Delaware Court Of Chancery Denies Stay Sought By Special Litigation Committee Appointed By Conflicted General Partner
09/04/2019On August 28, 2019, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery denied a motion to stay filed by the special litigation committee formed by defendant Blue Bell Creameries, Inc. (“BBGP”) in connection with a derivative action by limited partners of Blue Bell Creameries, LLP (“Blue Bell” or the “Partnership”) against BBGP, which is the sole general partner of Blue Bell, and others. Wenske v. Blue Bell Creameries, Inc., C.A. No. 2017-0699 (Del. Ch. Aug. 28, 2019). The Court previously denied a motion to dismiss the derivative action because it determined that BBGP had “a disabling interest for pre-suit demand purposes.” BBGP then appointed two new directors to its board, who established a special litigation committee consisting of three non-director members empowered to determine the interests of the Partnership in the derivative litigation. The special litigation committee promptly moved to stay the derivative action to permit its investigation and make a determination. But the Court denied the motion. It explained that “[a]ny conflict that disables the principal disables the agent” and “[b]ecause BBGP, as principal, is not fit to decide how to manage the Partnership’s claims against the Defendants (including the claims against BBGP itself), its purported special litigation committee, as agent, is likewise disabled.”
Specifically, in determining whether the stay should be granted, the Court noted that it must first determine whether the special litigation committee had “been properly constituted.” The Court explained that, because a conflict analysis in the limited partnership context focuses “on the general partner as an entity, not the individual members of the decision-making apparatus,” BBGP’s conflicts rendered it powerless—at the level of the entity—to investigate and consider derivative litigation on behalf of the Partnership. Because BBGP itself retained no relevant authority, it also had no ability to delegate authority to a purportedly independent special litigation committee. The Court thus held that the “motion to stay must be denied because it has been brought by a special litigation committee with no authority to bring it.”
The Court noted, however, that its decision did not foreclose the proper use of special litigation committees in the general partnership context altogether. Instead, such committees could be properly formed if created and controlled by a non-conflicted general partner. That avenue, however, was unavailable with respect to BBGP as the sole general partner of Blue Bell. The Court did not address whether an adjustment to the structure of the partnership could enable the formation of an effective special litigation committee while derivative litigation is pending.