Re K-Sea Transportation Partners LP Unitholders Litigation, C.A.
No. 6301-VCP (Del. Ch. April 4, 2012). The
prior Chancery decision in this case was highlighted on these pages here.
The issues addressed by the Court of Chancery in this matter were whether the
fiduciary duty claims and the contractual claims were barred by the provisions
in the limited partnership agreement, including whether a provision
in the agreement that established a presumption of good faith barred
claims for breach of the implied covenant of good faith and fair dealing.
This is a class action brought on behalf of the common
unitholders of a publicly-traded Delaware limited partnership. In March
2011, the partnership agreed to be acquired by a non-affiliated third party at
a premium to its trading price. The merger agreement also provided for a
separate payment to the general partner to acquire certain partnership
interests that it held exclusively. The plaintiffs allege that the
amount of that payment far exceeded the economic value of those
interests. To avoid this potential conflict of interest, the board
submitted the transaction to a conflicts committee of independent directors
who, relying on an investment bank's fairness opinion, determined that the
overall transaction was fair and reasonable. On that basis, the full
board approved the transaction.
The plaintiffs claim that the conflicts committee was
improperly constituted and it was provided with incentives to approve the
transaction, thus undermining its purportedly disinterested approval. The
plaintiffs claimed that the general partner breached fiduciary duties along
with the members of the board. The plaintiffs also accuse the
members of the board of materially misleading disclosures. For additional
background details, refer to the previous
opinion by the Court of Chancery in this case in which a motion to expedite was
denied. In Re K-Sea Transp. P'rs L.P. Unitholders Litig., 2011 Del. Ch. LEXIS 90, at *1-4 (Del. Ch. June 10, 2011) [hereinafter "K-Sea I"], highlighted
on these pages.
At footnote 6, the Court noted that the plaintiffs waived
any request for rescissionary relief because they did not respond to the
arguments by the defendants in their brief and at oral argument that the
plaintiffs' only remaining claims were for money damages. Thus, the Court
determined that by failing to respond to that argument, the request by the
plaintiffs for rescissionary relief was waived.
After reviewing the standard for a motion to dismiss for
failure to state a claim under Court of Chancery Rule 12(b)(6), the Court
reviewed the contractual terms of the limited partnership agreement for
purposes of determining whether there was an express waiver of any fiduciary
duties and whether the agreement provided for a contractual standard of review
that supplants fiduciary duty analysis. See, K-Sea I, 2011 WL
2520209, at *8.
According to the terms of the limited partnership
agreement, even if there were a breach of the agreement or any default
fiduciary duty, that breach could only support a claim for money damages if the
plaintiffs also alleged that the breach resulted from actions that were not
taken in good faith. Section 7.10(b) further defined that restriction so
that any liability for money damages for a breach of the agreement or a breach
of the fiduciary duty limited by the agreement, would prevail only if the
breach "resulted from an act or omission done in bad faith, and there is a
conclusive presumption according to the terms of the agreement that the general
partner acted in good faith if it relied on an expert it reasonably believed to
be competent to render an opinion on the particular matter." See
footnote 16 citing a case to the effect that: "there is no meaningful
difference between the lack of good faith and bad faith." Accordingly, to
prove a breach of the implied covenant, plaintiff must demonstrate that
defendants acted in bad faith.
Thus, in order to survive a motion to dismiss, plaintiffs
are required to plead facts that, if true, show that defendants both: (1)
breached the agreement or a fiduciary duty not eliminated by the agreement and
(2) in doing so, acted in bad faith.
The agreement allowed the general partner to exercise its
discretion in whether or not to approve a merger. The agreement also limited
the fiduciary duties that would otherwise apply by providing that a general
partner was permitted to make any decision in its discretion "so long as such
action is reasonably believed by K-Sea GP to be in, or not inconsistent with,
the best interests of the Partnership." The Court construed this
provision in Section 7.10 to waive, restrict or eliminate traditional fiduciary
duties. However those fiduciary duties were not entirely waived.
Instead, the provisions substituted a different, more narrow duty which was
that the discretion of the general partner had to be exercised in a manner that
was "not inconsistent" with the best interest of the partnership as a
Thus, for liability to attach, the general partner must
be shown to have acted in bad faith (that is, the general partner believed that
its actions did not advance the proper partnership purpose). See
footnote 20 citing cases that provide that where a contract confers discretion
on one party, the implied covenant requires that that discretion be used
reasonably and in good faith.
Importantly, Section 7.10(b) entitled the
general partner "to a conclusive presumption of good faith whenever it acts in
reliance on an expert opinion as to matters it reasonably believes to be with
the expert's professional competence." Because the general partner relied
on an expert's opinion, the agreement provides the general partner with a
conclusive presumption that it acted in good faith in exercising its discretion
to approve the merger agreement.
Thus, the Court observed that the only
remaining issue is whether the agreement's conclusive presumption of good faith
also satisfied the implied covenant of good faith and fair dealing.
For this, the Court referred to a recent decision by Vice
Chancellor Noble that directly addressed the issue of whether a plaintiff
can "plead that a defendant breached the implied covenant when the defendant is
conclusively presumed by the terms of a contract to have acted in good faith."
v. Enterprise Products Holdings LLC, 2012 Del. Ch. LEXIS 5 (Del. Ch. Jan. 6,
2012), highlighted on these pages here.
Answering that question in the negative, Vice
Chancellor Noble reasoned in the Gerber case that when the agreement
protects the general partner from any claims asserting that the action was
taken other than in good faith, that provision would also bar good faith claims
under the duty of loyalty, the implied covenant, and any other doctrine.
The drafters of the agreement provided that no claims asserting a failure to
act in good faith could be asserted when the general partner acted in reliance
upon the opinion of an expert.
The Court in this case agreed with that reasoning which,
in essence, endowed the general partner with unfettered discretion to consent
to a merger and incentivized the general partner to obtain the fairness opinion
and to rely on it. The only limitation in this case to the discretion of
the general partner was that it exercise its discretion in good faith.
Because it relied on the fairness of an opinion of an investment banker,
according to the terms of the agreement the general partner is conclusively
presumed to have acted in good faith. Therefore, there is no conceivable
set of circumstance on which the plaintiff could prove that the defendant
breached a duty by approving the merger agreement. Therefore, those
counts of the complaint were dismissed. See generally, footnote
21 which slightly distinguished certain nuances in the facts of the Gerber
case that did not change the result.
The Court also dismissed the claims for breach of the
fiduciary duty of disclosure. After a discussion of the case law regarding
disclosure, the Court determined that the agreement reflected a clear intent to
preempt fiduciary principles related to disclosure. Nonetheless, the
Court still concluded that the allegedly misleading disclosures could not
support a disclosure claim under any reasonably conceivable set of
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great blog, thank you and keep it up!