Opinion ID: 515232
Heading Depth: 3
Heading Rank: 3

Heading: The Partnership Agreement.

Text: 39 The first prong of the Williamson test 14 is encompassed by our focus on the partnership agreement. If the partnership agreement does not in fact create a general partnership but creates a limited partnership interest akin to an offering of preferred stock, then the interest may be found to be a security. See SEC v. Murphy, 626 F.2d 633, 640-41 (9th Cir.1980). We decline, however, to adopt the other two prongs of the Williamson test. 15 The proper focus must be the partnership agreement and not how in fact the entity functioned in carrying out its business affairs. 40 The agreement in this case is a standard general partnership contract. 16 It puts both managerial control and access to partnership information in the hands of the general partners. It is denominated a general partnership to which California law applies. It provides that no partner may withdraw capital from the partnership without the consent of all partners. No partner may lend or advance partnership money without the approval of the majority. The agreement makes the Murats the managing partners with the power to control the day-to-day business of the entity and assume direction of its operations. However, it also requires that they consult as far as practicable with the nonmanaging partners about their business decisions. Certain partnership acts may be done only with the consent of a majority of partners, including borrowing money for the partnership, transferring or hypothecating any partnership claims, and selling any partnership property except in the ordinary course of business. Further, the general partnership interests are not freely transferable. The admission of new partners into the partnership requires majority agreement. Any amendment to the agreement requires 100% approval. Also, the partnership's books are open for inspection to all partners. 41 Analysis of the partnership agreement leads to the conclusion that the appellants' interests are not securities. 17 The agreement clearly creates a general partnership vesting strong powers of supervision and control in the plaintiffs. The terms of the agreement provide them with all the access and ability to protect their investment that the securities laws would otherwise provide. It creates powers and duties in the general partners which are not typical of the passive investor in a security. See Williamson, 645 F.2d at 422; see also Wolf v. Banco Nacional de Mexico, 549 F.Supp. 841, 852 n. 17 (N.D.Cal.1982) (general partnership interest is not a security because the partners are mutual agents), rev'd on other grounds, 739 F.2d 1458, 1464 (9th Cir.1984), cert. denied, 469 U.S. 1108, 105 S.Ct. 784, 83 L.Ed.2d 778 (1985). 42 In the case at bar, the partnership agreement clearly creates a standard general partnership which on its face provided the plaintiffs with sufficient power to protect their investments. The appellants made no showing and are unable to show that they were prevented from exercising their powers under the agreement. The partnership agreement also provided them with access to the partnerships records and to information about its day-to-day business affairs. There is no evidence that the general partnership agreement was purposefully drafted to escape the application of the securities laws. The evidence points to the clear intent to establish a working general partnership. We hold that these general partnership interests are not securities under the federal securities laws. 43