Gotham Partners, L.P. v. Hallwood Realty Partners, L.P

Facts

D is a Delaware limited partnership that owns commercial office buildings and industrial parks in several locations in the United States and lists its partnership units on the American Stock Exchange. P is a hedge fund, the investments of which include real estate. It is the largest independent limited partner in the Partnership with approximately 14.8 percent of the outstanding partnership units. D is the sole general partner and is a wholly-owned subsidiary of Hallwood Group Incorporated (HGI) which owned 5.1 percent of the outstanding partnership units before the transactions challenged in this case. A reverse split was proposed to the Partnership's board of directors that it approve a reverse split, a unit option plan, and an odd lot tender offer subject to HGI's willingness to finance the transactions by buying any fractional units generated by a reverse split and any units purchased by the Partnership in an odd lot tender offer. At the time, more than half of the Partnership's units were held in odd lots and could be resold to HGI. The Partnership's board approved the transactions. HGI purchased 30,000 units, approximately 1.6 percent of the Partnership's equity, through the Reverse Split. The Option Plan resulted in officers and employees of the General Partner purchasing 86,000 units or 4.7 percent of the Partnership's equity. HGI increased its ownership of outstanding Partnership units from 5.1 percent to approximately 11.4 percent. By May 1995, HGI was willing to fund an odd lot tender offer. More than half of the Partnership's units were held in odd lots and thus could be tendered in the odd lot offer. The non-HGI directors voted as a 'special committee' to approve the Odd Lot Offer. D purchased 293,539 units from odd lot holders and placed them in a holding account. The Partnership then resold the units to HGI at the same price D paid for them, approximately $4.1 million. HGI purchased approximately 23.4 percent of D's outstanding units. HGI increased its stake in the outstanding D units from 11.4 percent to 29.7 percent and solidified its control over D. The Partnership Agreement requires the written consent or affirmative vote by at least 66 and 1/3 percent of the limited partners to remove a general partner. P owned 14.8 percent of the outstanding units as of September 1996. P was aware of the Odd Lot Offer and Resale but did not complain to D until January 1997 when it requested access to the Partnership's books and records. The Partnership denied the request. P filed a books and records action in the Court of Chancery in February 1997. P then filed another action in the Court of Chancery alleging derivative claims in connection with the Odd Lot Offer and Resale, the Reverse Split, and the Option Plan. P claimed that HGI paid an unfairly low price to acquire control over D. P claimed breaches by the General Partner of traditional fiduciary duties and contractually based fiduciary duties. The books and records action settled but the derivative action continued. The Court of Chancery sustained the contractual, fiduciary duty claims and dismissed the traditional fiduciary duty claims on the ground that the Partnership Agreement supplanted traditional fiduciary duties and provided for contractual, fiduciary duties by which Ds' conduct would be measured. The Court of Chancery found Ds liable for their conduct associated with the Odd Lot Resale to HGI but upheld their conduct connected with the Reverse Split and the Option Plan. The Vice Chancellor found that D breached the contractual fiduciary duties of entire fairness because (1) D never formed the Audit Committee as required by Section 7.10(a) to review and approve the Odd Lot Offer and Resale, and (2) D failed to perform a market check or obtain any reliable financial analysis indicating that the Odd Lot Resale would be conducted on the same terms obtainable from a third party. The Court of Chancery thus held D liable for breach of the contractually created fiduciary duties of entire fairness contained in the Partnership Agreement and found HGI, and other directors jointly and severally liable with the General Partner for aiding and abetting its breach. P was awarded money damages plus compound interest instead of rescission. The Vice Chancellor then went on to find that the challenged transactions were not 'conceived of as a conscious scheme to entrench D's control and enrich HGI' improperly. This appeal followed.

Issues

Rule of Law

Holding and Decision

Legal Analysis

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