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Chancery Excuses Demand Where General Partner and its Controller Faced Substantial Likelihood of Liability

Lipman v. GBP Capital Holdings, LLC, C.A. No. 2020-0054-SG (Del. Ch. Nov. 18, 2020)

In derivative actions, a plaintiff must either make a pre-suit demand or plead with particularity why demand should be excused. As this case shows, the facts that must be pled differ when the demand would be made upon the general partner in a limited partnership as opposed to a corporate board.

Here, limited partners alleged the general partner and its sole-member, who also was its CEO, breached fiduciary duties to the partnership and the limited partners. The defendants moved to dismiss on various grounds, all of which the Court rejected.

Within its several holdings, the Court distinguished the pleading standards for demand futility in the corporate context (where demand is made on directors) from the limited partnership context (where demand is made on the general partner, typically an entity). In the corporate context, Rales and its progeny require a plaintiff to plead facts showing that a majority of the individual directors are disabled from independently considering the demand. But, in the limited partnership context, a plaintiff need only plead that the general partner-entity or its controller is disabled from considering claims on behalf of the limited partnership. There is no strict requirement to plead that the general partner’s individual managers are disabled.

Assuming the truth of the limited partners’ allegations, general partner and its controlling member face a substantial likelihood of liability by in this action and its controlling member also faces liability in similar pending actions. It was therefore reasonably conceivable that general partner lacked the independent ability to properly evaluate a pre-suit demand, and demand was excused.

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