The Court of Chancery refused to permit the management of a hedge fund (the “Paige Fund”) to use a so-called “Gate Provision” of a partnership agreement (the “Partnership Agreement”) to restrict the withdrawal by the Paige Fund’s only outside investor of its entire investment, pursuant to the terms of its revenue sharing agreement (the “Seeder Agreement”). In October 2007, an investment vehicle called the Lerner Fund agreed to invest $40 million of “seed” capital into the newly created Paige Fund. The Lerner Fund entered into the Partnership Agreement through one of the Paige Fund’s investment vehicles, as well as the Seeder Agreement, which governed the relationship between the Paige Fund and the Lerner Fund, to the exclusion of any other potential limited partners. After three years and no new investors, the Lerner Fund decided to withdraw its entire capital investment, pursuant to the terms of the Seeder Agreement. However, the Paige Fund attempted to restrict this withdrawal, based on a “Gate Provision” contained in the Partnership Agreement that permitted the general partner to limit the withdrawal of any limited partners’ investments to 20% of the total capital investments. The Paige Fund argued that the Partnership Agreement had not been “amended” by the provisions of the Seeder Agreement, while the Lerner Fund argued that no amendments were necessary since the Partnership Agreement permitted the general partner to waive the Gate Provision. The Court, using New York law contract analysis, agreed with the Lerner Fund that the Gate Provision was superseded by the Seeder Agreement and that the Seeder Agreement was tantamount to a side letter between the general partner and the Lerner Fund, and that even had it not been, the fiduciary duties of the Paige Fund’s general partner would have required it to waive the Gate Provision. After a lengthy analysis, the Court found that with respect to Section 17-1101(e) of the Delaware Revised Uniform Limited Partnership Act (DRULPA), the general partner of the Paige Fund and the managing member of the general partner had breached their fiduciary duties by favoring their own interests over those of the investor in invoking the Gate Provision.
