A Comparison by Practitioners of Delaware and Cayman Islands Limited Partnerships: Confidentiality, Contributed by Andrea R. Cohen, SharesPost, Inc.; and Caroline S. Williams, Walker
In this series of six articles, the authors provide an in-depth analysis of Delaware and Cayman Islands limited partnership laws as they apply to private equity funds. The articles give an overview of the legal frameworks, analyze core differences, examine limited partner protections, address certain concerns relating to privacy, distributions, and defaults, and cover jurisdictional issues relating to side letters and anti-money laundering (AML) compliance. This final installment concludes the series by addressing certain additional confidentiality concerns.
Delaware Confidentiality Law
As discussed earlier in this series, subject to standards of reasonableness, including a limited partner’s right to reasonably demand information for any purpose reasonably related to the limited partner’s interest as a limited partner, Delaware’s Revised Uniform Limited Partnership Act (DRULPA) enumerates a laundry list of the types of information a limited partner has the right to receive.1 The language of a specific limited partnership agreement trumps the statutory provision.
Public disclosure of information about the limited partnership’s underlying portfolio investments, as well as information concerning the limited partnership’s operations, can be devastating to a limited partnership and its underlying portfolio investments.
Since disclosure of fund information may cause many potential harms, private equity fund sponsors dramatically limit information required to be disclosed to limited partners. If the general partner reasonably believes that (1) information is a trade secret, (2) it is not in the best interests of the limited partnership to disclose information, (3) disclosure of information could damage the limited partnership or its business, or (4) information must be kept confidential as required by law or contract,2 the Delaware courts will uphold the confidentiality of such information as between the general partner and the limited partner.
Caymans Islands Confidentiality Law
As a general principle, under Cayman Islands law, the disclosure of confidential information by a person pursuant to a right that has been conferred on that person, whether by contract or by statute, or the disclosure of confidential information pursuant to a duty imposed upon a person, for example a statutory obligation of disclosure under the Cayman Islands’ AML legislation, will not constitute a breach of duty owed to the party that imparted such confidential information and will not therefore expose the person that has made disclosure to liability.
— Criminal Offences under the CRPL
The key Cayman Islands statute that governs the circumstances in which confidential information may be disclosed is the Confidential Relationships (Preservation) Law (as amended) (CRPL).
The scope of the CRPL is not as wide as may be thought at first blush. The CRPL only applies to “confidential information” relating to “business of a professional nature” that arises in or is brought into the Cayman Islands and further applies to all persons that gain possession of such confidential information at any time after such confidential information came into being, whether such persons are within the Cayman Islands or outside of the Cayman Islands.3
The CRPL provides that “confidential information” includes information concerning any property4 which the recipient of such information is not, otherwise than in the normal course of business, authorized by the person who has provided such information to divulge.5
The CRPL gives a wide definition to “business of a professional nature” specifying that it “includes the relationship between a professional person and a principal, however the latter may be described.”6 The CRPL defines “principal” as a “person who has imparted to another confidential information in the course of the transaction of business of a professional nature.”7 The CRPL gives a very broad definition to “professional person” and so in addition to capturing, as would be expected, lawyers and accountants, it also covers every type of commercial agent and adviser.8 As the CRPL applies a broad definition to “professional person” and “business of a professional nature”, a general partner of an exempted limited partnership will almost certainly fall within the definition of a “professional person” and the CRPL will apply to certain information exchanged between the general partner of an exempted limited partnership and its investors. Similarly, an investor in an exempted limited partnership may fall within the definition of “professional person.” Accordingly, depending on the circumstances, either the general partner or an investor could be the principal who has revealed confidential information to the other party (the general partner or the investor, as applicable) in the course of transacting business of a professional nature.
Why is it important for a person who has received confidential information in a business context to maintain the confidentiality of that information, unless there is a contractual or statutory basis that permits disclosure? The revealing of confidential information contrary to the CRPL constitutes a criminal offence.9
— Safe Harbors
The scope of the CRPL is softened by the existence of various circumstances in which confidential information may be sought, divulged, or attained without committing a criminal offence (each, a safe harbor).10 In particular, the CRPL will not apply to the seeking, divulging, or obtaining of confidential information in compliance with directions of the Grand Court of the Cayman Islands.11
Additionally, the seeking, divulging, or obtaining of confidential information by or to “any professional person acting in the normal course of business12 or with the consent, express or implied, of the relevant principal” will not violate the provisions of the CRPL.13 This safe harbor is particularly important in a private equity context. Ideally, the limited partnership agreement and the subscription agreement, and any side letters to the extent relevant, should contain provisions addressing and permitting the disclosure of confidential information by the general partner and/or the investor in specified circumstances. This is important not only to avoid an inadvertent violation of the CRPL but also to prevent the necessity of having to seek the consent of a principal at a future point, where the recipient of confidential information needs to reveal such confidential information but in doing so will not have the protection of a safe harbor in the CRPL or some other statutory provision under Cayman Islands law.
The CRPL also provides a safe harbor where a person seeks, divulges, or obtains confidential information in accordance with any other Cayman Islands law.14
In circumstances where the relevant contract does not confer on a professional person the authority to reveal confidential information that has been imparted by a principal, and where a subsequent request for consent to divulge such information is not forthcoming, a person who intends or is required to deliver confidential information in evidence in, or in connection with, any proceedings must apply to the Cayman Islands’ courts for directions before revealing such confidential information.15
— Recent Developments
There has recently been a significant amount of activity in the Cayman Islands in relation to the introduction of new legislation and the amending and updating of existing legislation. The CRPL has not escaped the attention of the lawmakers and there are moves afoot to repeal the CRPL and replace it with a new law governing the disclosure of confidential information.
It is anticipated that new disclosure law will, like the CRPL, regulate the disclosure of confidential information and will restate the circumstances in which a person may be required or authorized to disclose confidential information without the express consent of the person to whom a duty of confidentiality is owed. However, it is expected that the new law will differ from the CRPL in that it will not impose criminal sanctions for breach but will instead impose civil sanctions.
In addition, it is anticipated that the new disclosure law will not be limited to “professional persons” as defined in the CRPL and referred to above but will have broader scope and apply to “persons” generally. This will ensure the protection of confidential information of parties that impart such information to another person in circumstances that do not fall within the strict parameters of “business of a professional nature” but which still merit confidentiality. Similarly, any party holding or in pursuit of such confidential information, but who is not a “professional person,” will be able to rely on an applicable safe harbor provision permitting the seeking, divulging, or obtaining of confidential information in the normal course of business with the express or implied consent of the relevant principal, which would not be permissible under the CRPL given that it only confers protection on a “professional person.”
Interpretation of limited partnership agreements governed by the Cayman Islands Exempted Limited Partnership Law (2010 Revision) (EPL) remains grounded in the English common law. Recent revisions to the EPL indicate the Cayman Islands legislature’s willingness to move closer to its roots and the provisions of the DRULPA. In particular, recent revisions to the EPL have enhanced the ability of partners to control their affairs and reflect the commercial terms of their relationship contractually, by placing more reliance on the agreed provisions in the limited partnership agreement. Both the DRULPA and the EPL will continue to provide robust and reliable frameworks for the formation of limited partnerships in a private equity context.
Ms. Cohen is Vice President of Legal Affairs in the San Bruno office of SharesPost, Inc. and Ms. Williams is a partner in, and co-head of the private equity group of, the Cayman Islands office of Walkers. Matthew Phelan, a former associate in the San Francisco office of Morrison & Foerster LLP, provided invaluable assistance in the preparation of the article.
1 6 Del. C. § 17-305. It provides:”(a) Each limited partner has the right, subject to such reasonable standards (including standards governing what information and documents are to be furnished, at what time and location and at whose expense) as may be set forth in the partnership agreement or otherwise established by the general partners, to obtain from the general partners from time to time upon reasonable demand for any purpose reasonably related to the limited partner’s interest as a limited partner:
(1) True and full information regarding the status of the business and financial condition of the limited partnership;
(2) Promptly after becoming available, a copy of the limited partnership’s federal, state and local income tax returns for each year;
(3) A current list of the name and last known business, residence or mailing address of each partner;
(4) A copy of any written partnership agreement and certificate of limited partnership and all amendments thereto, together with executed copies of any written powers of attorney pursuant to which the partnership agreement and any certificate and all amendments thereto have been executed;
(5) True and full information regarding the amount of cash and a description and statement of the agreed value of any other property or services contributed by each partner and which each partner has agreed to contribute in the future, and the date on which each became a partner; and
(6) Other information regarding the affairs of the limited partnership as is just and reasonable.”
“A general partner shall have the right to keep confidential from limited partners for such period of time as the general partner deems reasonable, any information which the general partner reasonably believes to be in the nature of trade secrets or other information the disclosure of which the general partner in good faith believes is not in the best interest of the limited partnership or could damage the limited partnership or its business or which the limited partnership is required by law or by agreement with a third party to keep confidential.”
3 CRPL § 3(1).
4 Under Section 2 of the CRPL, “property” includes “every present, contingent and future interest or claim direct or indirect, legal or equitable, positive or negative, in any money, moneys worth, realty or personalty, moveable or immoveable, rights and securities thereover and all documents and things evidencing or relating thereto.”
5 CRPL § 2.
8 Section 2 of the CRPL provides that “professional person” includes “a public or government official, a bank, trust company, an attorney-at-law, an accountant, an estate agent, an insurer, a broker and every kind of commercial agent and adviser whether or not answering to the above descriptions and whether or not licensed or authorised to act in that capacity and every person subordinate to or in the employ or control of such person for the purpose of his professional activities.”
9 Section 5(1) of the CRPL provides that:
“Subject to section 3(2), whoever-
(a) being in possession of confidential information however obtained-
(i) divulges it; or
(ii) attempts, offers or threatens to divulge it; or
(b) wilfully obtains or attempts to obtain confidential information,
is guilty of an offence and liable on summary conviction to a fine of five thousand dollars and to imprisonment for two years.”
10 CRPL § 3(2).
11 CRPL § 3(2)(a).
12 Section 2 of the CRPL defines “normal course of business” as meaning “the ordinary and necessary routine involved in the efficient carrying out of the instructions of a principal including compliance with such laws and legal process as arises out of and in connection therewith and the routine exchange of information between licensees.”
13 CRPL § 3(2)(b)(i).
14 CRPL § 3(2)(c).
15 Section 4(1) of the CRPL provides “Whenever a person intends or is required to give in evidence in, or in connection with, any proceeding being tried, inquired into or determined by any court, tribunal or other authority (whether within or without the Islands) any confidential information within the meaning of this Law, he shall before so doing apply for directions and any adjournment necessary for that purpose may be granted.”
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