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Wenske v. Blue Bell Creameries, Inc., C.A. No. 2017-0699-JRS (Aug. 28, 2019) (Slights, V.C.)

August 28, 2019

In this opinion, the Court of Chancery denied a motion to stay a derivative action to allow a special litigation committee time to evaluate whether to pursue the derivative claims, finding that, because the sole general partner from whom the special litigation committee received its mandate and authority had a previously-recognized “disabling interest for pre-suit demand purposes,” the special litigation committee, as the general partner’s agent, was likewise disabled.

This derivative action relates to a 2015 listeria-related recall of ice cream products of nominal defendant Blue Bell Creameries, L.P. (“Blue Bell”). The plaintiffs, two limited partners of Blue Bell, allege that Blue Bell’s sole general partner, Blue Bell Creameries, Inc. (“BBGP”), mismanaged Blue Bell and failed to operate the partnership in compliance with the governing standards set forth in Blue Bell’s limited partnership agreement (the “LPA”), resulting in the recall. In Wenske v. Blue Bell Creameries, Inc., 2018 WL 3337531 (Del. Ch. July 6, 2018), the Court denied BBGP’s motion to dismiss the action under Court of Chancery Rules 12(b)(6) and 23.1.

Nearly a year later, BBGP’s board of directors (the “Board”) appointed two new directors. These two directors were designated as the sole members of a special committee of the Board (the “Committee”) empowered to form a special litigation committee (the “SLC”) of non-Board members “to investigate all matters at issue in the derivative litigation and determine whether it was in the best interest of Blue Bell and its limited partners to pursue the claims.” The Committee appointed three non-Board members to serve on the SLC as “true and lawful agents” of Blue Bell, “exercising the full authority of [BBGP] to manage and control the business and affairs of Blue Bell with respect to the Derivative Lawsuit.” The SLC then moved to stay the derivative action to give it time to investigate the claims and determined whether to pursue the claims against BBGP on Blue Bell’s behalf.

The Court acknowledged that it generally will grant a stay of litigation to afford a special litigation committee an opportunity to determine whether a derivative action should be prosecuted. However, the Court declined to do so here after concluding that the SLC lacked the requisite impartiality and independence from BBGP to manage the litigation assets on Blue Bell’s behalf. Once the Court found that BBGP was conflicted, BBGP did not retain any authority to investigate and evaluate the derivative claims. The Court reasoned that BBGP could not “cure” this conflict by delegating its authority to third party agents because agents are by definition subject to the control of the principal delegating authority and therefore cannot act as independent decision makers. The Court rejected BBGP’s effort to “obscure” its influence over the SLC by adding two independent members to the Board and designating them as an independent Committee with the authority to empower the SLC. The Court recognized that these measures might be effective in the corporate context, where demand futility is assessed on a director-by-director basis, but held that these efforts were unavailing in the limited partnership context where the conflict analysis focuses only on the general partner as an entity. Having found that BBGP was conflicted, it was immaterial whether the newly-appointed directors were independent.

Accordingly, because the Court refused to recognize the authority of the SLC to determine the fate of the derivative claims, it held that there was no rational purpose to stay the action to allow the SLC to evaluate the claims.

The full opinion is available here