Inspection rights in a partnership agreement are frequently ignored until a dispute arises. And by that time, a limited partner’s degree of access may make the difference as to whether a lawsuit is ultimately filed.
Section 17-305 of the Delaware Revised Uniform Limited Partnership Act , 6 Del. C. § 17-101, et seq. (“DRULPA” or the “Act”), grants a limited partner of a Delaware limited partnership the right to demand access to the partnership’s books and records in a summary proceeding analogous to a shareholder’s right to bring a § 220 action. See Del. C. § 220. While Delaware law is clear that a limited partner’s inspection right is not without bounds, it is less clear to what extent it may be contractually limited and, more importantly, whether a limited partner can contract away their information rights entirely.
Section 17-305(a) provides that a limited partner’s right to access information may be “subject to such reasonable standards (including standards governing what information (including books, records and other documents) is to be furnished, at what time and location, and at whose expense) as may be set forth in the partnership agreement.” Delaware courts have held that such reasonable standards should not be used to “deny completely a right granted in the Partnership Agreement,” Parkcentral Glob., L.P. v. Brown Inv. Mgmt., L.P., 1 A.3d 291, 296 (Del. 2010), and that a limited partnership’s adoption of “reasonable standards” should not “substantively reduce the [statutory] right itself.” Madison Ave. Inv. Partners, LLC v. Am. First Real Est. Inv. Partners, L.P., 806 A.2d 165, 171-72 (Del. Ch. 2002).
In 2001, subsection (f) was added to Section 17-305, providing a new avenue for limited partnerships to restrict information rights. That subsection provides: “The rights of a limited partner to obtain information as provided in this section may be expanded or restricted in an original partnership agreement . . .” The stated purpose for adding this subsection was “to permit a partnership agreement to further restrict the rights of a limited partner to obtain information.” 73 Del. Laws, c. 73, § 20 (2001). The legislative history does not address, however, whether a partnership agreement can waive entirely a limited partner’s information rights under the Act.
There are few Delaware cases interpreting Section 17-305 and even fewer that post-date the addition of subsection (f). And no case has considered whether the newly added section permits a wholesale elimination of a limited partner’s statutory information rights. However, there is support for the position that such rights cannot be completely disclaimed in a partnership agreement.
First, Delaware courts have defined the word “restrict” to mean “to restrain within bounds; to limit; to confine.” State ex rel. Lucey et al. v. Terry, 196 A. 163, 167 (Del. Super. 1937). Thus, a natural reading of the word restrict would suggest only limitation, not wholesale elimination of a right. Indeed, a different section of the DRULPA, dealing with fiduciary duties, expressly provides that limited partnership agreements may contractually “expand, restrict, or eliminate any fiduciary duties that a person may owe[,]” 6 Del. C. § 17-1101(d), suggesting that if the legislature intended to permit complete eradication of such information rights in a partnership agreement, they would have added the word “eliminate” to subsection (f). Additionally, the Delaware Chancery Court, in interpreting Section 18-305 of the Delaware Limited Liability Company Act (the analogue to § 17-305 for LLCs), which contains similar language to Section 17-305, determined that Section 18-305 “allows ‘reasonable’ modification of inspection rights[,]” as opposed to total waiver of such rights. Durham v. Grapetree, LLC, No. CV 2018-0174-SG, 2019 WL 413589, at *2 (Del. Ch. Jan. 31, 2019). On the flip side, there is also support for the notion that a partnership agreement can deny access to items to which a limited partner is specifically entitled by statute. See Parkcentral Global, L.P., 1 A.3d at 296 (suggesting that under § 17-305(f), parties can fully eliminate access to certain categories of information to which limited partners are statutorily entitled, such as the names and addresses of partners).
Given the uncertainty over whether, and to what extent, a limited partner can contractually waive their right to information in the partnership agreement, any analysis of a demand for information must include reference to the statute, as well as the relevant partnership agreement, to determine whether the agreement incorporates, expands upon, or disclaims (in whole or in part) the rights available under the Act. Moreover, because a limited partner’s inspection rights can be an important tool for conducting pre-suit discovery, extra consideration should be given to the language used in a limited partnership agreement to define the scope of such a right.