Alleged Scheme to Exercise Partnership Agreement Call Right at Unfair Price Supports Breach, Tortious Interference Claims
By: Scott E. Waxman and Michael C. Payant
In In re CVR Refining, LP Unitholder Litigation, C.A. No. 2019-0062-KSJM (Del. Ch. Jan. 31, 2020), the Delaware Court of Chancery (the “Court”) concluded plaintiffs had pleaded reasonably conceivable breach of partnership agreement and tortious interference with contract claims in connection with an alleged scheme by defendants to exercise a contractual call right and buy out minority partnership unitholders at artificially depressed prices. The Court granted in part and denied in part defendants’ motion to dismiss.
Plaintiffs were former minority unitholders of CVR Refining, L.P. (the “Partnership”). Icahn Enterprises, L.P., an affiliate of Carl Icahn, controlled the general partner, CVR Refining GP, LLC (the “GP”) through a supermajority interest in the GP’s indirect parent, CVR Energy, Inc. (“CVR Energy”). Plaintiffs alleged a multi-step scheme by the GP, the Partnership, and CVR Energy culminating in the exercise of a call right to buy their units at an unfair price.
Under the Partnership agreement (the “Agreement”), the GP and affiliates had a right to purchase all minority units of the Partnership (the “Call Right”) in the event they collectively obtained (i) 95% of units outstanding; or (ii) 80% of units outstanding, after collectively owning less than 70% of such units at any prior point in time. The Agreement also included price protections such that the Call Right exercise price (the “Exercise Price”) had to be the greater of (i) any price paid by the GP or its affiliates to purchase any units within the 90 days preceding the date of exercise; or (ii) the average of the daily closing prices of such publicly traded units during the 20 consecutive trading days immediately prior to such date. Finally, the Agreement also eliminated traditional fiduciary duties, but imposed two contractual standards of conduct on the GP: (i) acting in its official capacity, it bore an obligation to act in good faith; (ii) acting in its individual capacity, it bore no such obligation.
In mid-May 2018, representatives of CVR Energy and the Partnership met to discuss a partial exchange offer (the “Exchange Offer”) that would take Icahn-affiliated entities from below 70% to more than 80% ownership of the Partnership and put them in position to exercise the Call Right. Later in May, the Board of the GP, consisting of Icahn and eight business associates, met to consider the Exchange Offer, and the GP publicly disclosed it would not make a recommendation for or against accepting the Exchange Offer, including in an SEC filing on behalf of the Partnership.
On May 29, 2018, CVR Energy launched the Exchange Offer at $27.63, a 25% premium over the pre-announcement unit price. Nearly half of outstanding minority units tendered their shares in response, and the collective ownership percentage of Icahn and affiliates grew to roughly 84.5% of the Partnership’s Units, sufficient to authorize exercise of the Call Right.
At the time of the Exchange Offer and repeatedly for several months thereafter, Icahn, CVR Energy, and affiliates disclaimed any intention to exercise the Call Right in SEC filings and public comments, but analysts expressed ongoing skepticism and the price of the units fell as a result. On November 14, 2018, Janet T. DeVelasco, an executive vice president of CVR Energy and the GP, purchased units at a price of $16.7162. Eventually, more than 90 days following the closing of the Exchange Offer, Icahn Enterprises and CVR Energy disclosed in an amended filing on November 29, 2018 that they were now contemplating exercise of Call Right, causing a precipitous further price drop. Nearly two months later on January 17, 2019 – after the Call Right price as determined by the trailing 20-day formula had fallen to just $10.50 per unit – CVR Energy announced that it had been assigned the Call Right by the GP and was exercising the Call Right.
Plaintiffs’ complaint alleged three counts:
- (1) breach of the Agreement by the Partnership, the GP, CVR Energy, and CVR Refining Holdings, LLC (“CVR Holdings”), an indirect wholly-owned subsidiary of CVR Energy and parent of the GP;
- (2) breach by the Partnership, the GP, CVR Holdings, and CVR Energy of an implied covenant of good faith and fair dealing in the Agreement; and
- (3) tortious interference with the Agreement by CVR Energy, Icahn Enterprises, and certain individuals, including Icahn and the directors of the GP.
In assessing Count I, the Court considered defendants’ conduct with respect to the Exchange Offer and defendants’ conduct in setting the Exercise Price lower than the amount DeVelasco paid in the preceding 90-day period.
With respect to the Exchange Offer, although the Agreement imposed no affirmative obligation on the GP or Partnership to act in case of a tender offer, any actions taken in the GP’s official capacity were subject to the contractual obligation to act in good faith. The Court concluded the GP “acted” when its board met to discuss the Exchange Offer, determined the GP would not make any recommendation, and disclosed its non-recommendation determination in an SEC filing on behalf of the Partnership. The Court concluded it was reasonably conceivable that (i) the Board believed the Exchange Offer was adverse to Plaintiffs’ interests without offsetting benefits because it would trigger speculation on the Call Right and a decline in unit price; (ii) the Exchange Offer was detrimental to the Partnership as a whole, because the trading price for the Partnership’s units would drop and its cost of capital would increase; and (iii) the Board had reason to know of these potentially harmful effects when it made and disclosed its non-recommendation determination. In light of the above, the Court upheld a claim for breach of a contractual good faith obligation with respect to the GP and the Partnership, but granted dismissal with respect to CVR Holdings (not alleged to have participated) and CVR Energy (not party to the Agreement at the time of the Exchange Offer).
With respect to the Exercise Price, defendants did not dispute DeVelasco had purchased shares at a higher price during the 90-day period preceding exercise of the Call Right; they instead disputed DeVelasco was an affiliate. The Court concluded on the evidence presented that it was reasonably conceivable that DeVelasco – a vice president of the GP and CVR Energy, who was held out as an executive officer on CVR Energy’s website, in press releases, and in SEC filings – was an affiliate of the GP. Accordingly, the Court denied dismissal with respect to the GP, who set the Exercise Price, and CVR Energy, who was by this time party to the Agreement. The Court dismissal with respect to the Partnership, which took no action in setting the Exercise Price, and CVR Holdings, which was not alleged to have acted.
In assessing Count II, the Court concluded it was reasonably conceivable that the language of the Call Right contained an implied requirement not act to undermine the protections afforded to unitholders by the 90-day and 20-day price-protection mechanisms. Conduct pleaded by the plaintiffs – an Exchange Offer calibrated to reduce the unit price, and a subsequent disclosure of intent to exercise the Call Right that precipitated further decline, timed to minimize Exercise Price but technically comply with the 20-day and 90-day price-protective periods. As such, the Court declined to dismiss with respect to the GP and the Partnership. The Court granted dismissal with respect to CVR Energy, which was not party to the Agreement at the relevant time, and CVR Holdings, which was not alleged to have participated.
Finally, with respect to Count III, the Court dismissed with respect to all individual defendants except Icahn, but denied dismissal with respect to Icahn, CVR Energy and Icahn Enterprises. The Court noted that a tortious interference 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. Defendants did not challenge that any of these elements. They instead sought to invoke the bright-line “Stranger Rule”, arguing that only strangers to a given contract may tortiously interfere with such contract. The Court rejected the bright-line Stranger Rule as inconsistent with Delaware’s adopted multi-factor standard, which factors in such items as the actor’s motive, nature of the actor’s conduct, social interests, and relations between the parties. Under this standard, the Court found claims against Icahn Enterprises and CVR Energy could survive. Turning to the individual defendants, the Court noted that Icahn had resigned as a director the day prior to closing the Exchange Offer, but all others had acted in their capacities as directors of the GP, and therefore under agency theory could not have tortiously interfered.
In re CVR Refining, LP Unitholder Litigation, C.A. No. 2019-0062-KSJM (Del. Ch. Jan. 31, 2020)