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

67 A.3d 354 (2013)

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Nature of the Case

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Facts

D was a publicly traded Delaware limited partnership. Ps represent a class consisting of D's unaffiliated former common unitholders. D and Kirby Corporation decided to merge. D'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 D. D'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 D. Abbate, Alperin, Baker, Casey, Dowling, Friedman, McCarthy, Reaves II, and Salerno served on KSGP's board of directors (the K-Sea Board) During the Merger negotiations, directors Abbate, Alperin, and Salerno comprised the D's Board's Conflicts Committee. K-Sea, K-Sea GP, KSGP, and the K-Sea Board members are the Defendants in this action. D'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%. K-Sea GP held incentive distribution rights (IDR). It would not receive payments until quarterly distributions reached $0.55 per unit. D's conservative estimates indicated that annual distributions would not reach $0.55 per unit until 2015. P contends D would not reach the $0.55-per-unit quarterly threshold until the mid-2030s. Based on these projections, the IDR rights were worth as little as $100,000. Kirby offered $306 million for D's common and preferred units. It was rejected, and Kirby was told that it was not enough for K-Sea GP's general partner interest and its IDRs. Kirby offered $316 million for all of D's equity interests. It was rejected again. Kirby offered $329 million for K-Sea, which included an $18 million payment for the IDRs. The last offer created a 'possible conflict of interest,' and the Merger was referred to the Conflicts Committee. 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 Committee hired Stifel, Nicolaus & Co. (Stifel) and DLA Piper LLP as its independent financial and legal advisors. Stifel stated that the consideration D's unaffiliated common unitholders received was fair from a financial viewpoint. The opinion expressly did not consider 'the fairness of the amount or nature of any compensation to any of the officers, directors or employees of D or its affiliates . . . relative to the compensation of the public holders of D's equity securities.' The Conflicts Committee unanimously recommended the Merger. D's Board approved it. A majority of D's unitholders voted in favor of the transaction, and the Merger closed. D's common unitholders received $8.15 per unit, and K-Sea GP received $18 million for the IDRs. P filed a class action complaint alleging the Conflicts Committee members breached their fiduciary duties by recommending the Merger without evaluating the IDR Payment's fairness. The complaint was dismissed, and P appealed.