Colony Capital has won a court case in the UK that could spark greater demands from limited partners seeking transparency on underlying investments.
Inversiones Frieira, a Spanish company and the largest LP in Colyzeo Investors II , a fund sponsored by Colony in which European firm Eurazeo is a strategic partner, sought a judgment in the UK High Court that the partnership should have made available all documents it requested relating to investments made in French hotel chain Accor and hypermarket group, Carrefour, which subsequently halved in value.
Nevertheless, the High Court ruled on Monday that where transactional information was in the hands of the underlying SPVs and hadn’t been passed up to the level of the GP or the manager, then broadly this information would not constitute 'documents of the partnership' and would not need to be provided to a requesting LP.
Though seemingly a technical point, experts said the decision could have implications for future LPs when it comes to fund documentation.
Jonathan Shenkman, partner at law firm Paul Hastings, said the decision could spark LPs to bargain for greater reporting rights in relation to a fund’s underlying SPVs.
He said: “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.” He added: “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.”
Inversiones Frieira had committed €101 million to Colyzeo Investors II, which is a European co-investment fund launched in February 2007 that raised a total of €854 million in equity. The vehicle made eight investments, including in Accor and Carrefour. In the latter case, shares were bought at a cost of €275 million but by March 2010 they were worth just €131 million, according to court papers.
Seeking answers to questions about the Accor and Carrefour investments, Inversiones Frieira asked for detailed information about the financial structures underlying them such as the hedging strategy. In the case of Accor, the LP asked for information not only on the hedging structure but also the partnership’s breakdown between shares, hedging and costs and fees. Though Colyzeo did produce some information, it drew a line in March 2010 when it said the list of documents requested went “well beyond the scope” of what the LP was entitled to review, which triggered legal action.
Colyzeo argued the requests by Inversiones Frieira were a “blatant attempt” to trawl through day-to-day operational documents to prepare a claim against them.
The case is relevant not 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, and the Cayman Islands where offshore vehicles are often registered.
Opining on the case, Paul Hastings’s Shenkman said: “When negotiating limited partner agreements you want to make sure that the information, in relation to underlying SPVs, is built into the agreement as your statutory rights probably won’t get you all the information you might want to receive.”