Chancery Finds That GP Was Not Property Admitted Under LP Agreement

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In the recent decision of Eames v. Quantlab Group GP, LLCC.A. No. 2017-0792-JRS  (Del. Ch. May 1, 2018), the Court considered an application under Del. C. § 17-110 to determine the validity of the admission of a new general partner to Quatlab Group, LP (“Quantlab LP”), a Delaware limited partnership.

Section 17-110 of the Delaware Revised Uniform Limited Partnership Act (“DRULPA”) provides that a partner may petition the Court of Chancery to, among other things, “determine the validity of any admission, election, appointment or removal or other withdrawal of a general partner of a limited partnership, and the right of any person to become or continue to be a general partner of a limited partnership….” 6 Del. C. § 17-110.

Per the opinion, in November 2017, a voting trustee, acting by written consent on behalf of approximately 96% of Quantlab LP’s voting limited partnership interests, purported to add Quantlab Group GP II, LLC (“Quantlab GP II”) as the general partner of Quantlab LP and then remove Quantlab Group GP, LLC (“Quantlab GP”) from its position as general partner.

The dispute arose over whether the LPA was followed in replacing Quantlab GP with Quantlab GP II. Under Quantlab LP’s limited partnership agreement (“LPA”), Quantlab LP’s general partner may be removed without cause only if at least one other general partner remains, and the addition of a new general partner requires the consent of the then-acting general partner.  Here, the admission and removal of the old and new general partner were done contemporaneously.

In response to the Section 17-110 petition, Defendant Quantlab GP moved for summary judgment that the addition of Quantlab GP II was invalid under the clear and unambiguous terms of the LPA.  Vice Chancellor Slights agreed, finding that under the LPA, it was necessary to admit a second general partner before Quantlab GP could be removed, and admitting a new general partner required Quantlab GP’s consent.  No consent was obtained, as Quantlab GP did not agree in advance to the voting trustee’s actions.  Therefore, Quantlab GP II was not properly admitted as general partner of Quantlab LP, and Quantlab GP remained the sole general partner of Quantlab LP.

Key Takeaway:

This case demonstrates the need for clear and unambiguous language of a limited partnership agreement to be followed carefully in connection with the removal or replacement of a general partner of a limited partnership.  Even though 96% of the voting limited partnership interests of Quantlab LP were in favor of replacing the general partner, and the representative of the original general partner agreed to the succession, the precise steps of the LPA were not followed, thus resulting in an invalid admission of the new general partner.

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