Del. Ch. No. 2427, V.C. Lamb (November 25, 2008)
In this case, the Court granted in part and denied in part the Defendant’s 12(b)(6) motion to dismiss for failure to state a claim. Plaintiff, a unitholder of TEPPCO Partners L.P. (“TEPPCO”), filed a class action on behalf of all the unitholders of TEPPCO, and derivatively on TEPPCO’s behalf, against TEPPCO’s general partner (“TEPPCO GP”), certain related entities of TEPPCO GP, the members of TEPPCO GP’s Audit and Conflicts Committee, and certain other members of TEPPCO GP’s board of directors that served during 2006 (the “February 2006 directors”) alleging that the Defendants breached their fiduciary duties by causing TEPPCO to enter into “grossly unfair transactions” with entities controlled by Dan Duncan (“Duncan”), the manager and a unitholder of TEPPCO and TEPPCO GP. Plaintiff also alleged that the defendants’ proxy materials relating to certain proposals to be voted on by the unitholders of TEPPCO contained materially misleading information and omitted material information. The defendants filed a Rule 12(b)(6) motion to dismiss certain of the breach of fiduciary duties and disclosure claims.
In 2005, Duncan-controlled entities acquired TEPPCO GP. In 2006, Duncan then caused TEPPCO to enter into certain favorable transactions with other Duncan-controlled entities (the “Initial Transactions”). Plaintiff believed that the Initial Transactions were an attempt by Duncan to transfer all of TEPPCO’s assets to other entities controlled by Duncan. Following the Initial Transactions, TEPPCO GP offered to relinquish certain distribution rights in exchange for a substantial amount of TEPPCO limited partnership units and amendments to TEPPCO’s partnership agreement (the “Subsequent Transaction”). The plaintiff filed suit in September 2006. In October 2006, defendant TEPPCO made public filings of its proxy materials, which filings were also delivered to its unit holders, which filings included supplemental disclosures relating to the Initial Transactions and the Subsequent Transaction and a copy of the plaintiff’s complaint.
The defendants moved to have the breach of fiduciary duties and acts of bad faith claims dismissed against the February 2006 directors, arguing that the complaint against the “defendant directors of TEPPCO GP” did not allege adequate, detailed facts to demonstrate that the February 2006 directors were involved in approving the Initial Transactions. The defendants argued that plaintiff’s complaint should have set forth particularized facts which demonstrated the extent to which the February 2006 directors actually participated in approving the Initial Transactions. Because Rule 12(b)(6) requires the court to “draw all reasonable references in favor of the plaintiff” when ruling on a Rule 12(b)(6) motion, the court found that the plaintiff was “entitled to the reasonable inference that the February 2006 directors, who were a part of the TEPPCO GP board at the time of the transactions, participated in approving the transactions,” and that such inference was “arguably the most reasonable inference.” The claim against the “defendant directors of TEPPCO GP” as a whole put the February 2006 directors on notice of claims against them, which is all that is required by Court of Chancery Rule 8(a), and therefore the court denied the defendants’ motion to dismiss on the fiduciary duty claim.
The defendants also moved to dismiss the plaintiff’s disclosure claims. In order for a disclosure claim to survive a motion to dismiss, the claim “must provide some basis for a court to infer that the alleged violations were material.” In Delaware, “a disclosure claim may be made by alleging a fiduciary made materially false statements, omitted material facts, or made materially misleading partial disclosures.” Here, the plaintiff claimed that the defendants’ disclosures with respect to the Initial Transactions and the information contained in the defendants’ proxy statements in respect of the Subsequent Transaction contained materially misleading partial disclosures and omissions. One such supplemental item was a letter from Duncan to TEPPCO GP’s President and CEO in which Duncan argued the importance of the Subsequent Transaction, which letter was attached to a letter from TEPPCO GP’s President and CEO to the unitholders. The plaintiff argued that Duncan’s letter was misleading and full of holes, and when viewed by itself, should survive a motion to dismiss. The court upon reviewing all the proxy statements and supplemental materials as a whole, rather than each document individually as the plaintiff argued, found that the plaintiff would not be able to sustain a disclosure claim, and therefore granted the defendants’ motion with respect to the disclosure claims. The court found that all the information that the plaintiff alleged should have been disclosed to TEPPCO’s unitholders in connection with the Initial Transactions and Subsequent Transaction was in fact disclosed to the unitholders in the defendants’ filing and provision of the supplemental proxy materials following the filing of plaintiff’s lawsuit.
The full opinion is available here.