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Brinckerhoff v. Enbridge Energy Company Inc.,  C.A. 5526-VCN (September 30, 2011)

This is a significant decision for 2 reasons.  First, it confirms the widely-held belief that the Tooley test to determine if a complaint is direct or derivative applies to limited partnerships.

Second, it interprets language in the LLP agreement permitting the general partner to rely on the advice of an investment banker as constituting proof of "good faith" in deciding to do a deal with an affiliate of that general partner.  This is important because while Delaware law permits LLP agreements to waive many duties owed by a GP, the duty to act in "good faith" cannot be waived. Hence, the ability to effectively define in the LLP agreement what will constitute good faith is another way to limit claims against the GP even for self-dealing.

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Authored by Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | July 13, 2011

The Court of Chancery often hears applications for expedition of a plaintiff's motion to enjoin a merger transaction. While the court "has followed the practice of erring on the side of more hearings rather than fewer" (Giammargo v. Snapple Beverage Corp. (1994)), it will not schedule an expedited hearing unless the plaintiff can show good cause.

The June 10 opinion in In Re K-Sea Transportation Partners L.P. Unitholders Litigation illustrates that, even where a plaintiff can state a colorable claim, the court will not schedule an expedited hearing if the plaintiff fails to show "a sufficient possibility of a threatened irreparable injury, as would justify imposing on the defendants and the public the extra (and sometimes substantial) costs of an expedited preliminary injunction proceeding," (citing Giammargo).

The K-Sea case also illustrates that when parties to agreements governing limited partnerships, limited liability companies or other alternative entities modify or eliminate fiduciary duties, a Delaware court will enforce the agreements as written. Courts will not undo what one party now believes is a bad bargain through the application of fiduciary duties or the implied covenant of good faith and fair dealing.

PARTNERSHIP ACQUISITION

K-Sea involved the acquisition of a Delaware partnership. The acquirer sought to acquire the limited partnership by merger for either cash or a combination of cash and the acquirer's stock. Representatives of the board of directors of target's general partner negotiated the terms of the merger agreement. A special committee approved the transaction.

The plaintiffs argued that the special committee's approval did not comply with the K-Sea Limited Partnership Agreement (LPA) for two reasons. First, the special committee failed to consider separately an $18 million payment to the general partner for its incentive distribution rights (IDRs). Second, the members of the special committee were not independent because shortly before the beginning of merger negotiations with the acquirer, the target granted them each 15,000 phantom units that would immediately vest upon a change of control.

The plaintiff-unitholders also challenged the disclosure provided the common unitholders in the registration statement.

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QVT Fund LP v. Eurohypo Capital Funding LLC I,   C.A. 5881-VCP (July 8, 2011)

When will Delaware law apply to a dispute is often not an easy question to resolve.  That is true even when the parties had agreed to sue under Delaware law but the issue presented may involve foreign law as well.  Here the Court sorted through a complicated deal involving the internal affairs of a German bank and held that some of the issues might be governed by German law but the main dispute was subject to Delaware law. This analysis is thus a useful guide in other complicated choice of law situations.

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In Re K-Sea Transpotation Partners L.P. Unitholders Litigation, C.A. 6301-VCP (June 10, 2011)

This decision on a motion to expedite the scheduling of a challenge to a merger is interesting for its extensive treatment of the merits of the complaint.  In the past, the Court of Chancery has treated motions to expedite more summarily.  Perhaps this indicates a greater focus on the burdens of expedition on the Court and others and a desire to limit expedition to those instances where otherwise a plaintiff would have no real remedy.

The opinion discussed in some detail when the possibility that a monetary judgment will be uncollectable is adequate to warrant expedition.  A real showing that is the case is required, not just speculation.

The opinion's other major holding is that a limited partnership agreement may effectively limit the amount of disclosures that must be given prior to a vote on a proposed merger.

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Steven M. Mizel Roth IRA v. Laurus U.S. Fund LP, C.A. 5566-VCN (February 25, 2011)

This decision has a good summary of the past decisions holding that it is rare for a receiver to be appointed for an LP.  This is particularly true for an investment fund that is still in the business of investing even if the plaintiff is unhappy with the results.

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Wimbledon Fund LP Absolute Return Fund Series v. SV Special Situation Fund LP,  C.A. 4780-VCS (February 4, 2011)

May the provisions of a limited partnership agreement governing withdrawal be waived?  This decision says that is possible.  That result is not particularly remarkable.

What is more interesting is the rest of the opinion.  For while the plaintiff's conduct in presenting its case was outrageous, the Court nonetheless stood fast in applying its rules on summary judgment to hold the plaintiff may have a trial on its claims.  While the case is more complicated than that [involving issues of what the Supreme Court meant in its remand to the trial court], the intellectual honesty of the Court of Chancery is heartening, as usual.

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Techmer Accel Holdings LLC v. Amer,  C.A. 4903-VCN (December 29, 2010)

This decision explains when Section 17-804 of the Delaware Limited Partnership Act comes into play.  That may have important consequences as it is under that statute governing dissolutions that the Court may control distributions to partners that might hurt its creditors.  But as this decision points out,  if that statute is not in play,  the distributions are controlled by a different statute that lacks judicial enforcement provisions and might leave creditors to their own devices.

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In re Inergy L.P. Unitholder Litigation ,C.A. 5816-VCP (October 29, 2010)

Delaware has consistently recognized that an LLP agreement may define the measure  of the duties owed to limited partners by the general partner and those who control the GP.  While the duty to act in good faith always remains, fiduciary duties may be disclaimed.  The problem is how to do so and still be left with a clear standard to apply.  Again and again the Court has had to interpret complicated and usually conflicting language in limited partnership or LLC agreements.  If it takes a long opinion to explain what these provisions mean, then how clear can they be in the first place.

In this case, the Court concludes that the agreement applies a subjective test of whether the transaction is fair in the view of the general partner. Of course, that still means the decision has to be made on good faith.  Indeed, the decision also holds that if the manager relies on the advice of competent counsel, then good faith may be presumed if that is what the partnership agreement provides [and take it from me it always does]. That is good news for us lawyers whose place at the table is now assured.

Finally, it needs to be said once again that the Court issued a 51 page opinion in a very complicated case in just 7 days. Only in Delaware do you get that level of service, consistently.

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Lonergan v. EPE Holdings LLC, C.A. 5856-VCL (October 11, 2010)

Delaware law permits an LLC or an LLP agreement to eliminate fiduciary duties of managers or members.  In addition, it is common in such agreements to provide for a "Special Approval " committee to permit self-dealing transactions by management.  The duty of good faith and fair dealing remains in such circumstances but exactly how that applies is often unclear.  This decision helps explain how all this works.

Briefly, the duty to act in good faith and to deal fairly operates as a sort of reverse business judgment rule.  If the transaction is so bad that no one could approve it in good faith, then the duty to act in good faith has been violated.  No Special Approval Committee can validly approve such a  deal.

Ok that is an oversimplification, but this is just a blog for goodness sake.

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The Harvard Law School Forum on Corporate Governance and Financial Regulation has posted a useful summary of the recent amendments to Delaware's alternative entity statutes, drafted by Delaware practitioner Louis G. Hering.  The post can be viewed here.

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David A. Stockman v. Heartland Industrial Partners, LP, C.A. 4227-VCS (July 14, 2009)

This is possibly the best decision to read to understand how to interpret the often confusing advancement and indemnification rights contained in limited partnership agreements. The discussion of the history of those rights under Delaware law is very useful as well.

There are three basic holdings that should be noted: (1) ambiguous agreements are to be construed against the entity, be it partnership or corporation, (2) acquittal of criminal charges puts the burden on the entity to show why any conditions to indemnification have not been meet (such as the lack of good faith, etc.) by the claimant, and (3) there is no need to wait until all proceedings against a director are concluded before he is entitled to indemnification for the proceedings that he won.

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BASF Corp. v. POSM II Properties Partnership L.P., C.A. 3608-VCS (Del. Ch. Mar. 3, 2009)

The plaintiff in this case argued it was entitled to be bought out of the partnership because the partnership agreement provided buy out rights when control of the partnership changed. The Court held that a change in ownership of the partnership managing entity was not a change in control of the partnership itself. Instead, only control of the manager had changed.

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This decision explains how distribution rights for a withdrawing partner may be determined and points out that ambiguous language in the partnership agreement may lead to uncertainty. This was particularly important here as the withdrawing partner was given an in-kind distribution of these hedge funds securities after they had declined in value in the period after the date for determining the partner's share and the actual distribution date. This may become an important issue when the market is declining.

The Court also held that the plaintiff had stated a claim for breach of fiduciary duty by alleging the controlling general partner had selected the assets to go to the departing partner with the intent of hurting his interest.

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Madison Real Estate Immobilien-Anlagegesellschaft Beschrankt Haftende KG v. KanAm USA XIX LP, C.A. 2863-VCP (Del. Ch. May 1, 2008)

This case sets out the law governing the right to inspect a limited partnership's records, particularly in the context of a possible tender offer. Delaware law draws a distinction between seeking inspection to determine the value of one's interest in the partnership and seeking inspection for purposes of making a tender offer. In the later case, inspection may be denied as not being for a purpose truly related to acting as a partner, but instead as an acquiror. While one might argue this distinction is too fine a line to draw, that is the law for now.

The opinion is also noteworthy for dealing with how to interpret a partnership agreement's contractual right to inspect. As the opinion points out, the right to inspect "books of account" is not as broad as the right to inspect "books and records."

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Forsythe v. ESC Fund Management Co., C.A. No. 1091-VCL (October 9, 2007).

The duties of a general partner in a Delaware limited partnership are governed by the partnership agreement. But when those duties may be delegated to third parties under the terms of the partnership agreement, the GP duties are less clear. Here, the Court had to decide if the scienter required by the Caremark case applied to hold the GP liable if red flags pointed to abuses by the parties running the show or whether instead the general partnership obligations of a GP to be responsible for its agents was the standard to apply.

Recognizing that in this case the authority to delegate to third party managers with clear conflicts of interest put the GP on notice, the Court held that the GP had more than just Caremark-like duties -there was a duty of more active inquiry.

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Twin Bridges Limited Partnership v. Draper, C.A. No. 2351-VCP (September 14, 2007).

This decision deals with how to change the governance structure of a limited partnership by using a merger to amend the partnership agreement. At the outset, the Court ruled that the doctrine of independent legal significance would not be applied to a two-step transaction involving an amendment to a limited partnership agreement to permit a merger and then the merger itself. Instead, the Court ruled that the two transactions were integrated and thus, considered as if they were a single event. This may mean that the corporate law concept of treating two transactions separately if they are authorized by two different sections of the corporate law will not apply in the context of a limited partnership that is based on contract law.

In addition, the Court held that using a merger to add an additional, tie-breaking general partner to the partnership governance structure was permissible absent a clear prohibition in the partnership agreement.

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Hillman v. Hillman, C.A. No. 1557-N (Del. Ch. August 23, 2006, modified,November 16, 2006).

When a general partner is dismissed as the limited partnership's general partner, the DRULPA is not clear on what happens to the interest of that former general partner. After a close reading of the statute and its legislative history, the Court of Chancery concluded that the former general partner is entitled to be paid back his partnership interest, but otherwise has no continuing interest in the limited partnership. The decision affects partnerships that have not provided for the result of a general partner dismissal in the partnership agreement. Note also, this decision deals solely with a general partner who is dismissed, not one who withdraws and is then subject to other sections of the statute.

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Kevin McGovern, et. al. v. General Holding, Inc., et. al., C.A. No. 1296-N (Del. Ch. June 2, 2006).

In this action to recover for the diversion of partnership property, the Court of Chancery fashioned a unique remedy by ordering that the partnership be sold by a receiver so as to realize the special value of its technology.

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Anglo American Security Fund, L.P. v. S.R. Global Int'l Fund, L.P., C.A. No. 20066-N, 2006 WL 1494360 (Del. Ch. May 24, 2006).

Plaintiffs and defendants brought cross-motions for summary judgment on claims arising from disputes over interpretation of limited partnership agreement ("LPA").

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McGovern v. General Holding, Inc., C.A. No. 1296-N, 2006 WL 1468850 (Del. Ch. May 18, 2006).

Plaintiffs brought action individually and on behalf of limited partnership against 90% owner of limited partnership for, among other things, breach of fiduciary duty and breach of limited partnership agreement.

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Madison Real Estate Immobbilien-Anlagegesellschaft Beschrankt Haftende KG v. GENO One Financial Place L.P. and GENO Auslandsimmobilien GmbH, No. Civ.A. No. 1928-N, 2006 WL 456779 (Del. Ch. Feb. 22, 2006).

The plaintiff is a German entity organized under that country's laws, as is the second named German limited liability defendant. The latter party is also a general partner in the first defendant entity. The plaintiff was one of two bidders that made an unregulated tender offer for a part of the first-named defendant's Delaware limited partnership interest. Plaintiff filed a motion in the Court of Chancery for expedited injunction proceedings, seeking to enjoin the defendant's general partner from approving any transfer agreements related to the tender offers.

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Ramunno v. Capano, et al., C.A. No. 18798-NC, 2006 WL 375541 (Del. Ch. Feb. 10, 2006).

This is a fiduciary claim based action to appraise the fair value of real property brought by the trustee of four trusts that held a 12.1% interest in that property held by the defendant entity and its two majority interest holders, after that entity's merger into a new Delaware limited partnership.

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Ruggerio v. Poppiti, C.A. No. 18961, 2005 WL 2622716 (Del. Ch. Oct. 5, 2005).

Plaintiff, who was limited partner of partnership and sole stockholder of corporation controlled by Defendants, alleged that Defendants failed to report or account to him regarding his ownership interest in the entities, breached their fiduciary duties and commingled assets. Defendants counterclaimed for money loaned by limited partnership to corporation.

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Jacques Pomeranz, et al. v. Museum Partners, L.P., C.A. No. 20211, 2005 WL 217039 (Del. Ch. Jan. 24, 2005).

In this motion to dismiss opinion, the court examines whether the claims were tolled or untimely and held against the plaintiff. The plaintiff had instituted contract claims, fiduciary duty violation claims and a breach of the limited partnership agreement claim against the defendant-partners.

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