Norton v. K-Sea Transp. Partners L.P.

• Decision Date: 28 May 2013
• Docket Number: 2012.,No. 238,238
• Citation: 67 A.3d 354
• Parties: Edward F. NORTON, III and Ken Poesl, Plaintiffs Below Appellants, v. K–SEA TRANSPORTATION PARTNERS L.P., K–SEA General Partner L.P., K–Sea General Partner GP LLC, James C. Baker, Timothy J. Casey, James J. Dowling, Brian P. Friedman, Kevin S. Mccarthy, Gary D. Reaves, Anthony S. Abbate, Barry J. Alperin and Frank Salerno, Defendants Below Appellees.
• Court: Supreme Court of Delaware

67 A.3d 354

Edward F. NORTON, III and Ken Poesl, Plaintiffs Below Appellants,

v.K–SEA TRANSPORTATION PARTNERS L.P., K–SEA General Partner L.P., K–Sea General Partner GP LLC, James C. Baker, Timothy J. Casey, James J. Dowling, Brian P. Friedman, Kevin S. Mccarthy, Gary D. Reaves, Anthony S. Abbate, Barry J. Alperin and Frank Salerno, Defendants Below Appellees.

No. 238, 2012.

Supreme Court of Delaware.

Submitted: Feb. 8, 2013.

Decided: May 28, 2013.

Court Below: Court of Chancery of the State of Delaware, C.A. No. 6301.

Upon appeal from the Court of Chancery. AFFIRMED.

Carmella P. Keener, Rosenthal, Monhait & Goddess, P.A., Wilmington, Delaware. Of Counsel: Ethan D. Wohl (argued) and J. Elazar Fruchter, Wohl & Fruchter LLP, New York, New York, attorneys for appellants.

Srinivas M. Raju and Jillian G. Remming, Richards, Layton & Finger, P.A., Wilmington, Delaware. Of Counsel: Blair Connelly (argued), Latham & Watkins LLP, New York, New York; Alan E. Kraus, Latham & Watkins LLP, Newark, New Jersey attorneys for appellees K–Sea Transportation Partners L.P., K–Sea General Partner L.P., K–Sea General Partner GP LLC, K–Sea IDR Holdings LLC, James C. Baker, Timothy J. Casey, James J. Dowling, Brian P. Friedman, Kevin S. McCarthy, and Gary D. Reaves.

John L. Reed, DLA Piper LLP, Wilmington, Delaware. Of Counsel: Timothy E. Hoeffner, DLA Piper LLP, Philadelphia, Pennsylvania for appellees Anthony S. Abbate, Barry J. Alperin, and Frank Salerno.

Before STEELE, Chief Justice, HOLLAND, BERGER, JACOBS and RIDGELY, Justices, constituting the Court en Banc.

STEELE, Chief Justice:

In this appeal, we consider a general partner's obligations under a limited partnership agreement. The plaintiffs allege that the general partner obtained excessive consideration for its incentive distribution rights when an unaffiliated third party purchased the partnership. Importantly, the plaintiffs do not allege that the general partner breached the implied covenant of good faith and fair dealing. We conclude that the limited partnership agreement's conflict of interest provision created a contractual safe harbor, not an affirmative obligation. Therefore, the general partner needed only to exercise its discretion in good faith, as the parties intended that term to be construed, to satisfy its duties under the agreement. The general partner obtained an appropriate fairness opinion, which, under the agreement, created a conclusive presumption that the general partner made its decision in good faith. Therefore we AFFIRM the Court of Chancery's dismissal of the complaint.

I. FACTUAL AND PROCEDURAL BACKGROUND ¹

A. The Parties

This case arises out of the Merger of K–Sea Transportation Partners L.P. (K–Sea or the Partnership) and Kirby Corporation. K–Sea operates a barge and tugboat fleet that transports refined petroleum products between American ports. Before the Merger, K–Sea was a publicly traded Delaware limited partnership. The Fourth Amended and Restated Agreement of Limited Partnership (the LPA) created K–Sea's governance structure. Plaintiffs Edward F. Norton III and Ken Poesl (Norton) represent a class consisting of K–Sea's unaffiliated former common unitholders.

K–Sea's general partner is K–Sea General Partner L.P. (K–Sea GP), which is also a Delaware limited partnership. K–Sea GP's general partner is K–Sea General Partner GP LLC (KSGP), a Delaware limited liability company that ultimately controls K–Sea. Anthony S. Abbate, Barry J. Alperin, James C. Baker, Timothy J. Casey, James J. Dowling, Brian P. Friedman, Kevin S. McCarthy, Gary D. Reaves II, and Frank Salerno served on KSGP's board of directors (the K–Sea Board) during the Merger negotiations. Directors Abbate, Alperin, and Salerno comprised the K–Sea Board's Conflicts Committee. K–Sea, K–Sea GP, KSGP, and the K–Sea Board members are the Defendants in this action.

B. K–Sea's Capital Structure and Ownership

At the time of the Merger, K–Sea's equity was divided among K–Sea GP, the common unitholders, and a class of preferred units held by KA First Reserve, LLC (KAFR). The common unitholders held 49.8% of the total equity, KAFR held 49.9%, and K–Sea GP's general partner interest comprised the remaining 0.3%.

In addition to its general partner interest, K–Sea GP held incentive distribution rights (IDRs) through a wholly owned affiliate.² These IDRs entitled K–Sea GP to increasing percentages of K–Sea's distributions once payments to the limited partners exceeded certain levels.³ K–Sea GP would not receive payments on the IDRs until quarterly distributions reached $0.55 per unit. K–Sea's conservative estimates indicated that annual distributions would not reach $0.55 per unit until 2015. Norton extrapolates these projections to show that K–Sea would not reach the $0.55–per–unit quarterly threshold until the mid–2030s. Based on these projections, the IDRs were worth as little as $100,000.

C. The K–Sea Board Issues Phantom Units to the Conflicts Committee Members

In December 2010, the K–Sea Board approved incentive compensation for the Conflicts Committee members,⁴ each of whom received 15,000 phantom K–Sea common units. These phantom units vested over five years, but became immediately payable if a change of control occurred. These phantom units represented a significant component of Abbate's, Alperin's, and Salerno's equity interests in K–Sea.⁵ The LPA, however, prohibited Conflicts Committee members from holding any ownershipinterest in K–Sea other than common units.⁶

D. Kirby Approaches K–Sea and Negotiates the Merger

Shortly after the phantom unit grant, Kirby's CEO communicated with McCarthy, who also served as a director designee of KAFR, to discuss a strategic transaction between Kirby and K–Sea. On February 2, 2011, McCarthy informed Dowling, the K–Sea Board's Chairman, of those discussions. K–Sea and Kirby then extended a confidentiality agreement they had previously signed, and K–Sea provided Kirby with due diligence.

On February 9, 2011, Kirby offered to pay $306 million for K–Sea's common and preferred units. After discussing the offer with the K–Sea Board, McCarthy rejected it and informed Kirby that future offers should include consideration for K–Sea GP's general partner interest and its IDRs. Kirby responded the next day with a $316 million offer for all of K–Sea's equity interests, but McCarthy again rejected the offer as inadequate. On February 15, 2011, Kirby offered $329 million for K–Sea, which included an $18 million payment for the IDRs (the IDR Payment).⁷

E. K–Sea Activates its Conflicts Committee to Consider the Merger

When the K–Sea Board met to consider Kirby's new offer, it acknowledged that the IDR Payment created a “possible conflict of interest” ⁸ and referred the proposed Merger to the Conflicts Committee for a recommendation. Under the LPA, the Conflict Committee's approval of a transaction would constitute “Special Approval,” which purportedly would limit the unitholders' ability to challenge the transaction.

The Conflicts Committee hired Stifel, Nicolaus & Co. (Stifel) and DLA Piper LLP as its independent financial and legal advisors, respectively. Stifel valued K–Sea's common units using a distribution discount model based on K–Sea's internal projections. After valuing the common units, Stifel opined that the consideration K–Sea's unaffiliated common unitholders received ⁹ was fair from a financial viewpoint.¹⁰ The fairness opinion expressly did not consider “the fairness of the amount or nature of any compensation to any of the officers, directors or employees of K–Sea or its affiliates ... relative to the compensation of the public holders of K–Sea's equity securities.” ¹¹

F. The K–Sea Board Approves the Merger and the Transaction Closes

After reviewing Stifel's fairness opinion, the Conflicts Committee unanimously recommended the Merger to the K–Sea Board, which also approved it. Like Stifel's fairness opinion, the Conflicts Committee's recommendation did not refer to the IDR Payment. K–Sea and Kirby then entered into a definitive merger agreement and disseminated a Form S–4 recommending that the common unitholders vote in favor of the Merger. A majority of K–Sea's unitholders voted in favor of the transaction, and the Merger closed on July 1, 2011. As finally negotiated, K–Sea's common unitholders received $8.15 per unit ¹² and K–Sea GP received $18 million for the IDRs. The consideration represented a 26% premium over K–Sea's March 11, 2011 closing price.

G. Procedural History

Shortly after K–Sea announced the Merger, Norton filed a class action complaint in the Court of Chancery. As amended, the Complaint contained four counts. Count I alleged that the Conflicts Committee members breached their fiduciary duties by recommending the Merger without evaluating the IDR Payment's fairness. In Count II, Norton contended that K–Sea GP, KSGP, and the K–Sea Board members breached the LPA by proposing, approving, and participating in an unfair transaction based on an inadequate review process. In Count III, Norton accused K–Sea GP, KSGP and the K–Sea Board of breaching the LPA by approving the Merger in reliance on the improperly constituted Conflicts Committee's Special Approval. Count IV alleged that K–Sea GP, KSGP, and the K–Sea Board breached their duty of disclosure by authorizing the dissemination of a materially misleading Form S–4. The Vice Chancellor denied Norton's motion for expedited discovery.¹³

After the parties submitted initial briefing on Defendants' motion to dismiss, the Vice Chancellor contacted the parties and advised them that he had reached a preliminary decision to grant the Defendants' motion. His rationale relied upon an interpretation of the LPA that neither party had argued nor briefed, and so he invited supplemental briefing. After reviewing the parties' submissions, the Vice Chancellor dismissed Norton's Complaint.¹⁴ Norton appeals from the Vice Chancellor's dismissal of Counts I, II, and III of that Complaint.¹⁵

II. ...