Posts tagged LP Agreements

Court of Chancery Denies Expedited Process in Merger of Limited Partnership Even Though Plaintiff Stated Colorable Claim

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.

  More ›

Share

Court of Chancery Applies Delaware Law To German Investment

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.

Share

Court Of Chancery Denies Expedited Scheduling

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.

Share

Court Of Chancery Denies Receiver For LP

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.

Share

Court Of Chancery Illustrates Possible Waiver Of LP Agreement

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.

 

Share

Court Of Chancery Explains Dissolution Statute

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.

Share

Court Of Chancery Interprets LLP Exculpation Clause

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.

Share

Court Of Chancery Explains Effect Of Fiduciary Duty Waiver

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.

Share

Summary of Amendments to Delaware Alternative Entity Statutes

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.

Share

Court of Chancery Interprets Confusing Indemnification Provision

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.

Share

Court of Chancery Denies Buy Out Claim Based on Change of Control

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.

Share

Court of Chancery Explains Distribution Rights Issues

Schuss v. Penfield Partners LLP, C.A. 3132-VCP (Del. Ch. June 13, 2008)

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.

Share

Court of Chancery Denies Inspection of Partnership Records

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."

Share

Court of Chancery Interprets Partner Duties

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.

Share

Court of Chancery Upholds Use of Merger to Change Partnership Governance

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.

Share