Court of Chancery Holds That Sole, Conflicted General Partner Cannot, By Reason of its Conflict, Delegate its Otherwise Valid Power to Manage Derivative Litigation

By: Scott Waxman and Tami Mack

In Wenske v. Blue Bell Creameries, Inc., C.A. No. 2017-0699-JRS (Del. Ch. August 28, 2019), the Court of Chancery held that Blue Bell Creameries, Inc., the sole general partner (the “General Partner”) of Blue Bell Creameries, LP (the “Partnership”), was not a disinterested entity such that it could delegate its otherwise valid power to manage derivative litigation. The Court also held that it was not appropriate to undertake a conflict analysis with respect to the individual members of the board of directors of the General Partner (the “GP Board”), because such analysis would disregard the established policy of respecting the legal fiction of the business entity.

After contamination at Blue Bell facilities and a resulting listeria outbreak led to hundreds of millions of dollars of lost profits, certain limited partners of Blue Bell (the “Plaintiffs”) filed suit against the General Partner for its alleged failure to comply with the Limited Partnership Agreement. After the General Partner’s initial motion to dismiss was denied, the Court having determined that the Plaintiffs adequately pled demand futility, the General Partner decided to implement a special litigation committee to manage the lawsuit. Specifically, the GP Board added two new directors to the board, designating them the sole members of a special board committee (the “SBC”) tasked with forming a special litigation committee of non-board members (the “SLC”). Once formed, the SLC moved to stay the action in order to investigate and make its determination regarding the appropriateness of the lawsuit.

In analyzing the motion to stay, the Court noted that, in the corporation context, a conflicted corporate board can maintain control of and manage a derivative action by establishing a committee of independent directors to investigate the claim and determine whether it is the corporation’s best interest to proceed with it. In such a situation, the Court will undertake an analysis as to each individual board member to determine whether or not the board is conflicted such that the board would not be able to validly delegate its ability to manage derivative litigation. The Court went on to state that the same did not necessarily apply in the limited partnership context, however, because “the Court does not draw a distinction between a general partner and the members of its board of directors when assessing conflicts.” Rather, unless the limited partnership agreement provides for a different approach, the analysis should focus only on the general partner as an entity, in accordance with the established policy of respecting the legal fiction of the business entity.

Because the General Partner had already been deemed conflicted and unable to objectively handle the Plaintiffs’ claims, the Court determined that, under an agency law analysis, the General Partner’s ultimate control over the SBC and, by extension, the SLC, similarly disqualified each of the SBC and the SLC from being able to objectively handle Plaintiffs’ claims.

The Court noted that the General Partner’s measures to establish the SLC likely would have been effective in a corporation context. However, the Court ultimately held that because the General Partner as an entity was conflicted out of managing the derivative litigation, so too, was the SBC and, ultimately, the SLC. The Court went on to deny the SLC’s motion to stay.

Copyright © 2024, K&L Gates LLP. All Rights Reserved.