In Grand Acquisition, LLC, v. Passco Indian Springs DST, the Delaware Court of Chancery determined a beneficial owner of a Delaware Statutory Trust (“DST”) had the right to inspect the books and records of the DST based on the language in the structure’s governing instrument. This case of first impression exhibits Delaware’s deference to the freedom of contract and allowing parties to define their own contractual relationships.
A DST is a business association form created by a governing instrument that conveys property to trustees to hold and manage for the benefit of all beneficial owners. DST’s are favored because of their ease to form, low maintenance costs, and the contractual freedoms they provide. Similar to LLC operating agreements, DST governing instruments allow parties the freedom to form their relationship as they see fit. This can include creating different classes of beneficial owners, limiting any fiduciary duties a trustee may owe, and enacting provisions that indemnify owners and trustees, among other things.
In Grand Acquisition, beneficial owners of Passco Indian Springs DST (“Trust”), sent a letter to the Trust demanding to inspect its books and records. The demand letter called for the ability to make copies of the current list of the Trust’s beneficial owners, contact information for those beneficial owners, and the current ownership interest that each beneficial owner held in the Trust. The Trust denied the demand letter, requesting that Grand Acquisition provide a reasonable basis for the information they were seeking as required under the Delaware Statutory Trust Act.
The Delaware Statutory Trust Act, 12 Del. C. § 3819 codifies the documents that a beneficial owner of a DST can inspect, which include:
- A copy of the governing instrument and certificate of trust and all amendments thereto, together with copies of any written powers of attorney pursuant to which the governing instrument and any certificate and any amendments thereto have been executed;
- A current list of the name and last known business, residence or mailing address of each beneficial owner and trustee;
- Information regarding the business and financial condition of the statutory trust; and
- Other information regarding the affairs of the statutory trust as is just and reasonable.
Grand Acquisition made a statutory demand under Section 3819 and also made a contractual demand under Section 5.3(c) of the Trust’s governing instrument. Section 5.3(c) of the Trust’s governing instrument provides beneficial owners the right “to inspect, examine, and copy the Trust’s books and records.” The only condition of Section 5.3(c) is that the inspection, examination, and copying must be done “during normal business hours.”
The Court of Chancery focused on whether the Trust’s governing instrument granted Grand Acquisition an independent right to inspect the books and records not subject to, and not incorporating, any preconditions or defenses found in Section 3819. The court reached its decision using settled law regarding limited liability companies and limited partnerships which recognizes a contractual books and records right written into the governing instrument as independent from any default statutory right.
Section 5.3(c) grants the right to inspect the Trust’s books and records but does not expressly include any statutory preconditions or defenses found in Section 3819. There is no mention in the contractual right that a “reasonable basis” must be shown for the requested books and records inspection. The court concluded that Grand Acquisition had an unqualified, unconditional right to inspect the records it requested because no express sections of Section 3819 were included in Section 5.3(c) of the governing instrument.
Grand Acquisition is important because it is a case of first impression deciding an issue on the right to inspect the books and records of a DST. The decision shows the deference the court will give to terms found in a DST’s governing instrument absent some express language defaulting to the DST statute. The court’s indicated preference for, and deference to, the freedom of contract is similar to the deference shown to operating agreements in LLCs and partnership agreements in LPs. The lesson for DST planners is not to assume that the parallel statutory framework governs the interpretation of a DST agreement provision that does not adopt that framework by contract.
Jason Rigby is a 4ED student at Delaware Law School and an Articles Editor with the Delaware Journal of Corporate Law.
Suggested Citation: Jason Rigby, Contractual Versus Statutory Rights In Books And Records Demands On Delaware Statutory Trusts, Del. J. Corp. L (Oct. 24, 2016), www.djcl.org/blog.