UK court case limits GPs’ reporting liabilities

LPs are not fully entitled to information or documents held within holding companies (or special purpose vehicles) used by private equity firms to acquire businesses, the UK’s High Court ruled earlier this year.
 
The decision could spark LPs to bargain for greater reporting rights in relation to a fund’s underlying SPVs, said Jonathan Shenkman, partner at law firm Paul Hastings. 

At the heart of the case was Inversiones, an investor, seeking greater information around two Colony Capital-backed businesses (hotel chain Accor and France-based hypermarket chain Carrefour) which had halved in value. Colony Capital denied the information request, arguing it was a “blatant attempt to trawl through Capital and CIM’s [the manager] day-to-day operational documents” to prepare a claim against them. 

The court ruled that where transactional information is in the hands of the underlying SPVs and hasn’t passed up to the level of the GP or the manager, then broadly this information would not constitute the “documents of the partnership” and would not – absent circumstances of inadequate fund level reporting – need to be provided to a requesting LP.  

The case’s relevance doesn’t lend just for English limited partnerships, which is the partnership that this was brought under, but as the English law is generally persuasive in other common law jurisdictions it is likely to be influential in the Channel Islands, the Cayman Islands and so on.

“On a statutory level, the information that the judge found was obliged to be provided to a limited partner is relatively light and certainly a lot lighter than the expectation that the limited partner in this particular case had,” Shenkman told PE Manager. 

Inversiones requested a range of documents, including draft loan agreements that had not been signed by Colony Capital with a pursued lender.    

“The judge was quite restrictive in saying that a limited partner is entitled to make a determination as to the current financial state of the partnership but that doesn’t entitle a limited partner to access absolutely everything that the GP and manager may have done or considered doing for the last five years where they have held that LP's money,” said Shenkman.

Shenkman added that lawyers representing LPs may want to negotiate into the limited partnership agreement rights to information held by underlying SPVs, but that a balance will need to be struck so as not to disrupt their limited liability status.