Chancery Court Holds that Company Does Not Have to Pay Damages for Refusing to Appoint Director Represented by Counsel That is Also Representing Opposing Party in Adverse Litigation

By Annette Becker and Priya Chadha

In Partners Healthcare Solutions Holdings, L.P. and GTCR Fund IX/A, L.P. v. Universal American Corp., Partners Healthcare Solutions Holdings, L.P. (“Partners”) sued Universal American Corporation (“UAM”), seeking damages and specific performance following a dispute as to Partners’ appointment of a director to UAM’s board.  During the litigation, the parties reached a settlement as to the specific performance aspect of the litigation, leaving only the issues of damages.  UAM filed a motion for summary judgment, which Vice Chancellor Glasscock granted.

In March 2012, Partners entered into a merger agreement with UAM, pursuant to which UAM purchased a Partners subsidiary, and Partners became one of UAM’s largest stockholders.  Partners was also given a seat for its designee on UAM’s board pursuant to a letter agreement (“Board Seat Agreement”).  That agreement provided that the designee must be independent under stock exchange rules, and granted Partners the right to name a replacement in the event that the initial designee resigned.  Partners named David Katz, a former board member of Partners, to the UAM board.

The subsidiary UAM purchased performed poorly following the merger, and UAM filed suit against Partners, Katz, and other parties, in October 2013, alleging, among other things, fraud claims (“Fraud Suit”).  Partners hired Kirkland & Ellis (“K&E”) and Morris, Nicholas, Arsht & Tunnell (“MNAT”) to represent it in the Fraud Suit.  UAM asked Katz to sign a confidentiality agreement that provided, among other things, that he would not share non-public information with anyone including K&E.  Katz refused to agree to that restriction and resigned as a director of UAM.

Partners then sought to appoint George Sperzel to replace Katz.  UAM asked Sperzel to sign a confidentiality agreement which forbade him from retaining K&E and MNAT in connection with his duties as a director.  Sperzel refused to sign the agreement, and Partners filed suit, alleging that UAM had violated the Board Seat Agreement by refusing to seat Sperzel.  During the pendency of the litigation, the parties agreed to allow Sperzel to retain K&E and MNAT provided that the firms erected ethical walls to mitigate any potential conflict of interest in connection with the pending Fraud Suit.  That left only the damages portion of Partners’ suit.  UAM filed a motion for summary judgment to dismiss the claim.

Vice Chancellor Glasscock granted the motion, holding that UAM did not violate the Board Seat Agreement by refusing to immediately seat Sperzel. He stated that UAM’s board was acting “in a faithful discharge of its fiduciary duties” when it insisted that Sperzel sign a confidentiality agreement.  He rejected Partners’ argument that language in the Merger Agreement waiving conflicts of interest was applicable here because that clause was limited to disputes “related to” the Merger Agreement, making the waiver inapplicable here.  Lastly, he rejected UAM’s arguments that Partners had been the party to breach the Board Seat Agreement because it failed to provide UAM with a loyal director.  Vice Chancellor Glasscock held that while Partners had the right to appoint a director, it did not have an obligation to do so.

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