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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Blue Bell Creameries: Chancery Finds Zapata Committee to Address Derivative Claims is not Available to Conflicted General Partner
In Zapata v. Maldonado, 430 A.2d 779 (Del. 1981), the Delaware Supreme Court established that, even where a derivative plaintiff adequately pleads demand futility, a corporation may retain control over derivative claims by delegating authority to a committee of independent directors. In this recent decision, the Court of Chancery applied principles of agency law to hold that, at least without prior authorization in a limited partnership agreement, a conflicted corporate general partner generally may not make a similar delegation, because the general partner is a “principal” who inherently retains control over its committee, the “agent.”
This is the most recent decision arising from the 2015 listeria outbreak that resulted in Blue Bell recalling all of its products and ceasing operations. Blue Bell’s operations were conducted through Blue Bell Creameries, L.P., whose general partner was Blue Bell Creameries, Inc. (“BBGP”).
In an earlier ruling, the Court denied BBGP’s motion to dismiss limited partners’ claim that it breached a partnership agreement provision requiring it to conduct Blue Bell’s business “in accordance with sound business practices in the industry.” The Court also held that the plaintiffs adequately alleged that a demand upon BBGP would be futile.
BBGP’s board of directors then appointed two new members, whom it authorized to form a special litigation committee to investigate derivative claims and determine whether pursuing them would be in the best interests of Blue Bell and its limited partners. When they did so, the special committee moved to stay the litigation pursuant to Zapata to allow time to investigate and make that determination.
Although such stays are often granted in the corporate context, the Court denied the stay request here because the committee was not “independent.” The Court reasoned that the issue of whether a corporate general partner is conflicted does not turn on the independence of its corporate board members, and it had already determined that BBGP was conflicted. The Court then reasoned broadly that, at least where a partnership agreement does not provide otherwise, in partnerships with a sole conflicted general partner, the conflicted “principal” (i.e., the general partner) cannot delegate its authority to an independent “agent.” As a matter of agency law, a principal inherently retains control over its agent. The Court reasoned that in the corporate context, by contrast, the delegation is from a set of principals (the directors), some of whom are conflicted (i.e., a majority conflicted board) to a set of non-conflicted principals (i.e., independent directors), so the problem of a conflicted principal retaining control does not arise. The Court thus concluded that, while the delegation at-issue “likely would be effective” in the corporate context, the “Court’s finding that BBGP is disabled from considering a demand ends the inquiry.”