Cygnus Opportunity Fund, LLC v. Washington Prime Group, LLC, C.A. No. 2022-0718-JTL (Del. Ch. Aug. 9, 2023)
An Indiana corporation reorganized via bankruptcy into a Delaware LLC, and a senior note holder negotiated for nearly 90 percent of the equity. The LLC agreement required that at least one member of the five-member board of managers be independent. It prohibited the controller from acquiring additional shares or squeezing out the minority without approval of the majority of independent managers or a majority of votes cast by minority unitholders. It also required the controller to provide notice of a proposed squeeze-out so that minority unitholders would have the option to challenge the fairness of the transaction unless it had received approval from a majority of the minority or a minority-approved independent manager.
The controller launched a two-tiered, front-loaded tender offer without obtaining approval or providing notice. The controller then finalized a squeeze-out merger, providing unitholders with a barebones information statement and informing them they had no right to vote, to appraisal, or to challenge the fairness of the transaction because a special committee—comprised of one independent manager—had approved it. Plaintiffs filed a complaint alleging that the squeeze-out merger undervalued their units and bringing fiduciary duty claims against officers, the board, and the controller.
The Court of Chancery dismissed the fiduciary duty claims against the board and controller because the LLC agreement contained an unambiguous fiduciary duty waiver as to them, though not as to the officers. The Court explained that at the pleadings stage, it would not dismiss claims against the officers for failure to provide any tender-offer disclosures, pending discovery to examine whether a failure to disclose had been at the direction of the board and whether that direction was so obviously wrong that officer compliance itself would constitute a breach of duty. The Court also declined to dismiss claims against the officers for insufficient disclosures regarding the squeeze-out. Delaware law does not hold that fiduciaries owe no duty of disclosure even when no action is requested of cashed-out minority holders. Further, when a fiduciary chooses to speak, she must do so candidly and with material completeness—yet the squeeze-out information statement fell short of that standard, given its lack of information about process, future prospects, and the special committee’s approval. Each defendant-officer had an area of responsibility under which the alleged disclosure violations fell.
The Court also sustained contract claims that the tender offer had breached the non-acquisition provisions of the LLC agreement, that the financial information defendants provided plaintiffs did not satisfy the right of minority unitholders to financial information, and that the squeeze-out merger breached the requirement of approval of the majority of independent managers or a majority of votes cast from minority unitholders. Finally, the Court sustained claims that the lack of information disclosure, the board’s choice to seek approval from an allegedly conflicted manager, and the insufficient squeeze-out consideration all violated the implied covenant of good faith and fair dealing. At the pleadings stage, the Court declined to apply an exculpation provision that would exempt all defendants from liability unless damages were a result of their malfeasance.
