In Re CVR Refining, LP Unitholder Litigation ( 2020 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE CVR REFINING, LP ) CONSOLIDATED
UNITHOLDER LITIGATION ) C.A. No. 2019-0062-KSJM
MEMORANDUM OPINION
Date Submitted: July 30, 2019
Date Decided: January 31, 2020
Joel Friedlander, Jeffrey M. Gorris, Christopher P. Quinn, FRIEDLANDER &
GORRIS, P.A., Wilmington, Delaware; Mark Lebovitch, Adam Wierzbowski,
David Wales, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, New
York, New York; Lawrence Deutsch, Michael Dell’Angelo, BERGER
MONTAGUE PC, Philadelphia, Pennsylvania; Counsel for Plaintiffs.
Srinivas M. Raju, Matthew W. Murphy, Nicole M. Henry, RICHARDS, LAYTON
& FINGER, P.A., Wilmington, Delaware; Herbert Beigel, LAW OFFICES OF
HERBERT BEIGEL, Tucson, Arizona; Counsel for Defendants CVR Refining, LP,
CVR Energy, Inc., CVR Refining Holdings, LLC, CVR Refining GP, LLC, Icahn
Enterprises, L.P., Carl C. Icahn, Sunghwan Cho, Jonathan Frates, David L. Lamp,
Andrew Langham, Louis J. Pastor, Kenneth Shea, Jon R. Whitney, and Glenn R.
Zander.
McCORMICK, V.C.
The plaintiffs allege that entities controlled by Carl Icahn engaged in a multi-
step scheme culminating in the exercise of a call right to buy out the minority
unitholders of CVR Refining, L.P. (the “Partnership”) at an unfair price. According
to the plaintiffs, the idea for this scheme came from a similar buyout at an unrelated
entity, Boardwalk Pipeline Partners, L.P. (“Boardwalk”). Just prior to the events
relevant to this litigation, Boardwalk’s general partner exercised a call right that was
subject to a trailing-market-based exercise price. After Boardwalk’s general partner
announced that it was “seriously considering” exercising the call right, it waited as
Boardwalk’s unit price fell by over 16%, then exercised the call right at the lower
price. Analysts criticized the Boardwalk process as designed to lower the market
price of the public units prior to exercise, thus lowering the cost of the buyout and
conferring a windfall to the option holder.
The plaintiffs alleged that the events at Boardwalk created a playbook for the
Icahn entities. To implement a similar scheme at the Partnership, the Icahn entities
first needed to increase their collective equity stake to achieve the contractually
designated threshold for exercising the call right. Therefore, in May 2018, defendant
CVR Energy, Inc. (“CVR Energy”) launched a partial exchange offer at $27.63 per
common unit. The board of directors of the general partner, comprising persons
closely affiliated with Icahn, determined not to make a recommendation concerning
1
the exchange offer and publicly disclosed their non-recommendation. After the
exchange offer closed, Icahn entities controlled over 84.5% of the Partnership.
In public filings made contemporaneously with the launch of the exchange
offer, Icahn entities disclaimed any intention to exercise the call right after
consummating the exchange offer. Nevertheless, analysts publicly speculated that
the entities would do so. This speculation drove down the price of the Partnership’s
common units. As analysts predicted, CVR Energy ultimately announced that it was
“contemplating” exercising the call right. CVR Energy then waited as the
Partnership’s unit price plummeted before exercising the call right at $10.50 per unit.
If the call right had been exercised at the exchange offer price, CVR Energy would
have paid an additional $393 million.
In their complaint, the plaintiffs claim that the exchange offer was the
beginning of a multi-step scheme designed to lower the cost of the buyout. They
allege that aspects of this scheme would constitute breaches of an express provision
of the partnership agreement requiring that the general partner act in good faith.
They further claim that the defendants breached an implied covenant in the call right,
which prohibited the defendants from manipulating the trading price of the
Partnership’s units to subvert the price protections in the call right. To reach the
defendants who were not parties to the partnership agreement, the plaintiffs claim
that those defendants tortiously interfered with the plaintiffs’ contractual rights.
2
The defendants have moved to dismiss the complaint. Because the
partnership agreement at issue eliminates all fiduciary duties owed by the
defendants, the primary question before this Court is whether the defendants’ alleged
scheme, if proven as true, breaches any express or implied provision of the
partnership agreement. This decision dismisses certain claims as to certain
defendants but otherwise denies the motion. The complaint alleges a reasonably
conceivable basis from which the Court can infer that the general partner’s non-
recommendation breached the partnership agreement’s express requirement that the
general partner act in good faith. The complaint also alleges that the general partner
breached the implied covenant in connection with the call right, and that certain
defendants tortiously interfered with the plaintiffs’ contractual rights.
Adding a wrinkle to the scheme, a contractual price protection required that
the call right exercise price be no less than any amount paid by an affiliate of the
general partner in the 90 days preceding the call right. The plaintiffs allege that an
executive vice president of the general partner, who purchased limited partnership
units within the 90-day window for $16.7162, was an affiliate whose purchase
triggered the price protection. This decision additionally holds that it is reasonably
conceivable that defendants breached the partnership agreement by not setting the
exercise price at the price paid by the vice president.
3
I. FACTUAL BACKGROUND
When consolidating six separate actions, 1 the Court deemed the Verified
Class Action Complaint filed in C.A. No. 2019-0210 as the operative complaint (the
“Complaint”).2 The background facts are drawn from the Complaint, documents it
incorporates by reference, and judicially noticeable facts.
A. The Partnership
Before being involuntarily bought out, the plaintiffs owned common units in
the Partnership, a Delaware master limited partnership whose common units were
traded on the NYSE under the symbol “CVRR.” The Partnership was in the business
of refining oil and marketing transportation fuels. CVR Refining GP, LLC is the
general partner (the “General Partner”) of the Partnership. CVR Energy is the
General Partner’s indirect parent, and its stock trades on the NYSE under the symbol
“CVI.” Icahn Enterprises, L.P. (“Icahn Enterprises”) controls the General Partner
through its 82% interest in CVR Energy.
1
C.A. No. 2019-0062-KSJM Docket (“Dkt.”) 47, Order Appointing a Leadership Structure
¶ 4.
2
C.A. No. 2019-0210-KSJM Dkt. 1, Verified Class Action Compl. (“Compl.”).
4
The following diagram depicts the relationships between these entities:
During time periods relevant to this litigation, Icahn and eight of his current
and former business associates comprised the Board of Directors of the General
5
resigned from those positions “due to his extremely busy schedule,” but the plaintiffs
allege that he resigned to distance himself from an ongoing call right exercise
scheme. 4
The Partnership is governed by the First Amended and Restated Agreement
of Limited Partnership of CVR Refining, LP (the “Partnership Agreement”). The
Partnership Agreement eliminates traditional fiduciary duties and imposes
contractual duties. 5
Section 7.9 of the Partnership Agreement imposes two contractual standards
of conduct on the General Partner, one when the General Partner is acting in its
official capacity as the general partner of the Partnership, and the other when the
General Partner is acting solely in its individual capacity.
Section 7.9(a) of the Partnership Agreement provides that when acting in its
official capacity as the general partner of the Partnership, the General Partner “shall
not make such determination, or take or omit to take such action, in Bad Faith.”6
“Bad Faith” is defined as “the belief that such determination, action or omission was
adverse to the interest of the Partnership.” 7 “Good Faith” is defined as “not taken in
4
Compl. ¶¶ 22, 93.
5
See P’ship Agreement § 7.2.
6
Id. § 7.9(a).
7
Id. § 1.1.
7
Bad Faith.”8 “In any proceeding brought by or on behalf of the Partnership, . . . the
Person bringing or prosecuting such proceeding shall have the burden of proving
that such determination, action or omission was not in Good Faith.”9
Section 7.9(b) of the Partnership Agreement provides that when not acting in
its capacity as the general partner of the Partnership, the General Partner is “entitled,
to the fullest extent permitted by law, to make such determination or to take or omit
to take such action free of any fiduciary duty or duty of Good Faith.”10
Section 7.9(c) further specifies that when acting in its contractually delegated “sole
discretion,” the General Partner is “acting in its individual capacity” and not “acting
in its capacity as the general partner of the Partnership.”11
The Partnership Agreement does not impose a separate standard of conduct
for conflict transactions, 12 although Section 7.9(d) provides optional safe harbors
8
Id.
9
Id. § 7.9(a).
10
Id. § 7.9(b).
11
Id. § 7.9(c).
12
Compare id. § 7.9(d) (providing that “the General Partner may in its discretion submit
any resolution, course of action with respect to or causing such conflict of interest or
transaction (i) for Special Approval or (ii) for approval by the vote of a majority of the
Common Units (excluding Common Units owned by the General Partner and its
Affiliates”), with Bandera Master Fund LP v. Boardwalk Pipeline P’rs, LP, 2019
WL 4927053, at *11 (Del. Ch. Oct. 7, 2019) (partnership agreement providing that “the
General Partner or its Affiliates in respect of such conflict of interest shall be permitted and
deemed approved by all Partners, and shall not constitute a breach of this Agreement . . .
or of any duty stated or implied by law or equity, if the resolution or course of action in
respect of such conflict of interest is (i) approved by Special Approval, (ii) approved by
8
that the General Partner may apply in its discretion. The General Partner did not
invoke Section 7.9(d) in connection with the events giving rise to this litigation.
B. The Call Right
Section 15.1(a) of the Partnership Agreement grants the General Partner or its
assignee the right to purchase common units held by unaffiliated limited partners
(the “Call Right”):
Notwithstanding any other provision of this Agreement, if
at any time the General Partner and its Affiliates hold more
than 95% of the total Limited Partner Interests of any class
then Outstanding, the General Partner shall then have the
right, which right it may assign and transfer in whole or in
part to the Partnership or any Affiliate of the General
Partner, exercisable in its sole discretion, to purchase all,
but not less than all, of such Limited Partner Interests of
such class then Outstanding held by Persons other than the
General Partner and its Affiliates, at the greater of (x) the
Current Market Price as of the date three days prior to the
date that the notice described in Section 15.1(b) is mailed
or (y) the highest price paid by the General Partner or any
of its Affiliates for any such Limited Partner Interest of
such class purchased during the 90-day period preceding
the date that the notice described in Section 15.1(b) is
mailed. Notwithstanding the foregoing, if, at any time, the
General Partner and its Affiliates hold less than 70% of the
total Limited Partner Interests of any class then
Outstanding then, from and after that time, the General
Partner’s right set forth in this Section 15.1(a) shall be
the vote of a majority of the Common Units (excluding Common Units owned by the
General Partner and its Affiliates), (iii) on terms no less favorable to the Partnership than
those generally being provided to or available from unrelated third parties or (iv) fair and
reasonable to the Partnership, taking into account the totality of the relationships between
the parties involved (including other transactions that may be particularly favorable or
advantageous to the Partnership)”).
9
exercisable if the General Partner and its Affiliates
subsequently hold more than 80% of the total Limited
Partner Interests of such class. 13
Section 15.1(a) thus has two conditions, one of which must be met before the
General Partner can exercise the Call Right. One condition is satisfied when the
General Partner and its Affiliates hold more than 95% of a class of units. The other
condition is satisfied when the General Partner and its Affiliates increase their
holdings from “less than 70% of the total Limited Partner Interests” to “more than
80% of the total Limited Partner Interests.”14
The Call Right provides limited partners with two price-setting provisions.15
The 90-day provision (the “90-day Provision”) prevents minority unitholders from
having their units called at a price below what the General Partner or its Affiliates
paid to purchase any units within the preceding 90 days of the date of exercise.16
The 20-day provision (the “20-day Formula”) calls for the price to be “the average
13
P’ship Agreement § 15.1(a).
14
Id.
15
Id. (explaining the exercise price shall be “the greater of (x) the Current Market Price as
of the date three days prior to the date that the notice . . . is mailed or (y) the highest price
paid by the General Partner or any of its Affiliates for any such Limited Partner Interest of
such class purchased during the 90-day period preceding the date that the notice . . . is
mailed); id. § 1.1 (definition of “Current Market Price”).
16
Id. § 15.1(a).
10
of the daily Closing Prices per Partnership Interest of such class for the 20
consecutive Trading Days immediately prior to such date.”17
C. The Scheme
As discussed at the outset of this decision, the plaintiffs posit the existence of
a “Boardwalk playbook” that sets out “how the controller of an MLP could
weaponize a call right with a trailing-market-price-based buyout price by artificially
manipulating the stock price.”18 They say that sophisticated investors and
investment banking analysts observed the Boardwalk scheme as it played out in
April and May of 2018 and published commentary predicting the outcome in real
time.
During the same month that analysts were publicly criticizing the Boardwalk
call right process, the plaintiffs allege that the defendants conceived of a similar
“multi-step plan to buy out the Partnership’s public unitholders on the cheap.”19
According to the plaintiffs, the steps went as follows:
First, propose a partial exchange offer to the Board.
Second, launch a partial exchange offer to acquire
sufficient Partnership common units to satisfy the Call
Trigger.
17
Id. § 1.1.
18
Dkt. 55, Pls.’ Answering Br. in Opp’n to Defs.’ Mot. to Dismiss (“Pls.’ Ans. Br.”) at 12;
see id. at 12–13 (discussing required steps taken to carry out scheme).
19
Compl. ¶ 58.
11
Third, wait for the 90-day price protection period of
Section 15.1(a) to expire and conceal or disclaim any
intent to exercise the Call Right during that period.
Fourth, announce that it was considering exercising the
Call Right, which would prompt the trading price to drop.
Fifth, exercise the Call Right at an artificially low price.20
1. CVR Energy Proposes the Exchange Offer.
On April 30, 2018, Boardwalk’s controller had announced that it was
“seriously considering” exercising the call right.21 On May 10, 2018, Barclays
issued a report titled “Digging deeper into call rights,” which analyzed the call rights
for numerous MLPs and criticized Boardwalk’s controller for teasing the market.22
On May 15, 2018, JP Morgan issued an analyst report regarding Boardwalk and
noting the “perception of securities manipulation.”23
Two days later, on May 17, 2018, representatives of CVR Energy and the
Partnership met to discuss a partial exchange offer that would position CVR Energy
to exercise the call right (the “Exchange Offer”). At the time, Icahn Enterprises was
poised to take advantage of the lower Call Right condition, having lowered its
interests in 2016 to below 70%.24 The May 17 meeting discussed a partial exchange
20
Pls.’ Answering Br. at 12–13.
21
Compl. ¶ 53.
22
Id. ¶ 56.
23
Id. ¶ 57.
24
The contemporaneous SEC filings disclosed that the sale “was to reduce the Call Right
Trigger percentage by reducing the ownership interests of the General Partner and its
12
offer that would allow CVR Energy to acquire over 80% of Partnership units,
thereby satisfying the condition to exercising the Call Right. Because each of the
Partnership’s executive officers is also an executive officer of CVR Energy, the
plaintiffs describe this May 17 “meeting” as a check-the-box exercise of no real
consequence. On May 24, 2018, the Board met to discuss the Exchange Offer. At
the time, the Board comprised Icahn, four Icahn Enterprises employees (Cho, Frates,
Langham, and Pastor), the CEO of CVR Energy (Lamp), two board members with
long-term ties to Icahn (Shea and Zander), and Whitney. Despite Icahn’s significant
ties to the overwhelming majority of the Board, the Board did not refer the decision
to a conflicts committee or otherwise invoke any safe harbor provisions of the
Partnership Agreement.
Four days later, the Board determined that it would not make a
recommendation for or against the Exchange Offer. The Board’s official position—
reflected in the Schedule 14D-9 it caused the Partnership to file with the SEC—was
that it was “expressing no opinion” 25 because the decision to participate in the
Exchange Offer was “a personal investment decision dependent upon each
individual limited partner’s particular investment objectives and circumstances and
Affiliates below 70% of the common units.” Compl. ¶ 49. After this sale, “the General
Partner and its affiliates (including the Reporting Persons . . .) collectively own[ed] 69.99%
of the Common Units.” Id.
25
Id. ¶ 79.
13
their own consideration and evaluation of all of the Partnership’s publicly available
information.”26
2. CVR Energy Launches the Exchange Offer.
On May 29, 2018, CVR Energy launched the Exchange Offer at a price of
$27.63, which represented a 25% premium to the pre-announcement unit price. The
Exchange Offer expired on July 27, 2018. Holders of nearly half of the outstanding
minority units tendered, increasing Icahn Enterprises and its affiliates’ ownership to
approximately 84.5% of the Partnership’s units.
3. CVR Energy Lets 90 Days Expire While the Market
Predicts that CVR Energy Will Exercise the Call Right.
In public filings made contemporaneously with the launch, Icahn Enterprises
and CVR Energy disclaimed any intention to exercise the Call Right. 27 Despite these
public statements, analysts remained skeptical. Analysts predicted that the prospect
of the Icahn-related entities satisfying the Call Right condition “would depress the
market price of the common units.”28 On May 29, 2018, Barclays issued a report
opining that the results of the Exchange Offer would be an “ongoing overhang for
the [Partnership] unitholders.” 29 Macquarie Research issued a report the next day
26
Id. ¶ 81.
27
Id. ¶ 72.
28
Id. ¶ 84.
29
Id. ¶ 85.
14
positing that the Exchange Offer was the first step in CVR Energy and its affiliates’
plan to exercise the Call Right.
The SEC was also skeptical, inquiring on June 5, 2018 “whether or not this
tender offer constitutes the first step in a series of transactions that ultimately could
produce one of the two specified going private effects.” 30 CVR Energy responded
that it “view[ed] the offer as a discrete transaction and not the first step in a series of
transactions that may occur in the future.” 31
During the Partnership’s July 26, 2018 earnings call, multiple analysts
expressed concern regarding the effects of the Exchange Offer.32 In a July 27, 2018,
research report, Barclays noted that positive second quarter 2018 results would have
only a “neutral impact” on the price of Partnership units because of the “privatization
risk” associated with the Call Right.33 On August 1, 2018, Macquarie Research
published a report noting how the prospect of a potential exercise of the Call Right
could “decrease unit holder[s’] ability to capture the long term underlying asset
30
Id. ¶ 68.
31
Id.
32
Id. ¶ 87 (alleging that a Goldman Sachs analyst characterized the Exchange Offer as
“very unusual” and asked Defendant Lamp about its “strategic rationale” and what it
“represents on a go-forward basis”); id. ¶ 88 (alleging that an analyst from Tudor,
Pickering, Holt & Co. asked Lamp: “If the exchange offer is successful, though, are you
worried about how the remaining units of [the Partnership] will trade? You are looking at
a stock with potentially a very low float, this call option from [CVR Energy].”).
33
Id. ¶ 89 (explaining that the majority unitholder could buy out the minority “without the
need to pay any premium above their current share prices”).
15
value.”34 Also on August 1, 2018, Icahn Enterprises and CVR Energy filed an
amended Schedule 13D reiterating that the “Reporting Persons and the Issuer have
no current plans to exercise the call right at this time.” 35
On October 24, 2018, the Partnership reported favorable third quarter 2018
results. According to Barclays, the “existence of the call option by the parent
corporation . . . will likely mute the market response” to these positive results
because “privatization risk still serves as an overhang to any potential upside.”36
During the Partnership’s October 25, 2018 earnings call, CVR Energy’s CEO, who
served on the Board, again denied that CVR Energy had plans to exercise the Call
Right. The next day, Barclays again noted its pessimism about the price of
Partnership units “so long as the . . . call option risk lingers.” 37 Macquarie’s
contemporaneous analyst report likewise added that the “potential removal of a
takeover premium make[s] [the Partnership] a less favorable vehicle.”38 Meanwhile,
the price of Partnership units fell while the price of CVR Energy units rose.
34
Id. ¶ 92.
35
Id. ¶ 94.
36
Id. ¶ 97.
37
Id. ¶ 101.
38
Id. ¶ 102.
16
4. CVR Energy Publicly Announces That It Might Exercise
the Call Right.
Ninety days and one month after closing the Exchange Offer, on
November 29, 2018, Icahn Enterprises and CVR Energy filed an amended
Schedule 13D disclosing that CVR Energy was “now contemplating” an exercise of
the Call Right. 39 The price of Partnership units at that time was approximately
$17.16. The trading price of CVR’s common units fell precipitously thereafter.
5. CVR Energy Exercises the Call Right.
On January 17, 2019, the Call Right price as determined by the 20-day
Formula was $10.50 per unit, $17.13 lower than the Exchange Offer price. The
Partnership and CVR Energy announced that the General Partner had assigned the
Call Right to CVR Energy and that CVR Energy would exercise the Call Right.
D. An Additional Wrinkle: An Alleged Affiliate Purchases
Partnership Units Within 90 Days of the Call Right Exercise.
Recall that the 90-day Provision required the party exercising the Call Right
to pay “the highest price paid by the General Partner or any of its Affiliates for any
such Limited Partner Interest of such class purchased during the 90-day period
preceding.”40 On November 14, 2018, Janet T. DeVelasco, the Vice President of
Environmental, Health, Safety and Security at CVR Energy and the General Partner,
39
Id. ¶ 103.
40
P’ship Agreement § 15.1(a) (emphasis added).
17
purchased Partnership units at a price of $16.7162. In addition to serving as an
officer of CVR Energy and the General Partner, DeVelasco is featured on the CVR
Energy website as a member of CVR Energy and the General Partner’s “Executive
Team.” DeVelasco’s promotion to her current role required the Partnership and
CVR Energy to file a Form 8-K, an SEC filing required to announce “major events
shareholders should know about.” 41
The plaintiffs allege that DeVelasco is an “Affiliate” of the General Partner
as defined in Section 1.1 of the Partnership Agreement such that the Call Right price
should have been at least $16.7162.
E. This Litigation
This action consolidated multiple suits filed within the weeks after the CVR
Energy’s exercise of the Call Right. On April 4, 2019, the Court entered an order
appointing co-lead counsel and designating an operative complaint.42 The
Complaint alleges three Counts:
• Count I for breach of the Partnership Agreement against the
Partnership, the General Partner, CVR Holdings, and CVR Energy;
• Count II for breach of the implied covenant of good faith and fair
dealing embedded in the Partnership Agreement against the
Partnership, the General Partner, CVR Holdings, and CVR Energy; and
• Count III for tortious interference with the Partnership Agreement
against CVR Energy, Icahn Enterprises, and the Individual Defendants.
41
Compl. ¶ 118.
42
Dkt. 47, Order Appointing a Leadership Structure.
18
The defendants filed a motion to dismiss on May 31, 2019. 43 The parties fully
briefed the motion by July 18, 2019,44 and the Court heard oral arguments on
July 30, 2019.45
While the defendants’ motion was pending, Vice Chancellor Laster issued his
decision on a pending motion to dismiss in the case challenging the exercise of the
call right in Boardwalk, Bandera Master Fund LP v. Boardwalk Pipeline Partners,
LP (“Boardwalk”). 46 The parties then submitted supplemental briefing on the effect
of that decision on the pending motion.47
II. LEGAL ANALYSIS
The defendants have moved to dismiss the Complaint pursuant to Court of
Chancery Rule 12(b)(6). Under Rule 12(b)(6), the Court may grant a motion to
dismiss if the complaint “fail[s] to state a claim upon which relief can be granted.”48
“[T]he governing pleading standard in Delaware to survive a motion to dismiss is
43
Dkt. 52, Defs.’ Mot. to Dismiss Verified Class Action Compl.
44
Defs.’ Opening Br.; Pls.’ Answering Br.; Dkt. 59, Reply Br. in Further Supp. of Defs.’
Mot. to Dismiss (“Defs.’ Reply Br.”).
45
Dkt. 62, Oral Arg. on Defs.’ Mot. to Dismiss.
46
2019 WL 4927053 (Del. Ch. Oct. 7, 2019).
47
Dkt. 64, Lead Pl.’s Supp. Br.; Dkt. 65, Supp. Submission on the Appl. of the Boardwalk
Mem. Op. in Supp. of Defs.’ Mot. to Dismiss (“Defs.’ Supp. Br.”).
48
Ct. Ch. R. 12(b)(6).
19
reasonable ‘conceivability.’” 49 When considering such a motion, the Court must
“accept all well-pleaded factual allegations in the [c]omplaint as true . . . , draw all
reasonable inferences in favor of the plaintiff, and deny the motion unless the
plaintiff could not recover under any reasonably conceivable set of circumstances
susceptible of proof.” 50 The Court, however, need not “accept conclusory
allegations unsupported by specific facts or . . . draw unreasonable inferences in
favor of the non-moving party.” 51 The defendants seek dismissal of each of the
plaintiffs’ three Counts.
A. Breach of the Partnership Agreement
In Count I, the plaintiffs claim that the Partnership, the General Partner, CVR
Holdings, and CVR Energy breached the Partnership Agreement twice: first in
connection with the Exchange Offer, and second by setting the exercise price of the
Call Right at an amount lower than the price DeVelasco paid. Count I states a claim
upon which relief can be granted.
49
Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 537 (Del.
2011).
50
Id. at 536 (citing Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002)).
51
Price v. E.I. du Pont de Nemours Co., Inc., 26 A.3d 162, 166 (Del. 2011) (citing Clinton
v. Enter. Rent-A-Car Co., 977 A.2d 892, 895 (Del. 2009)).
20
Principles of contract interpretation govern this analysis. 52 Delaware law
“construe[s] limited partnership agreements in accordance with their terms in order
to give effect to the parties’ intent.”53 This Court “will give priority to the parties’
intentions as reflected in the four corners of the agreement, construing the agreement
as a whole and giving effect to all its provisions.” 54 Words are given “their plain
meaning unless it appears that the parties intended a special meaning.” 55
If contractual terms are ambiguous, “the interpreting court must look beyond
the language of the contract to ascertain the parties’ intentions.” 56 But “[a] contract
is not ambiguous ‘simply because the parties do not agree upon its proper
construction,’ but only if it is susceptible to two or more reasonable
interpretations.”57 At the motion to dismiss stage, “the trial court cannot choose
52
6 Del. C. § 17-1101(c) (noting the Delaware Revised Uniform Limited Partnership Act
is intended to give “maximum effect to the principle of freedom of contract and the
enforceability of partnership agreements”).
53
Allen v. Encore Energy P’rs, L.P., 72 A.3d 93, 104 (Del. 2013) (citing Norton v. K-Sea
Transp. P’rs L.P., 67 A.3d 354, 360 (Del. 2013)).
54
In re Viking Pump, Inc., 148 A.3d 633, 648 (Del. 2016) (citing Salamone v. Gorman,
106 A.3d 354, 368 (Del. 2014)).
55
Encore Energy, 72 A.3d at 104 (citing AT&T Corp. v. Lillis, 953 A.2d 241, 252 (Del.
2008)).
56
Eagle Indus., Inc. v DeVilbiss Health Care, Inc., 702 A.2d 1228, 1232 n.8 (Del. 1997)
(citing Rhone-Poulenc Basic Chems. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1196
(Del. 1992)).
57
Norton, 67 A.3d at 354 (quoting AT&T, 953 A.2d at 253).
21
between two differing reasonable interpretations of ambiguous provisions.”58
Dismissal is appropriate on a Rule 12(b)(6) motion “only if the defendants’
interpretation is the only reasonable construction as a matter of law.” 59
1. The Exchange Offer
The defendants argue that dismissal of Count I’s challenge to the Exchange
Offer is warranted because the Exchange Offer was a “voluntary, unitholder-level”
transaction.60 They note that the Partnership Agreement is “wholly silent and
imposes no role or obligation on the General Partner with respect to a tender offer
or an exchange offer,” 61 which is technically true. They observe that unlike mergers,
tender and exchange offers do not require the involvement or consent of a general
partner. From the lack of affirmative contractual obligations specific to an exchange
offer, the defendants deduce that no defendant could have breached the Partnership
Agreement in connection with the Exchange Offer.
The defendants’ argument ignores that the General Partner took action in
connection with the Exchange Offer. The Board met to discuss the offer. Shortly
thereafter, it determined that the General Partner would not make any
58
VLIW Tech., LLC v. Hewlett-Packard Co., 840 A.2d 606, 615 (Del. 2003) (citing
Vanderbilt Income & Growth Assocs. v. Arvida/JMB Managers, Inc., 691 A.2d 609, 613
(Del. 1996)).
59
Id.
60
Defs.’ Reply Br. at 7.
61
Id.
22
recommendation to unitholders. The General Partner then disclosed its non-
recommendation determination as part of Schedule 14D-9 filed on behalf of the
Partnership. 62 The focus is thus not whether the General Partner was contractually
obligated to act, but rather, whether the actions taken by the General Partner
breached the Partnership Agreement.
As discussed above, the Partnership Agreement imposes different contractual
standards of conduct on the General Partner depending on whether the General
Partner acted in an official capacity. To resolve the current issue, the Court must
first determine whether the General Partner acted in its official capacity.
The non-recommendation determination was made in the General Partner’s
official capacity. A Schedule 14D-9 is an official document that discloses, among
other things, a statement of a target company’s position concerning a tender offer.63
Thus, the non-recommendation determination disclosed in the Schedule 14D-9 was
the official position of the Partnership concerning the Exchange Offer. The General
Partner acted in its official capacity when the Board deliberated and then made the
non-recommendation determination.
The disclosure of the non-recommendation determination also constituted an
action by the General Partner in its official capacity. Section 7.9(c) of the
62
Compl. ¶¶ 79–80.
63
17 C.F.R. § 240.14d-9(g); see also Morrison v. Berry, 191 A.3d 268, 272 (Del. 2018).
23
Partnership Agreement provides that the General Partner acts in its official capacity
when “the General Partner exercise[es] its authority as a general partner under this
Agreement, other than when it is ‘acting in its individual capacity.’” 64 For avoidance
of doubt, Section 7.9(c) continues to state that “‘acting in its individual capacity’
means: (A) any action by the General Partners or its Affiliates other than through
the exercise of the General Partner of its authority as a general partner under this
Agreement.” 65 Section 7.1(a) then enumerates specific authority possessed by the
General Partner, which includes the power to make public filings on behalf of the
Partnership. 66 It is therefore reasonably conceivable that by filing the 14D-9 on
behalf of the Partnership, the General Partner exercised its authority under the
Partnership Agreement and thus acted in an official capacity.
Because the General Partner was acting in an official capacity, the good faith
standard of Section 7.9(a) applies to the non-recommendation determination and
disclosure. Section 7.9(a) requires the General Partner “not to make such
determinations, or take or omit to take such action, in Bad Faith,” 67 with Bad Faith
defined as the “belief that such determination, action or omission was adverse to the
64
P’ship Agreement § 7.9(c).
65
Id. (emphasis added).
66
Id. § 7.1(a)(ii) (giving the General Partner power over “the making of . . . regulatory and
other filings, or rendering of periodic or other reports to governmental or other agencies
having jurisdiction over the business or assets of the Partnership”).
67
P’ship Agreement § 7.9(a).
24
Partnership.” 68 This definition implies a subjective standard.69 To plead subjective
bad faith, a plaintiff must plead facts to show that the defendants subjectively
believed that an action was “against the partnership’s best interests” or that the
defendants “failed intentionally to act in the face of a known duty.” 70
Although “the subjective good faith standard remains distinct from an
objective, ‘reasonable person’ standard,” the objective reasonableness of a
transaction may weigh in the Court’s analysis of whether the defendants subjectively
acted in bad faith. 71 “The directors’ personal knowledge and experience will be
relevant to a subjective good faith determination, which must focus on measuring
the directors’ approval of a transaction against their knowledge of the facts and
circumstances surrounding the transaction.” 72 The Delaware Supreme Court has
explained that it may be “reasonable to infer subjective bad faith . . . when a plaintiff
alleges objective facts indicating that a transaction was not in the best interests of
the partnership and that the directors knew of those facts.”73
68
Id. § 1.1.
69
See Encore Energy, 72 A.3d at 104 (“This definition distinguishes between ‘reasonably
believes’ and ‘believes’ and eschews an objective standard when interpreting the
unqualified term ‘believes.’”); Norton, 67 A.3d at 360.
70
Encore Energy, 72 A.3d at 105.
71
Id. at 107.
72
Id.
73
Id.
25
When considering whether a transaction is in the “best interests of the
partnership,” the Court generally takes a holistic approach, considering the effects
on the partnership as an entity. 74 This perspective affords a general partner the
“discretion to consider the full range of entity constituencies in addition to the
limited partners, including but not limited to employees, creditors, suppliers,
customers, and the General Partner itself.”75 However, “[a] transaction that is in the
best interests of the Partnership logically should not be ‘highly unfair to the limited
partners,’” 76 particularly where no offsetting benefits to the partnership are
apparent.77
In this case, it is reasonably conceivable that the Board believed that the
Exchange Offer was adverse to the interests of the limited partners with no offsetting
benefits, and, thus, adverse to the Partnership as a whole.
It is reasonably conceivable that the Exchange Offer was adverse to the
interests of the limited partners because it triggered speculation about the Call Right,
74
Norton, 67 A.3d at 367.
75
Boardwalk, 2019 WL 4927053, at *15.
76
Dieckman v. Regency GP LP, 2018 WL 1006558, at *4 (Del. Ch. Feb. 20, 2018) (citing
Allen v. El Paso Pipeline GP Co., 113 A.3d 167, 181 (Del. Ch. 2014)).
77
See Boardwalk, 2019 WL 4927053, at *16 (declining to dismiss when it “is not
intuitively apparent how the Potential-Exercise Disclosure would have had offsetting
positive effects on the Partnership’s business, employees, customers, suppliers, or the
communities in which it operates”); see also Norton, 67 A.3d at 367 (holding that “best
interests of the Partnership,” which included “the general partner and the limited partners”).
26
which “depress[ed] the market price of the common units” 78 and caused an “ongoing
overhang for the Partnership unitholders.”79 As discussed above, these effects raised
concern among analysts, evidenced by questions during the Partnership’s July 2018
earnings call. One analyst asked about the “strategic rationale” for the Exchange
Offer. 80 Another analyst expressed apprehension about the Partnership’s low float
and whether the units would be able to remain in the Alerian MLP index, “the
leading gauge of energy Master Limited Partnerships.”81 Yet another analyst
reported around the same time period that “given the majority shareholder’s right to
force the privatization of the remaining shares anytime . . . , without the need to pay
any premium above their current share prices, we believe [the Partnership] will
remain on the sidelines for any remaining prospective investors.”82 Analysts
continued to identify “privatization risk” as an overhang on the trading price even
after the Partnership announced positive third quarter 2018 results.83
It is also reasonably conceivable that the Exchange Offer was detrimental to
the Partnership as a whole. After the Exchange Offer, the trading price for common
78
Compl. ¶ 84.
79
Id. ¶ 85.
80
Id. ¶ 87; see supra note 32.
81
Id. ¶ 88.
82
Id. ¶ 89.
83
Id. ¶ 97.
27
units dropped, increasing the Partnership’s cost of equity and, therefore, its cost of
capital. The Partnership expressly acknowledged in its annual report that “[t]o the
extent we are unable to finance our growth externally, the growth in our business,
and our liquidity, may be negatively impacted.” 84 An increased cost of equity
increases the cost of raising external capital needed to finance growth. Thus, the
facts alleged support a reasonably conceivable inference that the Exchange Offer
was adverse to the interests of the Partnership as a whole, not just the remaining
unaffiliated limited partners.
It is further reasonable to infer that the Board actually knew of these
potentially harmful effects when it made and disclosed the non-recommendation
determination. Obtaining units sufficient to exercise the Call Right was a condition
to the Exchange Offer, as the Board disclosed.85 Thus, the Board was aware that
CVR Energy would be in a position to exercise it after the Exchange Offer. The
Board comprised “savvy and sophisticated parties” within the energy MLP sector,86
and thus it is reasonable to infer that its members were knowledgeable about the
highly publicized events at Boardwalk. As discussed above, analysts and the SEC
84
CVR Refining, LP, Annual Report (Form 10-K) (Feb. 19, 2019), at 67; see In re Kinder
Morgan Inc. Corp. Reorganization Litig., 2015 WL 4975270, at *8 (Del. Ch. Aug. 20,
2015) (describing concerns related to cost of capital).
85
Compl. ¶ 69.
86
Defs.’ Reply Br. at 27.
28
similarly saw the writing on the wall, questioned whether the Exchange Offer was
the first step in a series of transactions that would lead to a Call Right exercise, and
noted their concerns regarding the issue. If non-insiders can deduce the possible
detrimental effects posed by the Exchange Offer, it is reasonably conceivable that
savvy insiders knew what they were doing when they launched it in the first place.
In sum, the plaintiffs have alleged facts sufficient to show that the Board and
the General Partner knew of the risks to the Partnership associated with the Exchange
Offer. 87 They nevertheless made and disclosed the non-recommendation
determination. These allegations are sufficient to state a breach of contract claim as
to the General Partner. They are also sufficient to state a claim against the
Partnership, because the General Partner controlled the Partnership and caused it to
issue the no-determination disclosure.88
87
Encore Energy, 72 A.3d at 107.
88
See Boardwalk, 2019 WL 4927053, at *21 (remarking that “it is not clear the extent to
which the Partnership could be liable for breach of its Partnership Agreement if the breach
was committed by the General Partner,” but reasoning that “it would be premature to
dismiss the claim for breach of contract against the Partnership when the Partnership was
a party to the operative contract (the Partnership Agreement), when the General Partner
controlled the Partnership and caused it to take actions that are challenged in the case (such
as the issuance of the disclosure), and where a potential remedy may involve the
Partnership”); see also El Paso Pipeline GP Co. v. Brinckerhoff, 152 A.3d 1248, 1265 (Del.
2016) (finding claims were derivative in nature when limited partners alleged that general
partner breached standard of care and thus entity could not be held liable); Gerber v. EPE
Hldgs., LLC, 2013 WL 209658, at *12 (Del. Ch. Jan. 18, 2013) (“Even if [the plaintiff’s]
claims could be viewed as based on the [agreement], in addition to, or apart from,
traditional fiduciary duties, that a claim is based on contract does not necessarily make it a
direct claim.”).
29
This aspect of Count I does not state a claim against CVR Holdings in
connection with the Exchange Offer. Although CVR Holdings is a party to the
Partnership Agreement, CVR Holdings is not the subject of a single allegation in the
Complaint.89 This aspect of Count I also does not state a claim for breach of contract
against CVR Energy, which was not a party to the Partnership Agreement at the time
of the Exchange Offer and did not become bound by its terms until the General
Partner assigned the Call Right in January 2019.90
2. The Exercise Price
Count I also claims that CVR Energy breached the Partnership Agreement
when it exercised the Call Right at a price lower than what DeVelasco paid. The
defendants respond that DeVelasco is not actually an Affiliate of the General Partner
and that, even if she were, a trust purchased the units.
Under Section 15.1(a) of the Partnership Agreement, the General Partner must
exercise the Call Right at the “highest price paid by the General Partner or any of its
89
While it is conceivable that “a party who wishes to have a parent corporation backstop
the obligations of its subsidiary can do so by contract . . . by making the parent a party to
the agreement,” NAMA Hldgs., LLC v. Related WMC LLC, 2014 WL 6436647, at *26 (Del.
Ch. Nov. 17, 2014), the plaintiffs do not pursue this theory or otherwise explain how CVR
Holdings could be held liable.
90
See P’ship Agreement § 16.3 (providing that the Partnership Agreement “shall be
binding upon and inure to the benefit of the parties hereto and their heirs, executors,
administrators, successors, legal representatives and permitted assigns.”); El Paso
Pipeline, 113 A.3d at 178 (“It is a general principle of contract law that only a party to a
contract may be sued for breach of that contract.” (citing Gotham P’rs, L.P. v. Hallwood
Realty P’rs, L.P., 817 A.2d 160, 172 (Del. 2002))).
30
Affiliates for any such Limited Partner Interest of such class purchased during the
90-day period preceding” the notice of the exercise of the Call Right. 91 The Call
Right was exercised on January 17, 2019. The preceding 90 days began on
October 19, 2018. DeVelasco purchased units on November 14, 2018, within the
relevant timeframe. The only question is whether the plaintiffs have alleged that
DeVelasco is an Affiliate of the General Partner.
The Partnership Agreement defines Affiliate as “with respect to any Person,
any other Person that directly or indirectly through one or more intermediaries
Controls, is Controlled by or is under common Control with, the Person in
question.” 92 “Control” is defined as “the possession, direct or indirect, of the power
to direct or cause the direction of the management and policies of a Person, whether
through ownership of voting securities, by contract or otherwise.” 93 The defendants
contend that the plaintiffs have not pled a sufficient factual basis for the Court to
reasonably infer that DeVelasco is covered by the Affiliate clause. 94
It is reasonably conceivable that DeVelasco’s role as the Vice President of
Environmental, Health, Safety and Security at CVR Energy and the General Partner
affords her the power to direct management and policies at these entities. DeVelasco
91
P’ship Agreement § 15.1(a).
92
Id. § 1.1.
93
Id.
94
Defs.’ Opening Br. at 38.
31
is held out as an “executive officer” on CVR Energy’s website, in press releases, and
in SEC filings. 95 Federal regulations define an executive officer as a “president, any
vice president of the registrant in charge of a principal business unit, division or
function (such as sales, administration or finance), any other officer who performs a
policy making function or any other person who performs similar policy making
functions for the registrant.”96 The defendants argue that under the Partnership
Agreement, an Affiliate “must have the actual ‘power to direct or cause the direction
of the management and policies.’” 97 But the word “actual” does not appear in the
Partnership Agreement, and the Court will not read in superfluous language.
The defendants’ proposed interpretation is arguably belied by their own
treatment of DeVelasco in prior SEC filings related to the Call Right. In
August 2016, when Icahn Enterprises sold enough units to take advantage of the
lower Call Right condition, it announced that the total holdings of “the General
Partner and its affiliates” had been lowered to 69.99% even though Icahn-controlled
entities only owned 69.8% of the outstanding Partnership common units.98 The delta
95
Compl. ¶ 118.
96
17 C.F.R. § 240.3b-7; see In re Good Tech. Corp. S’holder Litig., 2018 WL 3649449, at
*2 (Del. Ch. July 31, 2018) (“[W]hen sophisticated parties in corporate litigation use
[“affiliate” and “associate”], they base their understanding on the widely used definitions
adopted by the federal securities laws.”).
97
Defs.’ Opening Br. at 38 (emphasis supplied by the defendants) (citing P’ship Agreement
§ 1.1).
98
Compl. ¶ 49 (emphasis added).
32
was owned by “directors and executive officers of the General Partner,” including
DeVelasco.99
Events related to this litigation further support the conclusion that DeVelasco
could be considered an Affiliate. Two days after the first complaint challenging the
Call Right Exercise was filed, DeVelasco filed an SEC Form 4 to clarify that the
units she purchased were held by a trust for which she serves as a co-trustee.
Notwithstanding the defendants’ claims that they were correcting an erroneous SEC
filing, it is reasonable to infer from the defendants’ conduct that they were aware
that DeVelasco could be considered an Affiliate and that her purchase would trip
Section 15.1(a).
The defendants also argue that DeVelasco is not truly the owner of the units
at issue, but this fallback position turns on a factual dispute. The plaintiffs
adequately plead that DeVelasco “purchased through a dividend reinvestment
236.2019 units of the Partnership” on November 14, 2018.
In the end, it might be that the definition of “Affiliate” in the Partnership
Agreement sufficiently differs from the other definitions to warrant excluding
DeVelasco. It could also be that DeVelasco did not purchase or own the units. But
for the purpose of this motion, it is reasonably conceivable that DeVelasco was an
Affiliate and purchased the units.
99
Id.
33
Accordingly, the plaintiffs have stated a claim against the General Partner for
breaching its contractual obligations to set the exercise price of the Call Right. By
this time, CVR Energy was a party to the Partnership Agreement, and thus the
plaintiffs have also stated a claim against CVR Energy for breach of the Partnership
Agreement.
This aspect of Count I does not state a claim against the Partnership because
the General Partner did not cause the Partnership to take any action in connection
with the Call Right. Nor does this aspect of Count I state a claim against CVR
Holdings, which is not the subject of a single allegation in the Complaint.100
B. Breach of the Implied Covenant
In Count II, the plaintiffs claim that the Partnership, the General Partner, CVR
Holdings, and CVR Energy breached the implied covenant of good faith and fair
dealing by undermining the price-setting mechanisms contained in the Call Right.101
The plaintiffs have stated a claim upon which relief can be granted.
In Dieckman, the Delaware Supreme Court articulated the principles
governing the application of the implied covenant in the MLP context as follows:
The implied covenant is inherent in all contracts and is
used to infer contract terms “to handle developments or
contractual gaps that the asserting party pleads neither
party anticipated.” It applies “when the party asserting the
implied covenant proves that the other party has acted
100
See supra note 89 and accompanying text.
101
Pls.’ Answering Br. at 41–46.
34
arbitrarily or unreasonably, thereby frustrating the fruits of
the bargain that the asserting party reasonably expected.”
The reasonable expectations of the contracting parties are
assessed at the time of contracting. In a situation like this,
involving a publicly traded MLP, the pleading-stage
inquiry focuses on whether, based on a reading of the
terms of the partnership agreement and considerations of
the relationship it creates between MLPs investors and
managers, the express terms of the agreement can be
reasonably read to imply certain other conditions, or leave
a gap, that would prescribe certain conduct, because it is
necessary to vindicate the apparent intentions and
reasonable expectations of the parties.102
The implied covenant is a limited remedy 103 whose application is a “cautious
enterprise.”104 Plaintiffs cannot “re-introduce fiduciary review through the backdoor
of the implied covenant.” 105 Nor can they seek to “rebalanc[e] economic interests
after events that could have been anticipated but were not, that later adversely
affected one party to a contract.”106 “[T]he implied covenant ‘does not apply when
the contract addresses the conduct at issue,’ but only ‘when the contract is truly
102
Dieckman, 155 A.3d at 367 (quoting Nemec v. Shrader, 991 A.2d 1120, 1125, 1126
(Del. 2010)).
103
Oxbow Carbon & Minerals Hldgs. v. Crestview-Oxbow Acq., LLC, 202 A.3d 482, 507
(Del. 2010) (quoting Nemec, 991 A.2d at 1128).
104
Nemec, 991 A.2d at 1125.
105
Lonergan v. EPE Hldgs., LLC, 5 A.3d 1008, 1019 (Del. Ch. 2010).
106
Boardwalk, 2019 WL 4927053, at *22 (citing Nemec, 991 A.2d at 1128); see also
Winshall v. Viacom Int'l, Inc., 55 A.3d 629, 636–37 (Del. Ch. 2011), aff’d, 76 A.3d 808
(Del. 2013) (The implied covenant “should not be applied to give plaintiffs contractual
protections that ‘they failed to secure for themselves at the bargaining table.’” (quoting
Aspen Advisors LLC v. United Artists Theatre Co., 861 A.2d 1251, 1260 (Del. 2004))).
35
silent’ concerning the matter at hand.”107 “Even where the contract is silent, ‘[a]n
interpreting court cannot use an implied covenant to re-write the agreement between
the parties’” 108 because “express contractual provisions ‘always supersede’ the
implied covenant.”109
Dieckman is particularly instructive. In that case, two limited partnerships in
the same MLP family sought to merge in a conflicted transaction. 110 The limited
partnership agreement afforded the general partner a safe harbor for conflicted
transactions if the transaction was approved by a fully independent special
committee or by a majority vote of unaffiliated unitholders. 111 To obtain the latter
protection, the general partner distributed a proxy statement describing at length the
planned merger, even though the express terms of the partnership agreement
required a disclosure of only a summary of the merger agreement.112 The lengthy
proxy statement did not disclose, however, that one member of the two-member
107
Oxbow, 202 A.3d at 507 (first quoting Nationwide Emerging Managers, LLC v.
Northpointe Hldgs. LLC, 112 A.3d 878, 896 (Del. 2015); then quoting Allied Capital Corp.
v. GC-Sun Hldgs., L.P., 910 A.2d 1020, 1033 (Del. Ch. 2006)).
108
Oxbow, 202 A.3d at 507 (quoting Nationwide, 112 A.3d at 896).
109
Boardwalk, 2019 WL 4927053, at *22 (citing Gerber v. Enter. Prods. Hldgs., 67 A.3d
400, 419 (Del. 2013)).
110
Dieckman, 155 A.3d at 360.
111
Id.
112
Id. at 365.
36
special committee had “alleged overlapping and shifting allegiances” that might
have called into question his independence.113
The plaintiffs challenged the transaction, claiming in part that the general
partner “failed to satisfy the [u]naffiliated [u]nitholder [a]pproval safe harbor
because the general partner made false and misleading statements in the proxy
statement to secure that approval.”114 The defendants moved to dismiss the
complaint, claiming that “in the absence of express contractual obligations not to
mislead investors or to unfairly manipulate the . . . process, the general partner need
only satisfy what the partnership agreement expressly required.” 115 Put differently,
the defendants argued that “only the express requirements of the partnership
agreement controlled and displaced any implied obligations not to undermine the
protections afforded unitholders by the safe harbors.”116
At the trial level, the Court of Chancery granted the motion to dismiss based
on the safe harbor.117 The Court “held that, even though the proxy statement might
have contained materially misleading disclosures, fiduciary duty principles could
not be used to imply disclosure obligations on the general partner beyond those in
113
Id. at 366.
114
Id. at 360.
115
Id.
116
Id.
117
Id. at 361.
37
the partnership agreement, because the partnership agreement disclaimed fiduciary
duties.”118 The Court concluded that the general partner had complied with an
express provision in the partnership agreement, which required the general partner
to provide only a summary of the merger agreement.119 The Court explained that
this express provision foreclosed any implied contractual duty to disclose material
facts about the process. 120
On appeal, the Delaware Supreme Court reversed. The Court reasoned that
although the implied covenant cannot supplant express contractual provisions, the
trial court “focused too narrowly on the partnership agreement’s disclosure
requirements.”121 The Supreme Court instead trained its sights on the safe harbor
provision, which encouraged the general partner to establish procedural mechanisms
designed to protect the minority unitholders in the event of a conflicted transaction:
We find that implied in the language of the LP
Agreement’s conflict resolution provision is a requirement
that the General Partner not act to undermine the
protections afforded unitholders in the safe harbor process.
Partnership agreement drafters, whether drafting on their
own, or sitting across the table in a competitive
negotiation, do not include obvious and provocative
conditions in an agreement like “the General Partner will
not mislead unitholders when seeking Unaffiliated
Unitholder Approval” or “the General Partner will not
118
Id.
119
Id.
120
Id.
121
Id.
38
subvert the Special Approval process by appointing
conflicted members to the Conflicts Committee.” But the
terms are easily implied because “the parties must have
intended them and have only failed to express them
because they are too obvious to need expression.” Stated
another way, “some aspects of the deal are so obvious to
the participants that they never think, or see no need, to
address them.” 122
The Boardwalk decision relied on Dieckman to deny a motion to dismiss a
similar implied covenant claim. After reviewing contractual price protections
similar to those at issue in this case, the Vice Chancellor held that “it is reasonable
to infer at the pleading stage that the parties had a reasonable expectation that the
General Partner would notify unitholders about its exercise of the Call Right in a
manner that would not affect the call price.” 123 In that case, as here, the general
partner disclosed that it was “seriously considering” exercising the call right. 124 In
response to that disclosure, which the Vice Chancellor dubbed the “Potential-
Exercise Disclosure,” Boardwalk’s unit price traded down during the trading
122
Id. at 368 (first quoting Danby v. Osteopathic Hospital Ass’n of Del., 101 A.2d 308,
313–14 (Del. Ch. 1953), aff’d, 104 A.2d 903 (Del. 1954); and then quoting In re El Paso
Pipeline P’rs, L.P. Deriv. Litig., 2014 WL 2768782, at *16 (Del. Ch. June 12, 2014), rev’d
on other grounds sub nom. El Paso Pipeline GP Co. v. Brinckerhoff, 152 A.3d 1248 (Del.
2016)); see also id. (holding that “[t]he implied covenant is well-suited to imply contractual
terms that are so obvious—like a requirement that the general partner not engage in
misleading or deceptive conduct to obtain safe harbor approvals—that the drafter would
not have needed to include the conditions as express terms in the agreement”).
123
Boardwalk, 2019 WL 4927053, at *23.
124
Id.; see Compl. ¶ 5.
39
window relevant to the price-protection mechanism. 125 The Vice Chancellor
concluded that this sequence of events “support[ed] a reasonable inference that the
defendants manufactured a basis to make the Potential-Exercise Disclosure because
they believed doing so would drive down the call price.”126
Dieckman leads to the same result in this action. In Dieckman, the Supreme
Court focused on the reasonable meaning of the safe harbor protections. In this case,
the plaintiffs focus on the reasonable meaning of contractual provisions designed to
protect minority unitholders—the 90-day Provision and the 20-day Formula. 127 The
90-day Provision prevents minority unitholders from having their units called at a
price below what the General Partner or its Affiliates paid to purchase any units
within the 90 days preceding the exercise date. 128 The 20-day Formula calls for the
price to be “the average of the daily Closing Prices per Partnership Interest of such
class for the 20 consecutive Trading Days immediately prior to such date,” which
125
Boardwalk, 2019 WL 4927053, at *5.
126
Id. at *23.
127
See Dieckman, 155 A.3d at 367 (focusing the implied covenant analysis on the safe
harbor provision and “what its terms reasonably mean”).
128
P’ship Agreement § 15.1(a) (“the greater of (x) . . . or (y) the highest price paid by the
General Partner or any of its Affiliates for any such Limited Partner Interest of such class
purchased during the 90-day period preceding the date [of the mailing of the Notice of
Election to Purchase].”).
40
appears designed to ensure the exercise of the Call Right at a price unaffected by the
public announcement of the exercise. 129
In Dieckman, the Supreme Court held that it is reasonably conceivable that
“implied in the language of the LP Agreement’s conflict resolution provision is a
requirement that the General Partner not act to undermine the protections afforded
unitholders in the safe harbor process.” 130 In this case, it is reasonably conceivable
that implied in the language of the Call Right provision is a requirement that the
defendants not act to undermine the protections afforded to unitholders by the price-
protection mechanisms. Just as it would be “obvious” and “provocative” to demand
the inclusion of an express condition that a general partner not subvert a safe harbor
protection through materially misleading disclosures, it would be “obvious” and
“provocative” to demand the inclusion of an express condition that a general partner
and its affiliates not subvert price-protection mechanisms through a multi-step
scheme designed to manipulate the unit price.131
In Dieckman, the Supreme Court held that the plaintiffs alleged facts to show
that it was reasonably conceivable that certain of the defendants breached the
implied covenant. 132 In this case, the plaintiffs have likewise alleged facts to show
129
Id.; id. § 1.1 (definition of “Current Market Price”).
130
Dieckman, 155 A.3d at 360.
131
Id. at 368.
132
Id. at 369.
41
that it was reasonably conceivable that certain of the defendants breached the
implied covenant.
In their primary response to these points, the defendants argue that because
CVR Energy made the allegedly manipulative disclosures, and because CVR Energy
was not a party to the Partnership Agreement at the time, Dieckman and Boardwalk
are distinguishable. This argument would require the Court to reject the reasonable
inference that the defendants carried out the related steps of the transaction as a
coordinated scheme.
To the contrary, it is reasonably conceivable that the General Partner worked
with CVR Energy to frustrate the Call Right’s price-protection mechanisms. Each
Board member had strong ties to Icahn and Icahn Enterprises, the ultimate controller
of CVR Energy. 133 Half of the Board also served of the board of CVR Energy. One
Board member was CVR Energy’s CEO; others were dependent on different Icahn
entities for employment. Given their status within the industry, it is reasonably
conceivable that the Board followed analyst coverage of the Boardwalk call right in
real time. The first meeting to consider the Exchange Offer occurred only two days
after JP Morgan’s report on the Boardwalk process. The Board’s significant ties to
CVR Energy and Icahn generally, their knowledge of the events at Boardwalk, and
the temporal proximity of the relevant events, together give rise to a reasonably
133
Icahn Enterprises, L.P. actually controls CVR Energy through its 82% ownership stake.
42
conceivable inference that the General Partner worked with CVR Energy to frustrate
the Call Right’s price protections.
The defendants further argue that they did not breach the implied covenant
because “CVR Energy may well have been legally required to issue the updated
discovery in November 2018.” 134 The defendants stop short of arguing that CVR
Energy was in fact legally required to disclose that it was “considering” exercising
the Call Right, and thus their argument lacks any real heft at the pleadings stage. At
this stage, it is reasonable to infer the defendants may not have been legally required
to issue the disclosure, and that the disclosure’s sole purpose was to drive down the
trading price of the common units in advance of exercising the Call Right.
Notwithstanding this analysis, some defendants named in Count II are not
bound by the implied covenant. CVR Energy was not bound by the terms of the
Partnership Agreement at any point in time covered by the plaintiffs’ allegations.
Thus, CVR Energy is dismissed from Count II. CVR Holdings is also dismissed
from Count II because there are no facts pled specific to its role in the scheme.135
The motion to dismiss Count II is denied as to the Partnership for the same reasons
discussed in connection with the Count I Exchange Offer claim. 136
134
Defs.’ Opening Br. at 47 (emphasis added, original emphasis omitted).
135
See supra note 89 and accompanying text.
136
See supra note 88 and accompanying text.
43
C. Tortious Interference with Contract
In Count III, the plaintiffs claim that CVR Energy, Icahn Enterprises, and the
Individual Defendants tortiously interfered with the Partnership Agreement. Such a
claim requires (1) a contract, (2) about which the particular defendant knew, (3) an
intentional act that is a significant factor in causing the breach of such contract, (4)
without justification, and (5) which causes injury. 137 A defendant can be liable for
tortious interference if there is an underlying breach of an express or implied
contractual obligation. 138
The defendants do not directly dispute that the plaintiffs have adequately pled
each of the five elements. Instead, they assert that there was no underlying breach.139
They alternatively rely on the “stranger rule,” which says that only strangers to a
contract can tortiously interfere with that contract.140 Having found it reasonably
conceivable that certain defendants breached the express and implied terms of the
Partnership Agreement, the Court focuses on the “stranger rule.”
137
WaveDivision Hldgs., LLC v. Highland Capital Mgmt., L.P., 49 A.3d 1168, 1174
(Del. 2012) (citing Restatement (Second) of Torts § 766 (1979)).
138
See NAMA Hldgs., LLC v. Related WMC LLC, 2014 WL 6436647, at *25 (Del. Ch.
Nov. 17, 2014).
139
Defs.’ Opening Br. at 50–51; Defs.’ Reply Br. at 29–30; Defs.’ Supp. Br. at 8.
140
Defs. Opening Br. at 51–53; Defs.’ Reply Br. at 29–30.
44
Boardwalk is again instructive. That decision identified doctrinal dissonance
between the stranger rule as applied a handful of times by this Court,141 on the one
hand, and the Restatement’s multi-factor standard adopted by the Delaware Supreme
Court, on the other hand.142
As Boardwalk explained, the stranger rule was originally imported into
Delaware law in 2007 from jurisdictions that have adopted an “absolute affiliate”
privilege.143 That privilege flows from the premise that “a parent and its wholly
owned subsidiaries constitute a single economic unit” such that “‘interference’ from
a parent in the performance of contractual obligations of its wholly owned
subsidiary, no matter how aggressive, is not actionable.” 144 Wherever possible,
Delaware law tends to steer clear of bright line rules like this, which ignore the
corporate form. 145
141
See Boardwalk, 2019 WL 4927053, at *27 n.14 (collecting Court of Chancery cases in
which the stranger rule has been applied or cited).
142
WaveDivision, 49 A.3d at 1174; ASDI, Inc. v. Beard Research, Inc., 11 A.3d 749, 751 (Del.
2010).
143
Boardwalk, 2019 WL 4927053, at *27 (identifying Tenneco Auto., Inc. v. El Paso Corp.,
2007 WL 92621, at *5 (Del. Ch. Jan. 8, 2007), as the original adopter of the stranger rule,
and explaining that the germ came from a Georgia decision, Atlanta Mkt. Ctr. Mgmt., Co.
v. McLane, 503 S.E.2d 278, 283–84 (Ga. 1998)).
144
Id. at *27–28 (quoting Shearin v. E.F. Hutton Gp., 652 A.2d 578, 590 (Del. Ch. 1994)).
145
See, e.g., Pauley Petroleum, Inc. v. Cont’l Oil Co., 231 A.2d 450, 452–54 (Del. Ch.
1967), aff’d, 239 A.2d 629 (Del. 1968); Shearin, 652 A.2d at 590 n.13 (citing Pauley and
concluding that the limited privilege theory “is more consistent with the traditional respect
accorded to the corporate form by Delaware law”).
45
In fact, when considering the appropriate standard for a claim of tortious
interference, the Delaware Supreme Court adopted the Restatement’s more nuanced,
“limited privilege” approach.146 The Restatement recognizes that parties can take
action that technically interferes with the contracts of others if done in the spirit of
genuine economic competition, and the relevant inquiry is therefore whether the
interference was “improper” or unjustified. 147 Toward that end, the Restatement
establishes a multi-factored balancing test, 148 which considers the “relations between
the parties”149 and “‘the significant economic interests of a parent corporation in its
subsidiary,’ but does so without foreclosing potential liability on the sole basis of
related-party status.”150
Because the bright-line “absolute privilege” of the stranger rule threatens the
nuanced “limited privilege” approach endorsed by the Delaware Supreme Court, the
Court in Boardwalk concluded that “[i]t would be inconsistent . . . to layer on the
146
WaveDivision, 49 A.3d at 1174; ASDI, 11 A.3d at 751 (Del. 2010).
147
Shearin, 652 A.2d at 589.
148
WaveDivision, 49 A.3d at 1174 (identifying the Restatement factors as “(a) the nature
of the actor’s conduct, (b) the actor’s motive, (c) the interests of the other with which the
actor’s conduct interferes, (d) the interests sought to be advanced by the actor, (e) the social
interests in protecting the freedom of action of the actor and the contractual interests of the
other, (f) the proximity or remoteness of the actor’s conduct to the interference, and (g) the
relations between the parties” (citing Restatement (Second) of Torts § 767)).
149
Id. (identifying “the relations between the parties” as factor “(g)”).
150
Boardwalk, 2019 WL 4927053, at *28.
46
stranger rule as an additional element of the analysis.”151 That well-reasoned
conclusion compels the Court to reject CVR Energy and Icahn Enterprises’ stranger-
rule defense. Further, under the Restatement, justification is a “fact-specific
inquiry,” 152 and the defendants have not offered arguments for why any alleged
interference was justified in this case.
To be sure, Boardwalk’s discussion of the stranger rule only addressed entity
defendants, and the plaintiffs bring Count III against the Individual Defendants as
well. In Shearin, a case heavily relied upon in Boardwalk, Chancellor Allen left
untouched the reasoning that “‘employees . . . of a contracting corporation cannot be
held personally liable for inducing a breach of contract by their corporations when
they act within their given role.’” 153 This is because “Delaware law adheres to this
general rule of imputation—of holding a corporation liable for the acts and
knowledge of its agents—even when the agent acts fraudulently or causes injury to
third persons through illegal conduct.”154
There are exceptions to this general rule of imputation, including “when the
corporate agent responsible for the wrongdoing was acting solely to advance his own
151
Id.
152
Id. at *29.
153
OptimisCorp v. Waite, 2015 WL 5147038, at *76 n.602 (Del. Ch. Aug. 26, 2015) (citing
Shearin, 652 A.2d at 590), aff’d, 137 A.3d 970 (Del. 2016).
154
Stew. v. Wilm. Tr. SP Servs., Inc., 112 A.3d 271, 303 (Del. Ch. 2015), aff’d, 126 A.3d
1115 (Del. 2015).
47
personal financial interest, rather than that of the corporation itself.” 155 “Because
most instances of fraud or illegal misconduct by corporate actors confer at least some
benefit on the corporation, the adverse interest exception may not apply even when
the ‘benefit’ enjoyed by the corporation is outweighed by the long-term damage that
is done when the agent’s mischief comes to light.”156 “Stated differently, ‘an officer
or director may be held personally liable for tortious interference with a contract of
the corporation if, and only if, said director exceeds the scope of his agency in doing
so.’” 157
The plaintiffs have not alleged that the Individual Defendants exceeded the
scope of their agency in this case. The plaintiffs argue that the directors “signed
fraudulent securities filings . . . , chose not to seek financial advice or to negotiate
the terms of the partial exchange offer,” and made various public, allegedly
misleading announcements regarding the Call Right. 158 All of these acts are within
the purview of the directors of an entity and cannot serve as the basis for an argument
that the Board “exceeded the scope of its agency.” Thus, Count III is dismissed as
155
In re Am. Int’l Gp., Inc., Consol. Deriv. Litig., 976 A.2d 872, 891 (Del. Ch. 2009), aff’d
sub nom. Teachers’ Ret. Sys. of La. v. Gen. Re Corp., 11 A.3d 228 (Del. 2010).
156
Stewart, 112 A.3d at 303.
157
OptimisCorp, 2015 WL 5147038, at *76 n.602 (citing Int’l Ass’n of Heat & Frost
Insulators & Asbestos Workers Local Union 42 v. Absolute Envtl. Servs., Inc., 814 F. Supp.
392, 400 (D. Del. 1993)).
158
Pls.’ Answering Br. at 48–49.
48
to the directors. However, Icahn served as a director only through the day before
the Exchange Offer closed in July 2018. The plaintiffs’ allegations that Icahn used
his control over the Partnership and General Partner to cause those entities to breach
the express and implied provisions of the Partnership Agreement stretch beyond July
2018. Thus, the motion to dismiss Count III is denied as to Icahn.
III. CONCLUSION
The defendants’ motion to dismiss is GRANTED in part and DENIED in part.
The Count I Exchange Offer claim is dismissed as to CVR Energy and CVR
Holdings. The Count I Exercise Price claim is dismissed as to the Partnership and
CVR Holdings. Count II is dismissed as to CVR Energy and CVR Holdings.
Count III is dismissed as to each of the Individual Defendants except Icahn. In all
other respects, the motion to dismiss is denied.
49