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Murfey, et al. v. WHC Ventures, LLC, et al.,
No. 294, 2019 (Del. Super. July 13, 2020) (en banc)
Why it is important
Summary
In Murfey et al. v. WHC Ventures, LLC, et al., the
Delaware Supreme Court sitting en banc held in a
3-2 ruling that limited partners seeking books and
records pursuant to contractual inspection rights
did not need to demonstrate that the records were
“necessary and essential” to the asserted purpose
of their inspection. The court found that although
the “necessary and essential” requirement was
well-established under Section 220 jurisprudence,
it was error for the Court of Chancery to read the
requirement into the inspection provisions of the
partnership agreements at issue. In so holding, the
court provided valuable guidance regarding when
implied contractual obligations, including those
established by statute, may be read into alternative
entity agreements. This guidance may prompt
entities such as partnerships and limited liability
companies to revisit their operating agreements to
ensure that desired limitations on inspection rights
are clearly delineated.
This action arose in connection with a books and
records demand seeking access to partnership
records under both 6 Del. C. § 17-305 (Section
305), the Delaware statute governing partnership
records demands, and the partnerships’ respective
partnership agreements. The parties agreed
that certain records would be produced, but the
partnerships insisted that K-1 tax records be
produced on a “professionals’ eyes-only” basis
such that only the plaintiffs’ expert could review
the K-1s, but not the plaintiffs themselves. The
Court of Chancery determined that the plaintiffs’
records demand was for a proper purpose – valuing
the plaintiffs’ ownership interests – but found
that the plaintiffs failed to establish a credible
basis for suspected wrongdoing. The Court of
Chancery then applied the standard adopted from
case law governing books and records requests
on corporations to hold that the plaintiffs were
not entitled to the K-1s because they were not
“necessary and essential” to the plaintiffs’ stated
purpose for seeking the records. In so holding, the
Court of Chancery rejected the plaintiffs’ arguments
that Section 220’s “necessary and essential”
requirement for corporate inspection requests
should not be read into the statute governing
partnership records requests or into the plaintiffs’
separate contractual inspection rights under the
relevant partnership agreements.
A divided en banc court reversed and remanded to
the Court of Chancery, finding that the partnership
agreements at issue did not contain language
limiting access to books and records that were
“necessary and essential” to the purpose of the
demand, and that the plaintiffs therefore had a
contractual right to the K-1s. The court held that
implying terms into a written contract should be
a “cautious enterprise.” Because the partnership
agreements specifically listed “federal, state and
local income tax or information returns or reports”
as information limited partners were entitled to, and
did not include the “necessary and essential” limiting
language, the court concluded that the plaintiffs
were entitled to the requested records. The court
further held that, as a practical matter, it did not
make sense to prohibit the plaintiffs’ advisors from
discussing the K-1 information with the plaintiffs in
order to advise them. The court expressly declined
to rule on whether Section 220’s “necessary and
essential” requirement for corporate inspection
requests should be read into the statute governing
partnership records requests.
The dissent pointed to the similarity of the language
in the partnership agreements to Section 305 and
the fact that case law has often interpreted Section
305 in reference to Section 220. They argued that
where contract language intentionally mirrors a
statute, it should be interpreted in the same manner
as that statute. The majority disagreed, emphasizing
that the language of the agreements controls.
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