Garrett v. Zon Capital Partners, L.P., C.
A. No. 5607-CS (Del. Ch., Nov. 10, 2011), read letter ruling here.
Whether a motion for class certification should be
granted pursuant to Court of Chancery Rule 23 in connection with a complaint
that alleges a self-interested transaction in which a majority of limited
partners voted to convert an LP into an LLC.
The defendants largely agreed to class certification
under Rule 23. The LLC involved had 4 classes of membership: A, B, C and D. The
defendants only objected to the inclusion in the class of 10 Class B Members
who also made investments as Class A Members. They argued, based in part on
deposition transcripts, that those who were both Class B Members and Class A
Members had conflicting economic interests as compared to those who were only
Class B Members.
The Court explained the two-step analysis it conducts to
determine the appropriateness of class certification:
Class certification under Rule 23 involves a two-step
analysis, and the plaintiff
seeking certification bears the burden of establishing that each step is
accordance with the Rule.
The first step requires satisfaction of Court of Chancery
Rule 23(a), which requires the party seeking class certification to demonstrate
that: (1) "the class is so numerous that joinder of all members is
impracticable;" (2) "there are questions of law or fact common to the class;"
(3) "the claims or defenses of the representative parties are typical of the
claims or defenses of the class;" and (4) "the representative parties will
fairly and adequately protect the interests of the class."
If the proponent of class certification is able to
establish the four elements under Rule 23(a), the second step of the class
certification analysis requires a demonstration that the class is maintainable
as a class action under at least one of the three recognized "prerequisites"
contained in Rule 23(b)(1) through (3). The plaintiffs in this case claim to
satisfy Rule 23(b)(1)(B) because "[t]he prosecution of separate actions by or
against individual members of the class would create a risk of . . .
[a]djudications with respect to individual members of the class which would as
a practical matter be dispositive of the interests of the other members not
parties to the adjudications or substantially impair or impede their ability to
protect their interests," as well as Rule 23(b)(3) because "questions of law or
fact common to the members of the class predominate over any questions
affecting only individual members, and . . . a class action is superior to
other available methods for the fair and efficient adjudication of the
controversy . . . ." (citations omitted).
In rejecting the defendants' arguments, the Court
reasoned that: "... although the Class A Members receive distributions before the
Class B Members begin to share in the distributions, a successful prosecution
of the class action would only have the effect of requiring the General Partner
to repay distributions it allegedly wrongfully accelerated to itself (as a
Class C Member) or to the BlackRock
entities under the terms of the LLC Agreement and distribution scheme above
[described in a chart provided in the Court's decision,] and would not have any
adverse effect on the Class A Members."
In sum, the Court granted the motion to certify the class
as described in more detail in the decision.
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