Consol. C.A. No. 14634-VCN (Del. Ch. June 6, 2011) (V.C. Noble)
The Court dismissed this action in favor of the defendants following trial. At issue was whether a sale process and winding-up of a Delaware limited partnership was fair to the limited partners. Specifically, the limited partners asserted that (i) the general partner (and its officers) assumed a heightened duty to the limited partners by stating in the disclosure statement that an independent law firm had been retained in connection with the sale process in order to “assure” that the appraisal and sale were “fair” to the limited partners; (ii) the general partner manipulated to its benefit the valuation and sale process; and (iii) the limited partners’ approval of the sale was not tantamount to limited partner consent to receive no further distributions pursuant to the partnership agreement. The Court disagreed with each of the foregoing claims.
Cencom Cable Income Partners, L.P., a Delaware limited partnership (the “Partnership”), was formed for the purpose of acquiring and operating cable television systems. The limited partnership agreement of the Partnership (the “Partnership Agreement”) provided that the term of the Partnership would expire on September 30, 1994 and that the Partnership’s assets could be sold to the Partnership’s general partner (the “General Partner”) or its affiliates. The Partnership Agreement also set forth an appraisal process which the General Partner implemented as the expiration of the Partnership’s term approached. Experts were retained to appraise the Partnership’s assets, and a law firm was engaged to represent the Partnership in connection with the dissolution and winding-up of the Partnership. Affiliates of the General Partner (the “Purchasing Affiliates”) entered into an asset purchase agreement pursuant to which the Purchasing Affiliates would buy the nine cable systems (the “Cable Systems”) acquired by the Partnership during its term. Limited partner consent was solicited by way of a disclosure statement which stated, among other things, that (i) the sale was to be deemed effective as of July 1, 1995 (but expected to close in January 1996), (ii) a proposed purchase price for the Cable Systems which reflected a 5% premium over the appraised fair market value, (iii) that no further quarterly distributions would be made to the limited partners as of the effective date of the sale and (iv) that, by voting on the sale, the limited partners acknowledged that the General Partner was proceeding with the Partnership’s liquidation in accordance with the Partnership Agreement. The sale of the Cable Systems occurred in March 1996, and the limited partners received their respective distributions thereafter.
Turning to the limited partners’ specific claims, the Court first rejected the limited partners’ argument that the disclosure statement created a heightened duty of the General Partner and its officers to the limited partners by providing that a law firm had been retained in connection with the sale of the Cable Systems “in order to assure that the Appraisal Process and the Sale Transaction would be fair to the Limited Partners and to protect the rights of the Limited Partners in connection therewith.” The Court found that the foregoing statement (i) would not induce a reasonably prudent limited partner to conclude that the law firm would opine on (and thereby “assure”) the fairness of the sale, and (ii) would not cause a reasonably prudent limited partner to infer that the limited partners’ rights pursuant to the Partnership Agreement were being expanded by such an “assurance” in a disclosure statement. The Court decided that the plaintiffs failed to establish an actionable breach of the duty of candor based on the “total mix” of information disclosed to the limited partners. Reading the entire list of tasks to be performed by the law firm in the disclosure statement, the Court concluded that a reasonable limited partner would have understood that the law firm was going to confirm that the sale process complied with the parties’ agreed-upon sale process as set forth in the Partnership Agreement. The Court noted that “how a ‘fairness’ notion would, or should ever, be imposed upon an express contractual relationship…is unclear.” The Court presumed that the performance by the General Partner of its obligations pursuant to the terms of the Partnership Agreement would be, in such context, “fair” to the limited partners. The Court rejected the idea that the mere use of the word “fair” implicates the notion of the “entire fairness” standard from Delaware corporate jurisprudence and would override express contractual terms in the Partnership Agreement. The Court also highlighted that the Partnership Agreement expressly contemplated (i) the termination of the Partnership on a set date, (ii) the appraisal and sale process and (iii) the possible sale of the Partnership’s assets to the General Partner or its affiliates. As such, the fact that a law firm was being retained in connection with the contemplated sale process would not lead a reasonably prudent limited partner to conclude that its financial rights or expectations were being expanded by an “assurance” in a disclosure document as to the “fairness” of the sale to the limited partners.
The Court also rejected the limited partners’ claim that the General Partner violated the Partnership Agreement or any equitable principle by establishing an eight-month gap between the effective date and the closing date of the sale and by paying the limited partners interest payments for such period of time in accordance with the disclosure statement instead of the priority distributions contemplated by the Partnership Agreement. The Court did not find the interest payments for the gap period to be inequitable. A reasonably prudent limited partner would have understood, upon approving the sale, that, pursuant to the unambiguous terms of the disclosure statement, she no longer would receive priority distributions but instead would receive interest payments until the sale closed. The Court found that the terms of the sale, including this payment structure, were fairly and accurately described in the disclosure statement and therefore that the limited partners were “fully informed and uncoerced.” The Court also noted that, even if the Partnership Agreement required priority distributions during the gap period, the interest payments were a reasonable substitute (and in fact exceeded the amounts the limited partners would have received as quarterly distributions pursuant to the Partnership Agreement). Therefore, the Court found no damage to the limited partners.
Finally, the Court did not find that the General Partner manipulated the sale process to its benefit. Although the Court noted that certain steps of the process were “troubling and inconsistent,” the Court found that such missteps did not cause the limited partners any cognizable damage and that the process, on balance, was fair to the limited partners. The Court decided that (i) the sale process was consistent with the terms of the Partnership Agreement (and therefore the limited partners received the benefit of their bargain), (ii) independent and qualified experts were retained, (iii) the numbers were reasonable (despite not capturing certain synergistic benefits), and (iv) the valuation process was not “driven or manipulated” by the General Partner or the law firm retained by the Partnership to assist with the sale process.
The full opinion is available here.