By Scott E. Waxman and Annamarie C. Larson

In Harry Greenhouse v. Polychain Fund I LP and Polychain 2030, LLC, C.A. No. 2018-0214-JRS (Del. Ch. May 29, 2019), the Delaware Court of Chancery held that a withdrawn limited partner no longer retains an equity interest in the partnership and therefore is not entitled to inspect the partnership’s books and records.

Plaintiff Harry Greenhouse was a limited partner in a fund of block chain assets, Polychain Fund I LP, a Delaware limited partnership (the “Fund”). The Fund requested the limited partners’ consent to designate side pockets of certain illiquid assets. Plaintiff then requested a full redemption of his capital account. The Fund’s chief of staff informed Plaintiff that they would used the “old terms” of the Limited Partnership Agreement (the “LPA”) to value Plaintiff’s redeemed interest, and that they would not side-pocket any assets.

Before the redemption was effective, Plaintiff and his counsel sought more information regarding the valuation of the redeemed assets, but they were told that the valuation policy would not be disclosed. Plaintiff requested suspension of the redemption request, but the Fund refused. Plaintiff received a statement that his capital account had been fully redeemed, and he accepted receipt of a wire transfer. The Fund held back 5% of Plaintiff’s capital account, pursuant to the LPA audit holdback provision. Plaintiff requested inspection of the Fund’s books and records to investigate the amount paid out upon his withdrawal. Plaintiff made a written demand under Section 17-305 of the Delaware Revised Uniform Limited Partnership Act (the “Act”). When the Fund failed to respond, Plaintiff filed a complaint.

The Court noted that under the Act, only current limited partners may inspect books and records, unless the LPA provides otherwise. Withdrawn limited partners have rights and remedies as creditors, but do not hold an equity interest that would entitle them to inspection rights. The Court then contrasted these rights to those provided under the model version of the Revised Uniform Limited Partnership Act, which allows a person dissociated as a limited partner to have access to information to which it was entitled while it was still a limited partner. On the contrary, neither the Act nor the LPA allow for rights for dissociated limited partners.

Plaintiff argued that he was still entitled to the rights of a limited partner because of the 5% holdback and an additional cash distribution based on assets that could not be valued at the time of withdrawal. The Court dismissed these arguments. Pursuant to the LPA, the 5% holdback was to be used to cover any downward audit adjustment of the Fund’s net asset value. The holdback amount was returned to Plaintiff within 30 days of the end-of-year audit, as required by the LPA. Also, the statement letter explained that the additional cash distribution was Plaintiff’s pro rata share of additional assets that could not be valued on the date Plaintiff withdrew, but could be valued five days after the statement. Neither the holdback nor the additional cash distribution represented an ongoing equity interest in the Fund, therefore Plaintiff was not entitled to the rights of a limited partner after his withdrawal.

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