Tuesday, September 27, 2016
The Delaware Chancery Court Addresses Inspection Rights in Delaware Statutory Trust
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?