In Twin Bridges Limited Partnership v. Draper, et al., 2007 WL 44609 (Del. Ch., Sept. 14, 2007), read opinion here, the Chancery Court explains in exhaustive detail the intricate facts of internecine warfare among family members engaged in a dispute over the governance of a family limited partnership that owns 250 acres of valuable real estate. Along the way, the court analyzes several sections as well as the legislative history of the Delaware Revised Uniform Limited Partnership Act ("DRULPA") in connection with challenged amendments that were made to the parties’ Limited Partnership Agreement in an effort to add an addtional general partner. The amendment was made with a majority of the ownership interests, in order to avoid a deadlock between two general partners. There are many important parts of this lengthy opinion that warrant further discussion, such as when fiduciary duties of general partners are waived in the context of a limited partnership agreement–and if fiduciary duties are waived by agreement, as allowed by statute, what is the standard of review.
However, my favorite part of this opinion, and one that comes from a hallowed Delaware Supreme Court case, is the concept that a court of equity can, and in some cases has, barred behavior that strictly complies with a statute, but which may still be inequitable. That principle and power, in a nutshell, is what makes a court of equity such a special place in our post-modern world.
The foregoing is an important concept that embodies, at least for me, the essence of the Chancery Court. Thus, despite its length, I am going to excerpt below part of the reasoning why the court refused to dismiss at this stage, the claims for breach of the duty of loyalty against the general partner who amended the agreement, with majority support, in full compliance with the DRULPA, in part, so as to eliminate (lawfully) any fiduciary duties:
First, I address Plaintiffs’ contention that because Schutt approved the integrated transaction in keeping with the OPA [the original partnership agreement] and DRULPA, she "was not restricted by any fiduciary obligation from voting her interest as she saw fit." [FN129]. Under Schnell v. Chris-Craft Industries, Inc., strict compliance with the Delaware Corporation Law in changing the by-law date was insufficient to insulate management from a breach of fiduciary duty claim– "inequitable action does not become permissible simply because it is legally possible." [FN130] As the fiduciary duty of loyalty of a general partner may be similar to that of a corporate director, Schnell has been extended to the limited partnership context on multiple occasions. [FN131] Thus, while the integrated transaction may be valid under the OPA and DRULPA, that does not necessarily immunize Schutt from a claim that she breached her fiduciary duty of loyalty to the Partnership in spearheading that transaction.
FN129. See POB at 31.
FN130. 285 A.2d at 439.
FN131. See, e.g., Alpine Inv. Partners v. LJM2 Capital Mgmt., L.P., 794 A.2d 1276, 1284 n.13 (Del. Ch.2002); Juran v. Bron, 2000 WL 1521478, at *19-20 (Del. Ch., Oct. 6, 2000).
Secondly, Plaintiffs argue that Defendants’ breach of fiduciary duty claim is not ripe because no self-dealing transactions have occurred to date, and Defendants have not alleged any such act. Thus, Plaintiffs contend that Defendants’ claim rests on speculation.
Citing Hollinger International, Inc. v. Black, [FN132] Defendants counter that "[g]overnance changes motivated by a desire to impose unfair self-dealing transactions over Mr. Draper’s objection are plainly actionable." [FN133] In Hollinger, this Court struck down a set of bylaw amendments, adopted under the direction of Hollinger’s controlling shareholder Conrad Black, whose "plain purpose" was to disable Hollinger’s board and prevent it from completing a review of alternative strategic transactions that Black was contractually required to further. [FN134] By striking the bylaws, the Court enabled "the board [to] take good faith action, within its domain, without being subject to a veto by Black or other directors subject to his control." [FN135]
FN132. 844 A.2d 1022 (Del. Ch.2004).
FN133. DOB at 46.
FN134. Hollinger Int’l, 844 A.2d at 1081.
FN135. Id. at 1082.
Under Delaware law, to be ripe a claim "must allege that present harms will flow from the threat of future action." [FN136] Here, Defendants allege that Schutt has engaged in a scheme to impose unfair self-dealing transactions on the Partnership. In Hollinger, Black caused the adoption of a governance change to restructure the power of the board. In this case, Defendants accuse Schutt of using the Amendment and Merger to facilitate self-dealing transactions that potentially will benefit Schutt and her allied partners.
FN136. Energy Partners, Ltd. v. Stone Energy Corp., 2006 Del. Ch. LEXIS 182, at *27 (Oct. 11, 2006).
Furthermore, in Delaware, "[a] court may find a case [ripe] where the interest in postponing review until the question arises in a more concrete and final form is outweighed by the immediate and practical impact on the party seeking relief." [FN137] Certain aspects of the challenged actions of Plaintiffs implicate this proposition, as well. Having found nothing inconsistent with the OPA or DRULPA in the aspects of the Amendment and Merger that effectively amend the OPA to provide for three, rather than two, general partners and elevate Osborn to the status of a general partner, I conclude that the implementation of those changes would not be inequitable. The situation is more murky, however, as to Paragraph 29(e) of the NPA, which purports to eliminate fiduciary duties in connection with the development and implementation of a Development Plan. Plaintiffs effected that change to the OPA without any prior notice to, or consultation with, Defendants. Rather, they presented Defendants with a fait accompli. [FN138] Because Paragraph 29(e) of the NPA purports to eliminate all fiduciary duties with respect to Development Plans, if this Court were to grant Plaintiffs’ motion to dismiss, any future review of a self-dealing transaction by Schutt as part of such a Plan would be subject only to a lesser standard of the implied covenant of good faith and fair dealing. [FN139] Limiting Defendants’ rights to challenge future Partnership actions on a Development Plan in that way would have an immediate and practical impact on Defendants. It would make it more difficult, for example, for Defendants to challenge a Partnership decision based on the use of some form of discretionary or family pricing. I view Defendants’ claimed need to challenge Plaintiffs’ effort to eliminate any fiduciary duties regarding Development Plans as outweighing any interest Plaintiffs or the Court might have in postponing that issue until it arises in a more concrete context. Accordingly, I hold that Defendants’ challenge to Paragraph 29 of the NPA as a breach of Schutt’s fiduciary duties is ripe for adjudication.
Notably, the foregoing conclusion was reached after the court’s discussion and analysis of the covenant of good faith and fair dealing–and a finding that the covenant was not breached.
Also noteworthy was the court’s application of the principle that equity will drill down to address the substance of contested transactions as opposed to being limited by the mere form of a transaction. In this case, the court treated a two-step related transaction as if it were one integrated transactions for analytical purposes.
For more background details, and further legal analysis, read the whole opinion at the above link. The court’s own introductory summary of the case follows.
This case involves a dispute over the governance of a family-owned limited partnership, Twin Bridges, which owns a 250 acre parcel of real estate in Chadds Ford, Pennsylvania. The partners of Twin Bridges are the surviving children of the late Katharine Reeve Draper and their children and spouses. Mrs. Draper established the partnership in 1985 for estate planning purposes and named two of her seven children, Katherine Draper Schutt ("Schutt") and Ford B. Draper, Jr. ("Draper"), as general partners with authority to make all major decisions. The other siblings and Mrs. Draper had no management authority in Twin Bridges.
In recent years Schutt and Draper have disagreed on some important issues, thereby effectively creating gridlock within the partnership. To circumvent this problem, Schutt and most of the limited partners, who collectively hold 87% of the interests and voting power in Twin Bridges, decided to pursue a solution without involving Draper and his two sons. On August 16, 2006, the partners aligned with Schutt acted by written consents to amend the partnership agreement and then to merge the partnership into a newly-formed limited partnership with a different governance structure. The new partnership agreement provides for a third general partner, Plaintiff Prudence Draper Osborn ("Osborn"), who is a sister of Schutt and Draper. The parties agree that these actions did not change any partner’s "economic interests" in the partnership.
The same day they effected the merger, Schutt and the limited partners aligned with her ("Plaintiffs") filed this action seeking a declaration of validity as to: the amendment to the partnership agreement, which authorizes the approval of a merger by partners holding two-thirds of the partnership interests; the merger of the partnership into another Delaware limited partnership; and the merger agreement pursuant to which the merger was effected. Draper and his sons filed an Answer, Counterclaim and Third-Party Complaint, [FN1] asserting four claims for: (i) breach of contract against all Plaintiffs (Count I); (ii) a declaration of invalidity of the amendment and merger against all Plaintiffs under the Delaware Revised Uniform Limited Partnership Act ("DRULPA") [FN2] (Count II); (iii) breach of fiduciary duty against Plaintiff Schutt (Count III); and (iv) aiding and abetting a breach of fiduciary duty against all Plaintiffs other than Schutt (Count IV).
FN1. The Counterclaim and Third-Party Complaint are referenced herein as the "Counterclaim."
FN2. 6 Del. C. §§ 17-101 to 17-1111.
Currently before the Court are Plaintiffs’ motion for summary judgment on their declaratory judgment claim and Defendants’ cross motion for summary judgment on the first two counts of their Counterclaim, which relate to the same subject matter as Plaintiffs’ claim. In addition, Plaintiffs have moved to dismiss all of Defendants’ Counterclaims for failure to state a claim.
For the reasons stated, I conclude that the amendment and the merger effected by Plaintiffs, whether they are considered in combination as part of a single, integrated step transaction, or separately, are valid because they comply with Paragraph 31 of the partnership agreement, do not violate the implied covenant of good faith and fair dealing, and do not violate DRULPA. As to Plaintiffs’ motion to dismiss, I grant it as to Counts I and II of the Counterclaim, which seek to declare the amendment and merger invalid for failure to comply with the partnership agreement and DRULPA. I deny the motion to dismiss, however, as to Counts III and IV to the extent they relate to aspects of the new partnership agreement beyond those that change the governance structure of Twin Bridges from having two to three general partners.