Court's view, this exception permits disclosures to the extent required by DRULPA. Moreover, the Court noted that Parkcentral's limited partners are "not unaffiliated third parties" to whom disclosure is intended to be restricted by the federal privacy regulations.
  • Finally, the partnership agreement states that the general partner "shall have the right to keep confidential from the Limited Partners ... any information which the General Partner ... in good faith believes is not in the best interests of the Partnership or could damage the Partnership or its business or which the Partnership is required by law or agreement with a third party to keep confidential." In response to Parkcentral's claim that the general partner "believed in good faith that disclosure would damage the Partnership," the Court observed that Parkcentral "does not actively conduct business; it has no business to damage." While disclosure "may harm the General Partner's reputation" and "may limit certain individuals' ability to gain investors in future funds," it will not damage Parkcentral itself. Parkcentral also sought to characterize each limited partner as a "third party" and the PPM as an agreement between such third party and the general partner, and on this basis argued that the general partner is precluded by this "third party" agreement from providing the requested information about each limited partner to Brown. The Court rejected this argument as well, concluding that because the "limited partners all signed and became principal parties to the Partnership Agreement," none of them may be considered a third party for purposes of this exception to the partner access provision of the partnership agreement.

Conclusion

The Parkcentral decision serves as a reminder that Delaware law gives parties wide latitude in drafting partnership agreements. Particularly in such a sensitive area as the right of limited partners to obtain partnership information for a proper purpose, Delaware courts will be reluctant to enforce supplementary policies which apparently undercut express provisions of the partnership agreement. It is also interesting to note that the Court was not prepared to view the federal privacy regulations as pre-empting the access granted to limited partners by DRULPA.


Robert Reder, Retired Partner/Consulting Attorney, rreder@milbank.com

Robert Reder is serving as a consulting attorney in Milbank's Global Corporate Group, since his retirement as a partner earlier this year. He joined the Firm as an associate in 1978 and became a partner in the Global Corporate Group in 1987.

Mr. Reder has extensive experience in all aspects mergers and acquisitions transactions, and frequently counsels corporate clients on their obligations under the federal securities laws. In addition, Mr. Reder writes extensively and teaches law classes in his areas of expertise. The clients who Mr. Reder has represented over the years cover a broad range of businesses and industries, including companies engaged in healthcare-related businesses, manufacturing and technology.

Nehal M. Siddiqui, Associate, nsiddiqui@milbank.com

Nehal Siddiqui is an associate in the Global Corporate Group of Milbank, Tweed, Hadley & McCloy LLP, also located in the Firm's New York office.

Milbank, Tweed, Hadley & McCloy LLP

Milbank, Tweed, Hadley & McCloy LLP is a leading international law firm which has been providing innovative legal solutions to clients throughout the world for more than 140 years. Milbank is headquartered in New York and has offices in Beijing, Frankfurt, Hong Kong, London, Los Angeles, Munich, SÆo Paulo, Singapore, Tokyo and Washington, DC.

The Firm's lawyers provide a full range of legal services to the world's leading commercial, financial and industrial enterprises, as well as to institutions, individuals and governments. Milbank's lawyers meet the needs of their clients by offering a highly integrated and collaborative range of services across key practice groups throughout its global network. Milbank's integrated practice is underpinned by its attorneys' acknowledged technical excellence, sector expertise and strong tradition of innovation and client service.

To learn more about Milbank and its attorneys, go to www.milbank.com.

[1] Specifically, regulations adopted under the Gramm-Leach-Bliley Financial Modernization Act of 1999, 15 U.S.C. õ 6801.

Material in this work is for general educational purposes only, and should not be construed as legal advice or legal opinion on any specific facts or circumstances. For legal advice, please consult your personal lawyer or other appropriate professional. Reprinted with permission from Milbank, Tweed, Hadley & McCloy LLP.