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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Showing 51 posts in LP Agreements.
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.
ShareCourt 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.
ShareCourt Of Chancery Illustrates Possible Waiver Of LP Agreement
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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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.
ShareCourt 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.
ShareCourt 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.
ShareSummary 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.
ShareCourt 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.
ShareCourt 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.
ShareCourt 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.
ShareCourt 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."
ShareCourt 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.
ShareCourt 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.
ShareCourt of Chancery Interprets DRULPA
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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