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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Chancery Examines Partnership Agreement Allowing Deference to General Partner’s Decisions While Acting in its Individual Capacity and Instances in Which a Tortious Interference Claim can Extend to a General Partner’s Controllers
The Court of Chancery held that plaintiff former common unitholders failed to state a claim for breach of fiduciary duties in connection with the general partner’s alleged wrongful exercise of its call right to purchase all of the common units after the price of those units plummeted following the general partner’s public announcement of its intent to exercise the call right. The governing limited partnership agreement established different duties and standards of conduct depending upon whether the general partner was acting in an individual capacity or in an official capacity as the general partner. The Court reasoned that because the general partner was acting in its individual capacity in the exercise of its call right, the most deferential standard of conduct provided for in the partnership agreement, which eliminated the general partner’s duty to the limited partner common unitholders and the partnership, applied to this allegedly conflicted transaction. The Court noted that the plaintiffs’ request to apply the partnership agreement’s more heightened standard of conduct to the exercise of the call right misapplied Delaware Supreme Court precedent set forth in Allen v. El Paso Pipeline GP Co., L.L.C., 2015 WL 813053, at *1 (Del. Feb. 26, 2015). In Allen, the Supreme Court interpreted a nearly identical partnership agreement provision, and based on that provision, ruled that the general partner’s ability to act in its individual capacity “parallels the ability of a corporate fiduciary to exercise rights that are not held or exercised in a fiduciary capacity.”
The Court found, however, that the plaintiffs had pled a legally sufficient claim for breach of the partnership agreement against the general partner as a result of the common units’ depressed trading prices, which were caused by the general partner’s public disclosure of its intent to exercise the call right. Such announcement was made in the general partner’s official capacity and arguably involved conflicts of interest that were not resolved in accordance with the partnership agreement. The Court also found that the plaintiffs had stated a claim for tortious interference with the partnership agreement against the general partner’s controllers. The Court reasoned that the complaint alleged sufficient facts to support a reasonable inference that the alleged interference by the controllers was motivated by a malicious or bad faith purpose to drive down the price of the common units, or cause the general partner to exercise its call right opportunistically, rather than to achieve permissible financial goals. In reaching this conclusion, the Court expressly rejected the “stranger rule” first set forth in Tenneco Auto, Inc. v. El Paso Corp., 2007 WL 92621, at *5 (Del. Ch. Jan. 8, 2007), which requires that the alleged tortfeasor be a stranger to both the contract and the contractual business relationship at issue to state a claim for tortious interference with the contract. The Court emphasized that “[a] bright-line application of the stranger rule would cut off potential liability in these situations, effectively converting Delaware’s limited affiliate privilege into an absolute affiliate privilege and upending the balance that Delaware law has struck between respecting corporate separateness and preserving a parent entity’s ability to protect its economic interest in its subsidiaries.”