(1) Inversiones Frieira Sl and Another v (1) Colyzeo Investors Ii Lp (2) Colyzeo Investment Management Ltd
| Jurisdiction | England & Wales |
| Judge | Mr Justice Norris |
| Judgment Date | 14 July 2011 |
| Neutral Citation | [2011] EWHC 1762 (Ch) |
| Docket Number | Case No: HC10C02611 |
| Court | Chancery Division |
| Date | 14 July 2011 |
[2011] EWHC 1762 (Ch)
Mr Justice Norris
Case No: HC10C02611
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
Peter De Verneuil Smith (instructed by SC Andrew LLP) for the Claimants
Andrew Hunter (instructed by Clifford Chance LLP) for the Defendants
Hearing date: 19 April 2011
The question in the present case is the extent to which an investor in a co-investment vehicle owned and managed by connected companies can discover what has actually happened to his money, and to what extent he must simply rely on what is reported to him by way of explanation as to why his investment has halved in value.
Colyzeo Investors II LP ("the Partnership") is a limited partnership established in February 2007. It was established to enable investors to co-invest with Colony Capital LLC and its affiliates ("Colony Funds") in real estate related investments located in Europe. The documents inviting participation describe the areas of proposed activity as including direct investments in real estate, purchases of distressed assets, investments in development opportunities and "investments in complex operating companies that utilise or have significant dependence on real estate". Some of this investment activity would result in physical assets in the ownership of the Partnership: but other investment activity might result in the Partnership acquiring rights of action arising under joint ventures or in special purpose vehicles in which Colony Funds or third parties may be participants.
The Partnership was a limited partnership under English law. The investors were to be limited partners. The sole general partner of the Partnership was Colyzeo Capital II LLP ("Capital"), itself a limited liability partnership under English law. As a limited liability partnership Capital in turn had managing partners (and they in turn were another Colony company ("ColonyCo") and its Chief Executive). So the structure was that the board of ColonyCo and its CEO would act as the agents of Capital who would in turn act as the sole agent of the Partnership.
The documents inviting participation disclosed that the Partnership would delegate its investment management and operating services functions to yet another Colony company called Colyzeo Investment Management Limited ("CIM") which would act as manager to the Partnership providing discretionary management services.
As is explained in the evidence of Serge Platonow, a collective investment scheme in which investors commit funds to a limited partnership is the predominant private equity model. That is because (a) the investor's liability is limited: (b) the partnership structure means that it is tax transparent (profit, should there be any, being taxed in the hands of the investor and not in the hands of the partnership): and (c) it permits the specific requirements of individual investors to be accommodated. Mr Platonow further explains that adopting this structure means that it must be managed by a general partner, who accepts unlimited liability for all debts and liabilities of the partnership: and invariably such a general partner appoints an investment manager to conduct the affairs of the partnership. This case, therefore, does not involve any arrangements which are exceptional or unusual.
The direct rights of the individual investor will be found in the document constituting the limited partnership.
The Partnership was constituted by a Deed dated 23 February 2007 made between Capital (as general partner) and two affiliated Colony companies as initial limited partners. Clause 2.1 of the Deed said:—
"The rights and liabilities of the Limited Partners shall be as provided herein, except as otherwise expressly provided in [the Limited Partnership Act 1907]".
By Clause 2.3.2 of the Deed it was provided:—
"While any Manager has been appointed, [Capital] shall execute all documents on behalf of the Partnership where so directed by the Manager and shall represent the Partnership in its dealings with the Manager".
The responsibility of CIM as manager was set out in Clause 3.3 of the Deed in these terms:—
"[CIM] shall undertake and shall have exclusive responsibility for the management, operation and administration of the business and affairs of the Partnership and, subject as provided herein, shall have the power and authority to do all things necessary to carry out the purposes of the Partnership…".
Clause 3.2 of the Deed provided that the Partnership would be bound by the terms of the Management Agreement.
The business and affairs of the Partnership were identified in Clause 3.1.1 of the Deed. This identified (at slightly greater length) the primary purpose of the Partnership in the terms which I have outlined above, specifically providing that:—
"[CIM], on behalf of the Partnership, may engage in open market purchases, privately negotiated transactions or other means of pursuing Investments and may…engage in Investments directly or indirectly, through subsidiaries, partnership interests, joint ventures or otherwise".
By Clause 3.5 of the Deed the members of the Partnership agreed that CIM be authorised to act in particular ways to achieve those purposes by means of such transactions. They agreed that CIM should have "full power and authority to act on behalf of the Partnership and with the power to bind the Partnership thereby and without prior consultation with any of the Limited Partners". CIM was not a party to the Deed: so rather than conferring direct authority that provision probably had the effect of authorising Capital to contract with CIM on those terms. The specific powers to be conferred (material to the present application) were the following:—
(a) By Clause 3.5.1 "to formulate the investment policy of the Partnership" provided that CIM had due regard to the purpose of the Partnership as set out above:
(b) By Clause 3.5.2 "to acquire…or otherwise deal in or with the Investments…whether directly or indirectly, through subsidiaries, partnership interests, securities, joint venture or otherwise":
(c) By Clause 3.5.7 "to open and maintain bank accounts in the name of the Partnership":
(d) By Clause 3.5.19 "to arrange for the assets of the Partnership to be held in the name of [Capital] or to procure that the assets of the Partnership are held by a custodian and to maintain the Partnership's records and books of account at the Partnership's principle place of business and to allow any Limited Partner or its representative access thereto at any time during normal business hours by prior arrangement for the purpose of copying the same…":
(e) By Clause 3.5.22 "to engage…investment and financial advisors and consultants as it may be necessary or advisable in relation to the affairs of the Partnership":
(f) By Clause 3.5.29 "in connection with its Investments [to] purchase typical hedging instruments…designed to protect the Partnership against adverse movements in currency, stock price and/or interest rates but not intended to speculate on an uncovered basis…or to trade in the foregoing".
There were some specific restrictions on the activities of CIM. These were set out in Clause 3.6 in the form of a direct covenant between CIM and the limited partners (even though CIM was not a party to the Deed). Those material to the present application are:—
(a) Clause 3.6.1 imposed a limit on the size of any investment CIM could make in an individual project:
(b) By Clause 3.6.5 CIM agreed not to borrow money or enter into credit facilities or to purchase derivatives which were speculative in nature and not used as hedging instruments relating to an Investment or the financing thereof: and
(c) Not to make any Investment without having been advised by Colyzeo Investment Advisors Limited (another Colony company) to do so.
The Deed also contains (in Clause 14) provision for an Advisory Committee composed of persons not associated with Investments. But Clause 14.4 provided that CIM should not be required to follow any advice or recommendation of Advisory Committee but had authority to exercise its powers as set out in the Deed and in the Management Agreement at its own discretion.
Within this context what were the rights of the investors in relation to Capital as general partner? They are to be found in various places in the Deed as follows:—
(a) By Clause 3.4 of the Deed it was provided that:—
"The Limited Partner shall take no part in the management, operation and administration of the business and affairs of the Partnership, and shall have no right or authority to act for the Partnership or to take any part in or in any way to interfere in the management, operation and administration of the Partnership…otherwise than as provided in [the Limited Partnerships Act 1907] or as set forth in this…Deed".
(b) Clause 3.4 continued expressly to provide that the limited partners and their duly authorised agents "shall at all reasonable times have access to and the right to inspect the books and accounts of the Partnership".
(c) The Limited Partnerships Act 1907 (to which Clause 3.4 referred) provided for a limited partner's access to information in slightly different terms. Section 6(1) says:—
"A limited partner shall not take part in the management of the partnership business, and shall not have power to bind the firm: Provided that a limited partner made by himself or his agent at any time inspect the books of the firm and examine into the state and prospects of the partnership business and may advise with the partners thereon".
It is clear from the terms of Clause 15.10 of the Deed that the terms of Clause 3.4 are cumulative and not exclusive of rights provided by ...
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