Opinion ID: 3051480
Heading Depth: 2
Heading Rank: 3

Heading: What Constitutes a “Majority Vote”?

Text: The district court also held that the Merger was effective because it was approved by limited partners holding 73.5% of the units actually voted. It further ruled that those limited partners who did not vote were not to be included in the calculation. The district court based its determination on the rules for counting votes set forth in the Proxy Statement. However, California law and the Partnership Agreement govern how the outcome of the vote is to be determined, not the proxy materials. [7] Cal. Corp. Code § 16103(b)(3)(B) states: “All of the partners or a number or percentage specified in the partnership agreement may authorize or ratify, after full disclosure of all material facts, a specific act or transaction that otherwise would violate the duty of loyalty.” (Emphasis added). In Skone, the partnership had only two partners. The ratification of the one partner’s actions by the other was, therefore, a unanimous one. 261 Cal. App. 2d at 241. By contrast, this case involves a limited partnership with approximately 1,000 partners. Nothing in the statute, however, varies the unanimity requirement in a general partnership based on the number of partners, and neither does the California Revised Limited Partnership Act (Act), which also applies in this case, provide a different default rule for ratification when limited partnerships are at issue. The Act commands that, unless otherwise provided, “limited partnerships shall be governed in the same manner as general partnerships would be governed.” Cal. Corp. Code § 15722. [8] Moreover, the Act specifies that only “the partnership agreement” can vary the unanimity requirement and require a lesser number of partners necessary to ratify a violation of the PERRETTA v. PROMETHEUS DEVELOPMENT 3111 duty of loyalty. The district court observed that the Proxy Statement, drafted by PDC and sent out shortly before the vote, purported to set forth what vote was required to approve the Merger, and in places stated that non-votes would not be considered.6 But no references to proxy statements appear in § 16103(b)(3)(B), and for good reason: allowing the general partner (which, after all, drafted the Proxy Statement) to unilaterally adopt ad hoc rules to ratify its own self-interested transaction would undermine the very purpose of ratification —allowing the limited partners to protect themselves. Only the Partnership Agreement, which the limited partners agreed to upon joining the Partnership, can vary the statutory requirement for what vote is required to ratify. [9] The Partnership Agreement, unfortunately, does not expressly mention the duty of loyalty or ratification; neither does it address limited partner votes in the presence of a conflicted general partner. Rather, it states, in relevant part, that “Limited Partners shall have the right, by Majority Vote to . . . [d]issolve and wind up the Partnership.” “Majority Vote,” in turn, is defined as “the vote of Limited Partners who are entitled to vote, consent or act and are holders of record of a majority of the outstanding Units.” Nowhere does the Partnership Agreement distinguish between interested and disinterested votes—even in areas where the general partner would almost always have a conflict of interest. For example, a “Majority Vote” is required to permit the general partner to perform a number of otherwise restricted activities—including 6 We note that the Proxy Statement was itself inconsistent with respect to the effect of non-votes on the election. In the body of the Statement, under the heading “Vote Required,” it warns: “If you fail to return your proxy and do not vote in person at the meeting, as a result of the agreement of PIP Partners to vote as have the voting limited partners, the effect on the merger proposal will depend on how other limited partners vote.” Earlier, however, in a Q&A summary section, it states: “If you fail to return your proxy or mark ‘ABSTAIN’ on your proxy, the effect will be the same as a vote against the merger proposal.” 3112 PERRETTA v. PROMETHEUS DEVELOPMENT selling the Partnership’s properties to itself or comingling its funds with that of the Partnership.7 [10] The lack of any reference in the Partnership Agreement’s voting provisions to duties of loyalty or conflicts of interest militates in favor of construing the Partnership Agreement’s voting provisions narrowly to involve only the juridical effectiveness of the Merger pursuant to Cal. Corp. Code § 15678.2,8 not to effect ratification under Cal. Corp. Code § 16103(b)(3)(B). Following that approach, the Partnership Agreement has not varied the unanimous ratification rule, and the ratification fails. However, we do not so construe the Partnership Agreement. The fact that a Majority Vote is required to approve certain potentially conflicted actions of the general partner makes clear that the Majority Vote is intended to be the principal way for limited partners to protect themselves against adverse actions of the general partner. The Majority Vote explicitly acts as an “approval and consent” of the issue under consideration, which is the requirement for ratification under Skone. 261 Cal. App. 2d at 241. 7 The Partnership Agreement permits the general partner to own limited partnership units. It therefore necessarily contemplates the possibility that certain limited partner units will be subject to a conflict of interest in the event a Majority Vote is required. 8 Cal. Corp. Code § 15678.2(a) provides, in relevant part: The agreement of merger shall be approved by all general partners of each constituent limited partnership and the principal terms of the merger shall be approved by a majority in interest of each class of limited partnerships of each constituent limited partnership, unless a greater approval is required by the partnership agreement of the constituent limited partnership. The Plaintiffs’ action here is one against the general partner for breach of fiduciary duty, not one seeking rescission of the Merger, see Cal. Corp. Code § 15679.14(e) (distinguishing between “action[s] for breach of fiduciary obligation” and those “to attack the validity of the reorganization or to have the reorganization set aside or rescinded”), and Plaintiffs expressly disclaim any attack on the Merger’s juridical effectiveness. We therefore decline to rule on the validity of the Merger here. PERRETTA v. PROMETHEUS DEVELOPMENT 3113 [11] We thus look to the Partnership Agreement’s definition of “Majority Vote” to determine what vote is necessary to ratify the Merger. While PDC contends that only a majority of disinterested shareholders actually voting was required to effect ratification, the Partnership Agreement’s definition of “Majority Vote” expressly requires a “majority of the outstanding Units”—making no distinction whether the Units are voted or not. Those who failed to cast their vote must, therefore, be included in the denominator of any vote total.