Books and Records Requests in Texas

Trying to adhere to my post-summer schedule of blogging something useful every Friday (know I will miss a few Fridays, and holiday exceptions should be permitted)….

I've had anxious, disgruntled, and worried limited partners — passive investors, not managers — come to me asking what they possibly can do "to find out what's going on with my investment?"  Their phone calls, emails, letters and meetings to and with the general have yielded nothing but stonewalling, excuses and evasions.  So the potential client assumes — and sometimes has been told pointblank by the uncooperative manager — that he will have to sue to get his answers; and just contemplating the cost of litigation increases the investors anxiety.

What the investor can do — at very low cost — is make a written demand for the partnership's books and records.  These examination rights are an important tool for investors.

Under Section 153.552 of the Texas Business Organizations Code (TBOC), any partner (or an assignee of a partnership interest who hasn't been admitted as a partner and may not want to be admitted as a partner) may request ALL of the records the partnership is obligated to maintain under Section 153.551 PLUS any other information regarding the partnership's business, affairs and financial condition "as is just and reasonable for the [partner or assignee] to examine and copy."  The 153.551 records include but aren't limited to a current list of the name, ownership interest and address of each partner; tax returns for the past six tax years; partnership agreement and certificate of formation together with amendments and restatements; written statement of every partner's past contribution to the partnership and future contributions the partner is obliged to make and when; and "books and records of the accounts of the limited partnership" or in other words, its entire financial records.

Some details: the requesting partner's examination and copying is made at his expense — not the partnership's — and has to occur at a reasonable time — usually normal business hours.  But copies of some items must be furnished at the partnership's expense, not the partners: the partnership agreement; certificate of formation; amendments and restatements of both; and federal income tax returns for the past six years.

Partnerships do NOT like to receive these requests.  Sometimes a general partner will try to ignore a request, even when the partnership agreement itself contains the same obligation (causing their denial to constitute not only a violation of the statute but also a breach of contract).   Sometimes the GP will politely decline to make the records accessible  at a reasonable time, thereby making it difficult for the limited partner to actually get the opportunity to look at the records at the company's office.  And frequently the GP will allow the partner to look at the records but will block him from making copies.

This is when the limited partner needs to know a few things:

1.  The company's time to respond to the request is tight: just five days.  That puts the GP  on defense right away.

2.  This section of the TBOC is one of the handful of provisions that CANNOT be waived or modified by the partnership agreement.  If the GP points out that the partnership agreement does contain a waiver or modification of these investor rights, the limited partner should immediately point back that any waiver or modification of the rights is invalid (that is, any attempt to waive or modify WHAT the rights are or their scope should fail).

3.  The partnership agreement may add specifications, conditions and restrictions on the manner in which the limited partner's rights may be exercised (that is, HOW the rights are exercised and HOW the company fulfills its duty to produce its books and records) beyond the plain vanilla qualification that the request is "just and reasonable" BUT the TBOC states flatly that such additional terms cannot unreasonably restrict the partner's right to access.

4.  Judges do not like to see disputes over access to books and records  appear on their docket.   And the case law in Texas puts the burden squarely on the GP to justify denying the right to examine or the right to copy.  In other words, the plaintiff investor enters the court as the presumptive winner.

5.  One of the most valuable types of information which a curious or suspicious investor can learn, is the identity and contact information of the other investors.  With that knowledge, a small investor can rally other investors — some of whom may have larger amounts at stake in the partnership and deeper pockets or better professional contacts that could enable them to fund or lead further inquiries into the GP's conduct.

6.  And this may be the most surprising part: a limited partner may sue the partnership and THEN submit a books and records demand — and it is more likely than not, the partner gets to exercise his B & R rights even though that constitutes, in effect, a run around the discovery rules of civil procedure.  Courts have listened to that argument by defendant GPs and partnerships, but hesitate when they realize the defendants are asking that the substantive rights of investors, clearly laid out in the statute adopted by the legislature and accompanied by explicit instructions that the rights granted cannot be waived or modified, should be cast aside on the basis that they don't fit neatly with rules of civil procedure.  In general the courts hold that the legislature granted these rights to every partner and it would be inconceivable that the legislature intended that a partner enjoy these rights when he doesn't need them but should be stripped of the rights when he  finds himself in litigation with the partnership.  Of course, every case is distinct and stands on its own facts and equities, and a court may throw out a B & R demand if it determines that the request fails to meet the "just and reasonable" test.  But a GP that refuses to let the partner get to the books and records can prevail only by successfully contending that the partner's request is not just and reasonable under the TBOC provision, not that it is merely inconsistent with the discovery procedures of civil litigation.

An investor can use the books and records request tool to obtain information, if he is ignorant about the condition of his investment; if he is suspicious of the GP and is searching for clues to either confirm or deny his concerns; and even if he has sued, or been sued by, the GP, in order to obtain evidence to further his complaint or to defend himself.

One more thing: the right of an investor to examine an entity's books and records doesn't apply exclusively to limited partnerships.  The same rule apples to LLCs (TBOC Section 101.502).  Corporate shareholders also have a right to examine records (TBOC Section 2.218) but surprisingly that right may not be as strong as the rights enjoyed by limited partners and LLC members: the statutory language is substantially different, probably because of historical reasons rather than intent.  Because the corporate right is the B & R examination right most widely known, and appears weaker than the more recent LP and  LLC rights, investors and attorneys may incorrectly assume that the latter rights are no stronger than the corporate right.

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