In a
recent decision
from the Delaware Chancery
Court, it addressed the right of a beneficial owner of a Delaware statutory trust
to inspect
books and records. Curiously, the court directed
that the law of limited partnerships
and LLCs would be applied in assessing the
beneficial owner’s
inspection rights. Grand Acquisition, LLC v. Passco Indian Springs
DST, C.A. No. 12003-VCMR (Del. Ch. Sept. 7, 2016).
Under the Delaware Statutory Trust
Act, on certain terms
and conditions, beneficial owners are entitled to inspect books and records of the trust. In this case, the governing agreement
for the trust set forth certain document inspection
rights that
did not include the additional terms
and conditions
that are set forth in the statute. When a beneficial owner sought inspection under
the terms of the governing agreement, those in control of the trust asserted
that the additional conditions
required by the statute had not been satisfied. Hence, the question came to the Chancery Court:
Should the requirements for
inspection of
books and records as set forth in the governing agreement
control of
themselves,
or should there be read into them as well the additional statutory
requirements.
The court would hold that the former is correct.
Much of this decision would come down to the question of what it takes to override the default statutory rules
of the Delaware Statutory
Trust Act. In this instance, the member, Grand Acquisition, asserted that the governing instrument should
be looked at only within its four corners, and that the application of
additional statutory
requirements,
in this case those set forth in Section 3819 of the Delaware Statutory Trust
Act, should be excluded. The trust, in opposition, would argue that those provisions
should be read into the agreement unless they have been affirmatively rejected.
In determining
that the statutory requirements
would not apply, the Chancery
Court began by
treating the
contractual inspection
right as separate and independent from
the statutory
right, and then adopting prior
law setting
a relatively
low bar to the override of default statutory
rules.
This Court
consistently has
treated a contractual books
and records
right provided
in a limited liability
company’s (“LLC”) or a limited partnership’s (“LP”) governing instrument
as independent
from the relevant default
statutory right. As then-Vice Chancellor Steele held in Bond Purchase,
L.L.C. v.
Patriot Tax
Credit Properties, L.P., it is not necessary for … partnership
provisions to
include explicit
language that
they are creating contractual
rights separate
and independent
of statutory
rights in order for those provisions
to in fact create a separate and independent
contractual right. Rather, where a provision in a partnership
agreement appears
on its face to create a right separate
and independent
from a statutory right
or a right granted
in another
section of
the partnership
agreement,
the partnership
agreement must
explicitly state
that the provision is
merely clarifying
or placing
additional conditions
on the other statutory
or contractual
right if in fact that is the provision’s intended purpose. Otherwise, this Court will conclude that
the parties
intended the
provision to
create the
separate and
independent contractual
right that
the provision
on its face purports
to create. (Footnotes omitted).
This and related guidance
is important
to the application of
the “unless otherwise
provided in
a written operating agreement” standards
applied under
most LLC acts. Essentially,
should language
be read narrowly, preserving as
much is the statutory
default rule
as is possible in the face of the contractual agreement, or should it be read broadly to the effect that any reference to
the subject
matter overrides
the statutory
rule?
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