Opinion ID: 1889298
Heading Depth: 1
Heading Rank: 9

Heading: Whether the Court of Chancery Abused Its Discretion by Failing to Account for a Control Premium

Text: The Court of Chancery awarded money damages of approximately $3.4 million based on a per unit value of $25.84 for each Partnership unit resold to HGI. [64] The court gave equal weight to four factors: book value, Gotham's comparables for minority stakes in other limited partnerships, the per unit price of an unrelated Spring 1996 repurchase of Partnership units, and the average price paid by the Partnership during the Odd Lot Offer. [65] Gotham notes that none of the four factors takes account of the lock on control that HGI obtained in the Resale. [66] Gotham emphasizes that, at trial, Gumbiner valued control of the Partnership at $50 to $55 million and that only a mere $3.4 million was awarded as monetary damages. Gotham argues that this Court should reverse on this issue and remand to the Court of Chancery for a new remedy calculation that accounts for the value of control of the Partnership. This Court reviews the Court of Chancery's fashioning of remedies for abuse of discretion. [67] The Partnership Agreement provides for contractual fiduciary duties of entire fairness. Although the contract could have limited the damage remedy for breach of these duties to contract damages, it did not do so. The Court of Chancery is not precluded from awarding equitable relief as provided by the entire fairness standard where, as here, the general partner breached its contractually created fiduciary duty to meet the entire fairness standard and the partnership agreement is silent regarding damages. The Court of Chancery in this case may award equitable relief as provided by the entire fairness standard and is not limited to contract damages for two reasons: (1) this case involves a breach of the duty of loyalty and such a breach permits broad, discretionary, and equitable remedies; and (2) courts will not construe a contract as taking away other forms of appropriate relief, including equitable relief, unless the contract explicitly provides for an exclusive remedy. In this case, as the Vice Chancellor properly found, the fiduciary duties provided for by the Partnership Agreement supplanted common law fiduciary duty principles, [68] but some of the agreement's provisions were `in some sense ... an explicit acceptance of the default duty of loyalty and fair dealing.' [69] The General Partner breached its duty of loyalty by failing to comply with the contractually created entire fairness standard during the Odd Lot Resale, which resulted in the General Partner and its corporate parent solidifying their control over the Partnership. Where there is a breach of the duty of loyalty, as here, `potentially harsher rules come into play' and `the scope of recovery for a breach of the duty of loyalty is not to be determined narrowly [because t]he strict imposition of penalties under Delaware law are designed to discourage disloyalty.' [70] Therefore, the Court of Chancery's powers are complete to fashion any form of equitable and monetary relief as may be appropriate. [71] In addition, courts will not construe a contract as taking away a common law remedy unless that result is imperatively required. [72] For example, this Court has held that, even if a contract specifies a remedy for breach of that contract, a contractual remedy cannot be read as exclusive of all other remedies [if] it lacks the requisite expression of exclusivity. [73] The Maryland Court of Appeals also has held that mere inclusion of a money damages clause as the specified remedy for a breach will not negate the possibility of injunctive [or other equitable or legal] relief in a proper case. [74] Therefore, even where a partnership agreement specifies a remedy for breach of that contract, the Court of Chancery is not prohibited from awarding other equitable or legal remedies, at least unless the partnership agreement explicitly states that the specified remedy is the exclusive remedy. In addition, where the partnership agreement is silent regarding remedies, the Court of Chancery has the discretion to award any form of legal and/or equitable relief and is not limited to awarding contract damages for breach of the agreement. The Vice Chancellor thus had the discretion to apply any equitable and/or legal remedy applicable in corporate cases where the controlling entity fails the test of entire fairness. [75] The question is whether he abused that discretion by not ordering adequate damages or equitable remedies to account for the control premium. In this case, Gotham requested rescission, or rescissory damages and sterilization of the voting rights attached to the Odd Lot Resale units. The Vice Chancellor, as discussed above, had the discretion not to grant rescission because Gotham unjustifiably delayed contesting the Odd Lot Resale and the defendants did not intend to entrench the General Partner or unfairly enrich HGI through the challenged transaction. Although the Vice Chancellor found that the defendants did not intend for the General Partner to become entrenched or HGI to be unjustly enriched, the Odd Lot Resale had that effect. The Court of Chancery was thus required to remedy that effect by compensating the limited partners for a control premium. As the Vice Chancellor recognized, the Audit Committee  whose contractually-mandated functions were not implemented  conceivably would have taken into account the fact that the Odd Lot resales were of particular advantage to HGI and demanded value for that advantage in exchange because the Odd Lot resales solidified HGI's control. [76] Consequently, we find that the Vice Chancellor abused his discretion in fashioning the remedy in this case by failing (1) to address and decide the applicability of rescissory damages, and (2) to include in the damages calculation a premium for the control acquired by HGI through the Odd Lot Resale. The Partnership is entitled to receive, at a minimum, what the Partnership units sold to HGI would have been worth at the time of the Odd Lot Resale if the General Partner had complied with the Partnership Agreement. [77] We thus reverse the judgment of the Court of Chancery regarding the remedy in this case, and we remand for procedures, such as expansion of the record, as may be necessary and appropriate to accomplish two objectives. First, the Court of Chancery should seek to quantify how the challenged transaction would have been consummated had the defendants adhered to the Partnership Agreement's contractual entire fairness provisions. Specifically, the court should determine and consider what price the Audit Committee would have approved for the Odd Lot Offer resales to HGI if the Audit Committee had been aware that the transaction would result in HGI solidifying control over the Partnership. Second, the Court of Chancery should reconsider and award some form or combination of the various equitable remedies available to the limited partnership, including rescissory damages, sterilization of voting rights, and other appropriate methods of accounting for a control premium. We note that the Court of Chancery has the discretion to consider afresh in light of the above analysis whether or not to order rescission.