600 A.2d 43 (Del. Ch. 1991)
In 1986 the business of USA-Cafes, Inc., a Nevada corporation, was reorganized into USACafes, L.P., a Delaware limited partnership, and USACafes General Partner, Inc., a Delaware corporation that serves as the general partner of the Partnership.1 Sam and Charles Wyly own all of the stock of the General Partner, sit on its board, and personally own 47% of the limited partnership units.2 Four other individuals also serve as directors of the General Partner.3
In October 1989 Metsa Acquisition Corp. purchased substantially all of the assets of the Partnership for $72.6 million, or $10.25 per unit.4 In connection with the sale the Wylys received more than $11 million from Metsa in payments described as consideration for covenants not to compete.5 The General Partner received a $1.5 million payment right.6 Defendant Rogers had a $956,169 loan forgiven and received an employment agreement providing for a $1 million payment upon change in control.7 Defendant Tuley had a $229,701 loan forgiven.8 The other directors received employment agreements providing for $60,000 payments upon change in control.9
Plaintiffs, holders of limited partnership units, filed consolidated class actions in the Court of Chancery of Delaware on behalf of all limited partnership unitholders except defendants.10 They allege that the sale price was low because the directors of the General Partner received side payments totaling between $15 and $17 million that were not offered to the unitholders.11 The amended complaint also asserts claims based on a December 5, 1986 prospectus issued in connection with the reorganization, which allegedly misrepresented that unitholders would have a right to vote on a liquidation of the Partnership.12 Metsa is named as a defendant for allegedly participating in the other defendants' conduct by offering and making the personal payments.13
The Wyly defendants and the other director defendants moved under Rule 12(b)(6) to dismiss the breach of fiduciary duty claims and under Rules 12(b)(2) and (4) to dismiss for lack of personal jurisdiction.14 The Partnership, General Partner, and individual defendants moved to dismiss the prospectus claims.15 Metsa moved under Rule 12(b)(6) to dismiss the claim against it.16
Whether directors of a corporate general partner owe fiduciary duties to the limited partners of the partnership?17
One who controls property of another may not, without implied or express agreement, intentionally use that property in a way that benefits the holder of the control to the detriment of the property or its beneficial owner.18 Courts extend this fiduciary principle from trust law to directors of a corporate general partner when they deal with partnership property, imposing duties of loyalty and care running directly to the limited partners.19
Yes. The established facts show that the Wyly brothers and the four other directors controlled the General Partner and thereby directed the affairs of the Partnership.20 They authorized the 1989 sale of substantially all assets to Metsa for $72.6 million.21 At the same time they received personal side payments between $15 and $17 million that were not offered to unitholders.22
These facts, if proven, demonstrate that the directors used their control over partnership property to secure personal benefits such as the Wylys' $11 million non-compete payments, loan forgiveness for Rogers and Tuley, and change-in-control compensation.23 All of this occurred at the expense of the limited partners who received only $10.25 per unit. The allegations that these inducements caused the General Partner to accept an unfairly low price without seeking higher offers directly implicate the duty of loyalty.24 The motion to dismiss therefore fails because the complaint states a claim for breach of duties the directors owed to the limited partners.25
Directors of a corporate general partner owe fiduciary duties of loyalty and care to the limited partners of the partnership.26
Whether the Court of Chancery may exercise personal jurisdiction over the director defendants of the corporate general partner?27
Under 10 Del.C. § 3114, service of process is authorized on non-resident directors of a Delaware corporation for actions alleging violation of their duties in that capacity.28 Constitutionally, the purposeful creation of Delaware entities creates a relationship with the state. Acceptance of directorships that empower control over those entities renders jurisdiction fair when the claims concern breaches of fiduciary duties arising from that control.
Yes. The established facts establish that the individual defendants authorized the 1986 creation of the Delaware General Partner and the Delaware limited partnership.29 They have served continuously as its directors and have controlled the Partnership's affairs from that time forward.30 These voluntary acts of employing Delaware law to form the entities make it reasonable and foreseeable that they would be required to defend claims in Delaware. The acts also involve assuming positions that carry fiduciary obligations under Delaware law arising from alleged breaches of those obligations.31
The claims here concern precisely such breaches in connection with the Metsa transaction. Therefore the claims fall within both the statutory authorization of Section 3114 and the constitutional limits of fair play and substantial justice.32 The motion to dismiss for lack of personal jurisdiction is denied.33
The Court of Chancery may exercise personal jurisdiction over the director defendants of the corporate general partner.34
Whether the December 5, 1986 prospectus contained materially false or misleading statements regarding unitholder voting rights?35
A claim for breach of the duty of candor or under Sections 11 and 12(2) of the Securities Act of 1933 requires a materially false or misleading statement in the prospectus that caused injury to the plaintiffs. Where the alleged misrepresentation concerns a voting right that did not exist and could not have been exercised, no actionable injury arises.36
No. The established facts indicate that the 1986 reorganization of the Nevada corporation into the Delaware limited partnership was effected by shareholder consent without any vote.37 The prospectus itself disclosed that no shareholder vote was necessary or sought.38 Because the unitholders possessed no right to vote on the reorganization or on the subsequent sale of assets, they suffered no injury from any alleged misrepresentation about voting rights on a liquidation.39 The state-law candor claims are therefore dismissed.40
The individual defendants are not subject to Delaware jurisdiction on the federal securities claims.41 While limited federal claims against the Partnership and General Partner survive for further briefing, the core theory of misleading statements fails to state a claim upon which relief can be granted.42
The December 5, 1986 prospectus did not contain materially false or misleading statements regarding unitholder voting rights that caused injury.43
Whether the buyer of partnership assets may be held liable for knowingly participating in alleged breaches by the general partner and its directors?44
One who knowingly participates in the breach of a fiduciary duty stands liable with the primary wrongdoer for injuries resulting from the breach or for recovery of profit wrongfully captured.45 Allegations that the buyer offered substantial personal payments to induce the fiduciaries to accept an unfairly low price and to divert funds from the partnership state a claim for knowing participation.46
Yes. The established facts allege that Metsa offered and paid or agreed to pay the directors and officers between $15 and $17 million in side payments.47 These included the Wylys' non-compete compensation and change-in-control benefits.48 The payments served as inducement to approve the $72.6 million asset sale at a price alleged to be grossly inadequate.49
The complaint further alleges that Metsa was aware by August 1989 of the plan to proceed without a unitholder vote.50 Metsa knowingly rendered substantial assistance by structuring the transaction to divert money that would otherwise have gone to the limited partners.51 These specific facts concerning the size, nature, and timing of the payments support the inference that Metsa acted with knowledge that the payments would induce breaches of duty.52 The motion to dismiss the claim against Metsa is therefore denied.53
The buyer of partnership assets may be held liable for knowingly participating in alleged breaches by the general partner and its directors.54