Chancery Court Finds Majority Partner Breached Contractual and Fiduciary Obligations to the Minority

By Scott Waxman and Claire White

In this Chancery Court decision, VC Laster examined damages owing to plaintiffs for claims of breach of contract and breach of fiduciary duties of care and loyalty in connection with the sale of a partnership’s assets.  The plaintiffs, partners in a D.C. partnership, had proved at trial that the sale by the majority partners (U.S. Cellular) to a related party was not entirely fair to them, as minority holders.

On the breach of contract claim, VC Laster found that defendants had breached a confidentiality provision in the partnership agreement by sharing confidential information regarding the partnership with a valuation firm, for the purposes of obtaining a valuation for the sale transaction.  Notwithstanding the breach, only nominal damages were awarded as plaintiffs failed to show proof of actual injury from the breach.  Among other facts, the Count highlighted that the confidentiality provision in the partnership agreement could have been waived by the majority partners.

On the breach of fiduciary duty claim, VC Laster noted that plaintiffs had proved at trial that the sale of the partnership was a self-dealing transaction, in breach of the duties of loyalty and care.  The Court found that the majority partners failed to demonstrate the entire fairness of the transaction as an affirmative defense, and that both procedural and substantive unfairness existed.  Procedural unfairness resulted from the majority partners’ breach of the confidentiality provision, failure to appoint an independent representative to represent the minority partners’ interests, or condition the sale transaction on a majority-of-the-minority vote. In addition, the Court noted that although plaintiffs’ voted unanimously against the transaction, the majority partners went forward with the sale without modification.

VC Laster also found that two discounted cash flow (DCF) models produced at trial demonstrated substantive unfairness, and offered a sufficiently reliable method for determining fair value and exclusive evidence of plaintiffs’ damages.  As a result, the Court awarded damages equal to the minority partners’ interest (approximately 7%) of the difference in value between the fair market valuation provided by the DCF models, and the sale price (approximately $30 million).

BL Cellular v USCOC

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