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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Showing 7 posts from October 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.
This case is another example of the care practitioners must take in drafting LLC agreements. In this decision, Vice Chancellor Noble applied the Kahn v. Lynch entire fairness standard of review to a merger between a publicly traded LLC and its controlling unitholder. Plaintiffs, LLC unitholders, alleged the controlling unitholder breached its fiduciary duties to minority unitholders by negotiating an unfair merger through an unfair process. Plaintiffs also alleged that the directors and officers of the LLC breached their fiduciary duties by agreeing to the merger.
The controlling unitholder argued that it was not liable for breach of fiduciary duty because the LLC Agreement provided that if a conflict of interest arose between the LLC and controlling unitholder, it could be resolved by certain actions that had occurred here. Plaintiffs argued that the conflict of interest at issue was between the controlling stockholder and minority unitholders and thus the LLC Agreement conflict of interest provision was inapplicable. The Court agreed and found the merger between the LLC and its controlling unit holder subject to the entire fairness standard of review. In the absence of anything in the LLC Agreement addressing a conflict of interest between the controlling unitholders and minority unitholders, the Court saw no reason not to apply the reasoning of Kahn v. Lynch. As is typical in cases where the entire fairness standard of review applies, the Court denied the controlling unitholder's motion to dismiss.
The Court did, however, grant the motion to dismiss of the LLC directors and officers. The LLC Agreement provided that the directors and officers did not owe fiduciary duties to the LLC or its members. Thus, unlike the provision governing conflicts of interest, this provision of the LLC Agreement expressly eliminated fiduciary duties of directors and officers to members. Under the LLC Agreement, the officers and directors were subject to a subjective good faith standard. This standard of good faith is narrower than the good faith standard under Delaware law. Applying this subjective standard of good faith, the Court found that Plaintiffs had failed to state a claim that the directors and officers believed they were acting against the best interests of the LLC's unitholders in negotiating the merger.
For all the occasional griping the plaintiffs' bar does over how it is sometimes treated in the Court of Chancery, this is a good example that a large fee award may be justly earned. The decision is particularly interesting in that the benefit conferred was intangible, a fact that usually has led to smaller awards. Here the benefit was to enhance or preserve voting rights, a sacred right under Delaware corporate law.
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.
A termination fee must be reasonable. That is well known. But how to calculate the fee to test its reasonableness is sometimes misunderstood. This decision explains how to do so.
The preferred approach is to calculate the fee based on the equity value of the transaction. That is the amount needed to buy the equity, usually market value. Normally, the equity value is less than the enterprise value that includes the equity value and the value of the debt, less cash.
This is the most important clarification of Delaware law under the Unocal and Moran decisions in several years and is worth a close study. The Supreme Court upheld the Court of Chancery decision that a 5% poison pill was valid under the Unocal tests and not preclusive under Moran despite the presence of a staggered board.
This decision is a variation on the issue of when should a LLC be dissolved when the managers/ members are deadlocked. Merely because 1 of the managers is able to keep the business functioning at some level is not sufficient to avoid dissolution when its basic purpose is not being fulfilled.