Delaware Court Of Chancery Applies Entire Fairness Standard To Breach Of Fiduciary Duty Claim Arising From Asset Sale That Benefited Senior Preferred Unitholder
On October 11, 2019, Vice Chancellor Kathaleen S. McCormick of the Delaware Court of Chancery dismissed all but one claim arising out of an asset sale by Pro Performance Sports, LLC (“Pro Performance”) to private equity firm Implus Footcare LLC (“Implus”) in which the senior unitholder, venture capital fund Steelpoint Capital Partners, LP (“Steelpoint”), received all of the sale consideration. JJS Ltd. et al., v. Steelpoint CP Holdings LLC et al., C.A. No. 2019-0072-KSJM (Del. Ch. Oct. 11, 2019). The common unitholders challenged the sale, asserting that the LLC managers breached their fiduciary duties by structuring and approving the transaction and violated the terms of the LLC Agreement because the common unitholders were not permitted to vote as a separate class on approval of the sale. The Court dismissed the claims based on the LLC Agreement, but sustained the fiduciary duty claim.
In so holding, the Court first acknowledged that although Delaware law permits an LLC to eliminate fiduciary duties in its governing agreements, the Pro Performance LLC Agreement did not do so. Vice Chancellor McCormick rejected the majority of the allegations related to violations of the LLC Agreement as insufficient to plead a breach of duty because she had already determined that the transaction and approval vote did not violate the agreement. Plaintiffs alleged, however, that four of the directors who voted in favor of the transaction were conflicted, asserting that three were appointed and employed by Steelpoint and the fourth was granted an outsize severance package just prior to the approval vote. The Court concluded that these allegations were sufficient, at the pleadings stage, to apply the entire fairness standard of review and, on that basis, declined to dismiss the breach of fiduciary duty claim.