In Venhill Limited Partnership v. Hillman, 2008 WL 2270488 (Del. Ch., June 3, 2008), read opinion here, the Chancery Court addressed egregious breaches of the duty of loyalty by the general partner of a limited partnership whose assets were derived from various trusts that were used to keep afloat a failing business the general partner ran. This is another Chancery opinion in the span of about a week that approaches 100 pages in its original format and could easily merit a summary that would take several hours, but which I only have time to provide a small taste of today.
1. This opinion should be must reading for anyone who advises family businesses. In order to avoid the full-scale internecine family warfare that ultimately ensued, a brother and cousin deferred a confrontation with another family member who ultimately advanced about $85 million into a failing company over several decades, despite the company having little prospect of ever producing a return on investment whether characterized as equity or debt.
2. Importantly, the court rejected the argument that because the plaintiffs did not exercise their power to remove the defendant as the general partner over the lengthy period that they complain of his improper transactions, they thereby acquiesced and ratified the contested actions–i.e., simply due to their failure to exercise their power of removal during that period. See footnotes 76, 77 and 79.
3. The court discusses at length the "entire fairness" standard that applies here to the disloyal fiduciary who stood on both sides of the contested investment transactions (i.e., as both the one who authorized the payments to be made from the limited partnership, and the CEO of the company that accepted them.) See, e.g., footnotes 75, 81 through 84 and 89 and accompanying text. The court also discusses the difference between using the entire fairness test "to consider whether to unwind a transaction and the analysis necessary to determine whether a fiduciary is personally liable for damages resulting from a transaction…."
4. Of note is the observation that it was not greed that motivated the wealthy defendant to advance his own interests ahead of those for whom he owed fealty, rather he gave priority to "the continuation of his hobby [the failing business] and let a stubborn sense of pride and an unwillingness to admit error come ahead of his duties…." See also footnote 102 that quotes from a case that reminds me of the "7 deadly sins" that could also motive one to violate his or her fiduciary duties.
5. Of educational value additionally is the "mini-business course" that the court provides in the standards typically used by private equity and venture capital investors in deciding whether or not to invest in a business–none of which were following in this case by the defendant who used trust assets as his own personal piggy bank.