It is common practice for GPs to delegate fund management duties to a fund manager, in this case a sister company of the GP, Henderson Equity Partners Limited (“the Fund Manager”).

The LP investors alleged that they were led to believe that they were investing solely in private finance initiative (“PFI”Â) projects.

The Fund Manager instead invested into Laing Plc, a construction and project management company. The PFI fund subsequently fell in value by two thirds during the 2007-2008 economic downturn.

The LPs alleged that the purchase of Laing Plc was in breach of the fund’Âs mandate.

As the GP and Fund Manager were connected and the fact that the GP would not likely sue the Fund Manager the LPs sought to bring a derivative action in the name of the partnership against both the GP and the Fund Manager.

The court had to decide on the construction of the documents and also whether bringing a derivative action would amount to management activity and expose the LPs to the full liabilities of the partnership.

Mr Justice Cooke decided that the GP and Fund Manager had not breached the investment criteria however his judgment also provided insight into and a clearer demarcation of what would amount to management activities and in particular:

1.) The LP’s were entitled to pursue the derivative claim against the Fund Manager however so long as they pursued their claims in the name of the partnership they must forfeit their limited liability status;

2.) The LP’Âs were not entitled to pursue a derivative claim against the GP. They could pursue the GP as individual LPs but not in the name of the partnership. It was held that the limited partnership agreement governed claims by the LPs against the GP and the court would approach such claims as ordinary partnership disputes. Enforcement of these rights would not fall under management of partnership business;

3.) On what activities would constitute management the court affirmed the statements made in Inversiones Frieira SL v Colyzeo Investors I and II LP [2012] Bus LR 1136 which made reference to the qualifying provision in Section 6(i) as stated above in that the LPs can inspect the books, examine and advise the partners. Such activity would not constitute participation or management. An LP that analyses and discusses this information with other LPs does not become involved in the management of the partnership however participation in the decision making process and commenting on operational business decisions taken by the GP will be deemed as involvement in management activities. Conducting litigation was not partnership management;

4.) The court held in favour of the GP and Fund Manager in that they had not breached the investment criteria after having scrutinised the Limited Partnership Agreement and Management Deed.