The Cayman Islands exempted limited partnership (ELP) is a popular form of investment vehicle. Here, Carey Olsen's James Noble and Yang Yang examine the extent of the rights of limited partners to the information in the investment vehicles in which they often entrust their money with another person for a long period of time and remedies as may be available under the Cayman statues and common law.
A Cayman ELP is commonly established pursuant to an Exempted Limited Partnership Agreement (the LPA). Often the relevant fund documents would also include a private placement memorandum and any subscription agreements and side letters (the Fund Documents). While the general partner manages the ELP pursuant to the Fund Documents, the Fund Documents commonly include specific provisions on the right of a limited partner to receive information in relation to the ELP.
The rights of a limited partner to receive information in respect of the ELP are also expressly provided by section 22 of the Exempted Limited Partnership Law (2018 Revision) (the ELP Law):
"Subject to any express or implied term of the partnership agreement, each limited partner may demand and shall receive from a general partner true and full information regarding the state of the business and financial condition of the exempted limited partnership."
Despite these often general provisions, we have been on numerous occasions instructed to provide Cayman Islands law advice regarding the specific rights of a limited partner to information under the Fund Documents, as well as any statutory rights to receive information.
In Dorsey Ventures Limited and XIO GP Limited (FSD 38 of 2018, unreported 22 October 2018) the Grand Court of the Cayman Islands provided clarification regarding the extent of a limited partner's rights to information in an ELP.
LP's Right to information
Under section 22 of the ELP Law a limited partner may “demand and shall receive from a general partner true and full information regarding the state of the business and financial condition of the exempted limited partnership.” However, these rights are also "subject to any express or implied provisions of a partnership agreement".
In general, the general partner would be in breach of the Fund Documents if it fails to provide information expressly provided by the Fund Documents. The general partner would also be in breach of the statutory provisions of the ELP Law in respect of the "true and full information regarding the state of the business and financial conditions" of the ELP, unless the Fund Documents contain any express provisions which would disapply the obligation to provide this information.
The statutory rights to information may be restricted by the terms of the Fund Documents. Often we see provisions subject the statutory rights to any such conditions and restrictions as the general partner may reasonably prescribe, including that the general partner may decline to provide confidential or proprietary information in connection with the investments.
In Dorsey, the general partner refused the limited partner's request for information and documents on the basis that the express provisions in the LPA excluded the general rights to receive information under section 22 of the ELP law.
The Cayman Court dismissed such interpretation and clarified that the statutory obligation under the ELP Law was greater than what was provided under the LPA and a reasonable man could not have understood that the parties to have the intention to exclude the statutory right to wider categories of information by providing specific information and documents. Therefore, to restrict or exclude the limited partner's right to receive "true and full information" would require express language by the Fund Documents. The Cayman Court clarified that providing certain class or categories of documents could not have the effect of restricting or excluding the general partner's statutory obligation under section 22 of the ELP Law.
In order to satisfy this obligation, the general partner must keep proper books and accounts such as is necessary to give a true and fair view of the business and financial condition of the Fund and to explain its transactions.
Often the Fund Documents entitle a limited partner to appoint a director to the board of the general partner. As a director, the person appointed by the limited partner is prima facie entitled to access the books and records of the general partner, in order to allow him to discharge his fiduciary duties owed to the general partner.
The English Court (whose judgments are considered persuasive in the Cayman Islands) has been willing to curtail a director’s right to inspect the books of a company (a right which is established at common law), where access to such information would be for an improper purpose or one which is injurious to the company. However in the absence of clear proof to the contrary, it is assumed that a director seeking access to the books and records of the company is doing so for a proper purpose.
Pursuant to the ELP Law, where the partnership agreement contains provisions to establish and regulate boards and committees (including any powers to be exercised by such boards and committees), a member appointed to such a board or committee may enforce these provisions. The fact that the member is not a party to the partnership agreement in his own right does not prevent the member from enforcing the provisions of the agreement.
A person appointed by the limited partner to the board or committee may thus enforce the relevant provisions under the Fund Documents and is entitled to obtain such documents as is necessary to be able such person to properly consider and review the subject of the tasks of such board or committee in order to properly discharge his/her duties as an member of such board or committee (there is also an argument that such a term is implied into the Fund Documents so as to give it business efficacy).
The ELP Law provides that that the partners of the ELP are free to agree on the remedies for any breach in the partnership agreement and these remedies will not be unenforceable solely on the basis that they are penal in nature. In the absence of any contractual remedies, a number of common law and equitable remedies are available to the limited partner in respect of the breaches of the general partner to provide information.
In respect of the general partner's breach of the Fund Documents in failing to provide Information, and the information to which the limited partner is entitled under the ELP law, the limited partner would typically have following remedies available to it: (i) an order for specific performance, compelling the general partner to provide information; and (ii) a claim for damages against the general partner for a breach of the LPA and/or the ELP law, where it can be established that the limited partner suffered a loss as a result of the breach.
Pursuant to s.64 of the Companies Law (2018 Revision), on the application of a shareholder holding not less than one-fifth of a company’s shares, the Court may appoint an inspector to examine the company’s affair and report back to the Court. This would potentially a remedy for limited partner who is also a minority shareholder of the general partner, an entity incorporated in the Cayman Islands.
The circumstances in which an inspector is likely to be appointed would require the applicant to show that the business of the company is being conducted fraudulently or unlawfully, in a manner oppressive to it members, or that the company members have not been given all the information with respect to its affairs which it might reasonably respect.
Finally, the ELP Law states that the Court is entitled to make any winding up order it considers to be just and equitable. The non-provision of the information may provide a sufficient basis for the limited partner to present a winding up petition on the just and equitable ground if coupled with prima facie evidence of misconduct or management. The usual grounds to present such a petition would be on the basis of: (i) lack of probity on the part of directors; (ii) the need for an independent investigation of company’s affairs; (iii) deadlock; (v) oppression of minority shareholder; (iv) loss of substratum; and (v) quasi-partnership.
However, in some cases the Fund Documents provide that a limited partner may not present a petition to wind up the Fund on just and equitable grounds. S.95(2) of the Companies Law provides that "the Court shall dismiss a winding up petition or adjourn the hearing of a winding up petition on the ground that the petitioner is contractually bound not to present a petition against a company". The Court in the Cayman case of Re Rhone Holdings L.P held that this article is incorporated by reference into the ELP Law. Accordingly, the LP would not be entitled to equitable relief by way of a winding up order.
The decision in Rhone Holdings L.P. has been questioned on public policy grounds in light of the purpose of just and equitable relief (being to provide an equitable remedy to a party where they may not otherwise be entitled to any relief). Whilst the decision in Rhone is currently the position of the common law in Cayman, there may be an argument (which we note was not before the Court in Rhone), that where a petition is being presented to obtain relief in respect of prejudicial, oppressive or fraudulent conduct, the public policy consideration of enforcing the terms of a contract (as endorsed by the Court of Appeal in Rhone) are outweighed by the public policy of ensuring that a wrongdoer or fraudulent party does not benefit from the improper conduct.
An original version of this article was published by Asia Business Law Journal, February 2020.