In a recent English High Court case [2012] EWCH 3259 certain limited partners (LP's) in a private equity fund (which was structured as a limited partnership) brought an action against the general partner (GP) and the fund manager which were companies in the same group. The LP's claims alleged that the fund's investment criteria had been breached.

The LP's sought to bring a derivative action in the name of the partnership against both the GP and the fund manager. The LP's sought a declaration that they were permitted to advance the claims on behalf of the partnership and that they would not be exposed to personal liability for the partnership's debts in doing so.

The Court held:

  1. The LP's were not entitled to pursue a derivative action against the GP as the LP's could pursue a claim against the GP under the partnership agreement;
  2. The circumstances of the case were sufficent to justify the bringing of a derivative claim against the manager in the name of the partnership but the taking of such action would constitute the participation in the management of the partnership and the LP's would therefore be exposed to personal liability to creditors of the partnership.

In the course of his analysis Cooke J observed that there can be some grey areas about what constitutes participation in management. Cooke J observed that the expression of a view to the GP about the performance of the partnership or the strategy or future direction of the partnership or even a preference about how a particular asset should be dealt with would not constitute participation in management. However participaion on invidiual decision making processes such as requiring notice of individual decisions or commenting upon or making representations in connection with operational business decisions of the GP would constitute participation in management by an LP. Cooke J had no hesitation in finding that the conducting of litigation on the part of the partnership would involve the LP's in management functions.

The decision also contains an interesting example of how a court would apporach the construction of exculpatory clauses which are normally included in partnerhsip agreements for the beneifit of the GP and in management agreements with fund managers.