Ellis v. OTLP GP, LLC, C.A. No. 10495-VCN (Del. Ch. Jan. 30, 2015) (Noble, V.C.)
In this letter opinion, the Court of Chancery denied plaintiffs’ motion to expedite certain contractual claims arising from the sale of a limited partnership after finding that the claims were not colorable. Plaintiffs were unitholders of a limited partnership that had entered into a merger agreement pursuant to which the limited partnership would be merged with an acquirer and plaintiffs would be cashed out. The general partner of the limited partnership held two-thirds of the limited partnership interests and, as a result of a transaction that preceded the proposed merger transaction, was owned by the proposed acquirer. As a result, the acquirer controlled the simple majority vote required to approve the merger. Plaintiffs brought suit after the merger was announced and moved to expedite the proceedings so as to seek a preliminary injunction in order to halt the merger. To prevail on such a motion, the Court observed, a plaintiff must, among other things, plead a colorable claim. It concluded that plaintiffs had failed to do so.
Plaintiffs principally argued that the limited partnership agreement required that the merger be approved by a majority of the minority unitholders. This was so, plaintiffs contended, because the limited partnership agreement provided that such a vote was required with respect to any merger that occurred prior to the completion of certain payments to the unitholders. Plaintiffs acknowledged that only a simple majority vote would be required after such payments were completed and further that the vote on the merger was set to occur after the completion of those payments. Nevertheless, plaintiffs argued the implied covenant of good faith and faith dealing required a majority of the minority vote because the merger was announced prior to the completion of the payments. The Court found the claim non-colorable. According to the Court, plaintiffs had pointed to no reason why the time of the announcement, rather than the time of the vote, should control. In addition, the Court noted that there would be no untoward effect of such an outcome that the limited partnership agreement’s drafters would have addressed had it occurred to them.
Plaintiffs next argued that the merger and the prior acquisition of the general partner should be viewed as a single transaction and that, when viewed together, demonstrated an improper attempt to avoid the majority of the minority vote requirement. As evidence, plaintiffs pointed to the fact that the party who owned the general partner prior to its acquisition refused to negotiate with the acquirer over the acquisition of the entire limited partnership at the time that it negotiated with respect to its interest in the general partner. The Court found that the refusal of the prior owner of the general partner to negotiate a sale of the entire partnership, but only a sale of the general partner, did not evidence a breach of any contractual duty, express or implied. The Court observed that controllers, such as the prior owner of the general partner, are free to dispose of their interests as they see fit. Moreover, the Court observed that the step-transaction doctrine was inapplicable because the acquisition of the general partner was not contingent upon, nor did it otherwise require, the purchase of the remainder of the limited partnership. Even if the step-transaction doctrine applied, the Court reasoned that plaintiffs’ claim would fail because the completion date of the transaction, which would trigger the type of vote required, remained the date of the vote on the merger and for the reasons previously discussed required only a simple majority vote.
Plaintiffs’ final claim was that the general partner breached its contractual duty of good faith in structuring the merger. As an initial matter, plaintiffs suggested that the general partner should not have informed the acquirer that the majority of the minority vote requirement would cease to apply upon completion of certain payments. The Court disagreed, observing that plaintiffs had not explained how informing a potential acquirer of the voting requirements constituted a breach of any contractual duty. Plaintiffs also argued that, under the terms of the limited partnership agreement, the general partner was not exculpated because it did not seek the best price possible for the unitholders. The Court observed that the merger offer was referred to and approved by a conflicts committee, as required by the limited partnership agreement. Although it was troubled by the fact that the unitholders received less per unit than the price obtained in the sale of the general partner, the Court observed that this appeared to be a function of the manner in which the limited partnership agreement was structured and not an indication of a breach.