The opinion by the Delaware Court of Chancery in this case addresses the impact, if any, on the rights of limited partners based on the use of the word “fair” in a disclosure statement that described the winding-up process pursuant to the terms of a limited partnership agreement. In Re Cencom Cable Income Partners, L.P. Litigation, Cons. C.A. 14634-VCN (Del. Ch., revised June 6, 2011), read opinion here. The introduction to the opinion has the distinction of including one of my all-time-favorite “opening lines” to any opinion, from any court, at least in part due to its recognition of a quotidian reality–a recognition that is usually lacking in the legal profession, on both sides of the bench. The Court’s 33-page opinion begins as follows:
We all have bad days. The unknown drafter of a disclosure statement explaining to limited partners the process for winding up a partnership had one of those days. A limited partnership, in accordance with the terms of its governing document, was coming to an end. A process had been prescribed for establishing the sale price of its assets. A law firm was retained to assure that the limited partners’ rights under the limited partnership agreement would be protected. The drafter of the disclosure statement, for reasons that will never be known, wrote that the law firm was engaged to assure the limited partners that the dissolution process would be “fair”. The Plaintiffs have latched on to that phrase and argue, in essence, that the use of the word “fair” imbues their challenge with all of the prinicples of “entire fairness” as that concept has evolved in our jurispridence. Ultimately, that is an untenable stretch: the substantive rights of the limited partners are determined by reference to the provisions of the limited partnership agreement, and one sentence in a disclosure document cannot change those rights. Perhaps more importantly, no reasonable limited partner would have read that sentence and accepted that her rights would be amplified in such a fashion.
Among the issues addressed were:
1) Was a duty to assure the fairness of the sale process both assumed and breached, as described by a disclosure statement regarding the process for the sale of the assets during the winding up period?
2) Were fiduciary duties breached by the manner in which the appraisal and sale were conducted?
The Court also addressed the related issues of: (i) whether the general partner manipulated to its benefit the process by which the partnership assets were valued and sold, and (ii) whether approval by the limited partners of the sales process which established a price and provided for interest on that amount following a date certain until distribution of the sales proceeds acted to deprive the limited partners of the right to any quarterly distributions following the start of the period during which interest would be paid.
This case is hoary by Chancery standards and was filed in 2005. A prior Chancery decision in this matter from 2008 that provides more background was highlighted on these pages here.
The Court acknowledged that in “assessing the sufficiency of a disclosure, a court must examine the ‘total mix’ of information made available to the, in this instance, limited partners.” The opinion explained why the plaintiffs placed too much emphasis on the word “fair” in the disclosure statement, and reasoned that upon a “reasonable reading of the words chosen to describe Husch’s [the law firm that prepared the document] role, it becomes apparent that a reasonable Limited Partner would have understood that Husch had undertaken a effort to assure that the Limited Partners received that which they contracted for through the Partnership Agreement.”
The opinion continues by reasoning that: “Moreover, how a “fairness notion would, or should ever, be imposed upon a express contractual relationship, evidenced by a Partnership Agreement, is unclear…. The mere use of the word ‘fair’, however, does not implicate those principles [of ‘entire fairness’ from Delaware corporate jurisprudence] to override the terms of the contractual relationship, at least, where there is nothing inherently or fundamentally ‘unfair’ about the transaction.”
Appraisal Procedure Followed Agreement and Industry Standards Notwithstanding the misplaced emphasis on the use of the word “fair” by the plaintiffs, the Court reviewed the procedures followed in the sale process and the preparation of the appraisals, and found the process used to be consistent with the Partnership Agreement, and the efforts made to be both reasonable and fair.
The methods used by the appraisers followed the guidelines in the Partnership Agreement and also followed “standard appraisal techniques”, using income and market methodologies. The Court noted at footnote 60 that simply because the appraisers reached different valuation conclusions does not mean that they used non-standard appraisal techniques. See also footnotes 75 and 76 (regarding whether business units should have been valued individually or in the aggregate.)
In sum, the Court found that the appraisal and the sale process did not deny the Limited Partners the benefit of their bargain as described in the Partnership Agreement. In addition to being a fair process, to the extent that there may have been a deviation from the procedures in the agreement, the Limited Partners were not damaged.