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In Spencer L. Murfey, III, et al. v. WHC Ventures, LLC, et al., 2020 WL 3957837 (Del. July 13, 2020), the Delaware Supreme Court held that limited partners who were seeking partnership tax records under the terms of a partnership agreement (as opposed to under 6 Del. C. Section 17-305) were not required to meet the “necessary and essential” showing because the partnership agreement did not explicitly condition the inspection rights upon proving that the tax records were “necessary and essential” to their stated purpose.

Auteurs: Brian M. Rostocki Benjamin P. Chapple Alexandria P. Murphy

Delaware courts often look to the Delaware General Corporation Law to decide cases involving alternative entities, such as limited liability companies and limited partnerships. Under 8 Del. C. Section 220, a corporate stockholder can seek books and records of a corporation if the stockholder can show a proper purpose that is reasonably related to such person’s interest as a stockholder.1 Delaware courts have long held that the scope of the demand must be “necessary and essential” to the proper purpose asserted.2

Borrowing from the familiar standards that govern demands for corporate books and records under 8 Del. C. Section 220, Delaware courts have consistently held that statutory demands for a limited partnership’s books and records under 6 Del. C. Section 17-305 (or under 6 Dec. C. Section 18-305 for limited liability companies) must be accompanied by a showing that each request is “necessary and essential” to the demanding party’s stated purpose.3 However, in Murfey, the Delaware Supreme Court held that the “necessary and essential” showing is not required—and no basis exists to infer that the showing should be required—where the inspection right is contractual and the partnership agreement does not expressly condition document inspection rights on satisfying the “necessary and essential” test.4

Background of the case

Murfey arose from a contractual books-and-records demand made by two limited partners of certain limited partnerships.5 As an initial matter, the language in the limited partnership agreements provided that limited partners could request (1) the partnership tax returns and (2) information related to the name, address, capital contributions, and partnership percentage of each limited partner.6 Although many of the books and records sought by the limited partners were produced, one category of documents – the Schedule K-1s attached to the partnerships’ tax returns – remained in dispute between the parties.7 The limited partners were provided with their own K-1s, but the limited partners specifically were seeking the K-1s of the other limited partners for the purposes of (1) valuing their ownership stake in the partnerships and (2) investigating possible mismanagement and wrongdoing.8

The Delaware Court of Chancery, based on its history of interpreting 6 Del. C. Section 17-305 in the same manner as 8 Del. C. Section 220, held that the K-1s were subject to the requirement that documents sought be “necessary and essential” to the investor’s stated purpose.9 Although the partnership agreements did not include the “necessary and essential” language, the Court of Chancery inserted the “necessary and essential” requirement into the contractual framework because it found that the partnership agreements incorporated the requirement applied in cases construing 6 Del. C. Section 17-305.10 The Court of Chancery held that the K-1s failed the “necessary and essential” test.11