Many of you have been tracking the heated debate in various states concerning what private equity data should be released pursuant to the growing number of requests under state Freedom of Information Act ("FOIA") laws. We want to apprise you of a recent, significant development in Texas on this issue. On October 1, 2004, as the keynote speaker at a Freedom of Information Foundation event, Texas Attorney General Greg Abbott announced that he will continue to advocate for openness and greater disclosure in the way private equity firms do business with Texas pension funds. In his speech, Abbott declared that "in the aftermath of vast corporate scandals, it is imperative that we balance a private investment firm’s right to certain confidentiality in its financial dealings, with the public’s right to know how that firm is managing the public’s dollars." Abbott added, "Texans should not be shielded from information" and that he was drawing "a line in the sand" for more open government. In short, the Texas Attorney General’s scale now appears tipped in favor of greater disclosure of data concerning private equity investment funds.
Such a position raises serious concerns and implies that data that was once viewed as exempt from disclosure under the Texas open records act may now have to be publicly released. Information subject to disclosure may no longer be limited to "top line" data, but may include more sensitive information such as partnership agreements or even fund portfolio company information.
In fact, Abbott’s speech comes on the heels of litigation recently filed against him by two Texas entities, the Texas Growth Fund ("TGF") and the Teachers Retirement System of Texas ("TRS"). In this lawsuit, TGF and TRS seek to overturn Abbott’s recent ruling requiring TGF to publicly disclose information about the identities and activities of TGF portfolio companies. The ultimate outcome of this lawsuit will have a major impact on every private equity fund with Texas public entities among its investors. Fortunately for private equity funds, the Texas Attorney General’s authority on these issues is not absolute. Even if the Texas Attorney General’s Office determines that a limited partner subject to an open records request is required to disclose sensitive private equity information, such a determination can be challenged in the Texas courts — as the TGF case demonstrates.
Until this issue is resolved by the Texas courts, however, we advise any funds that have Texas public entity investors to promptly contact those Texas public entities to discuss how they intend to deal with Abbott’s recent pronouncements. Below we also identify strategies that we have seen fund managers explore in order to protect their most confidential fund information from public disclosure:
Keep partnership data from becoming "public records." The best way to limit the disclosure of information pursuant to an open record request is to assure that the information never becomes a public record. Accordingly, fund managers can re-visit the issue of exactly what information should be sent to public entity limited partners. Particularly now with Texas, funds may want to consider cutting back on the level of truly confidential information being provided. We also have seen clients consider changing the way they disseminate partnership information. One example of this has been to make partnership agreements and periodic reports accessible to investors via a password protected, non-downloadable, non-printable website. Information also can be supplied to investors with a request for its prompt return after it has been reviewed.
Limit disclosure of certain information. The Delaware limited partnership statute, which governs many private equity partnerships, provides that the general partner of a partnership has the right to keep confidential from limited partners trade secrets or any other information which the general partner in good faith believes the disclosure of which is not in the best interests of the partnership, or could damage the partnership’s business, or is the subject of a confidentiality agreement with a third party. Accordingly, fund managers can consider whether the laws under which their private equity partnerships are organized permit them to omit certain information from their periodic reports to certain limited partners.
Consider removing or excluding limited partners with FOIA issues. As a measure of last resort, some funds with public entity limited partners who are subject to FOIA and open records requests may consider asking these limited partners to sell their existing interests or not allowing such limited partners to participate in future funds.
Given the sensitivity of the information at stake, private equity funds should be taking proactive steps to address FOIA concerns and to keep their confidential information private. The strategies discussed above are intended to help fund managers begin to identify what might work for their partnerships with their public investors, but are not a substitute for legal advice tailored to the situation in which each fund finds itself.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
