SCHEDULE 13D
Under the Securities Exchange Act of 1934
(Amendment No. 11)
Hallwood Realty Partners, L.P.
(Name of Issuer)
Units Representing Limited Partnership Interests
(Title of class of securities)
40636T5
(CUSIP Number)
Peter A. Nussbaum, Esq.
Schulte Roth & Zabel LLP
900 Third Avenue
New York, New York 10022
(212) 756-2000
(Name, address and telephone number of person authorized to
receive notices and communications)
November 18, 1998
(Date of event which requires filing of this statement)
If the filing person has previously filed a statement on Schedule
13G to report the acquisition which is the subject of this
Schedule 13D, and is filing this schedule because of Rule 13d-
1(b)(3) or (4), check the following box [ ].
Check the following box if a fee is being paid with the statement
[ ]. (A fee is not required only if the reporting person: (1)
has a previous statement on file reporting beneficial ownership
of more than five percent of the class of securities described in
Item 1; and (2) has filed no amendment subsequent thereto
reporting beneficial ownership of five percent or less of such
class.) (See Rule 13d-7.)
Note: Six copies of this statement, including all exhibits,
should be filed with the Commission. See Rule 13d-1(a) for other
parties to whom copies are to be sent.
* The remainder of this cover page shall be filled out for a
reporting person's initial filing on this form with respect to
the subject class of securities, and for any subsequent amendment
containing information which would alter disclosures provided in
a prior cover page.
The information required on the remainder of this cover page
shall not be deemed to be "filed" for the purpose of Section 18
of the Securities Exchange Act of 1934 ("Act") or otherwise
subject to the liabilities of that section of the Act but shall
be subject to all other provisions of the Act (however, see the
Notes).
<PAGE>
SCHEDULE 13D
CUSIP No. 4063T5 Page 2 of 5 Pages
1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Gotham Partners, L.P. 13-3700768
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A (a) [ ]
GROUP* (b) [ ]
3 SEC USE ONLY
4 SOURCE OF FUNDS*
WC
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS [ ]
IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e)
6 CITIZENSHIP OR PLACE OF ORGANIZATION
New York
NUMBER OF 7 SOLE VOTING POWER
SHARES 245,286
BENEFICIALLY 8 SHARED VOTING POWER
OWNED BY EACH 0
9 SOLE DISPOSITIVE POWER
REPORTING 245,286
PERSON
WITH 10 SHARED DISPOSITIVE POWER
0
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH
REPORTING PERSON
245,286
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) [ ]
EXCLUDES CERTAIN SHARES*
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW
(11)
14.66%
14 TYPE OF REPORTING PERSON*
PN
<PAGE>
SCHEDULE 13D
CUSIP No. 4063T5 Page 3 of 5 Pages
1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Gotham Partners III, L.P. 13-4011515
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A (a) [ ]
GROUP* (b) [ ]
3 SEC USE ONLY
4 SOURCE OF FUNDS*
WC
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS [ ]
IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e)
6 CITIZENSHIP OR PLACE OF ORGANIZATION
New York
NUMBER OF 7 SOLE VOTING POWER
SHARES 2,708
BENEFICIALLY 8 SHARED VOTING POWER
OWNED BY EACH 0
9 SOLE DISPOSITIVE POWER
REPORTING 2,708
PERSON
WITH 10 SHARED DISPOSITIVE POWER
0
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH
REPORTING PERSON
2,708
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) [ ]
EXCLUDES CERTAIN SHARES*
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW
(11)
.16%
14 TYPE OF REPORTING PERSON*
PN
<PAGE>
Page 4 of 5 Pages
This Amendment No. 11 amends and supplements the Statement on Schedule
13D (the "Schedule 13D") relating to the Units representing limited
partnership interests (the "Units") of Hallwood Realty Partners, L.P., a
publicly-traded Delaware partnership (the "Partnership"), previously filed by
Gotham Partners,L.P., a New York limited partnership ("Gotham").
Capitalized terms used and not defined in this Amendment have the
meanings set forth in the Schedule 13D.
Except as specifically provided herein, this Amendment does not modify
any of the information previously reported on Schedule 13D.
* * *
Item 2 is hereby amended and restated in its entirety as follows.
Item 2. Identity and Background
This Statement is being filed by Gotham with respect to shares of Common Stock
owned by it and Gotham Partners III, L.P., a New York limited partnership
("Gotham III") with respect to shares of Common Stock owned by it. Gotham
and Gotham III are together the "Reporting Persons".
Effective July 1, 1998, Gotham converted to a Section 3(c)(7) exempt entity
from a Section 3(c)(1) exempt entity under the Investment Company Act of 1940,
as recently amended (the "Act"). Gotham III was created in connection with
Gotham's conversion in order to provide an investment entity for those limited
partners of Gotham who did not meet the definition of a "qualified purchaser"
set forth in Section 2(a)(51) of the Act. Only "qualified purchasers" may
invest in Section 3(c)(7) exempt entities. Gotham distributed approximately
1.09% of its assets and liabilities to withdrawing limited partners, who
contributed such assets and liabilities to Gotham III in return for limited
partnership interests therein.
Each of Gotham and Gotham III was formed to engage in the buying and selling
of securities for investment for it's own account.
Item 4 is hereby amended to add the following information:
Item 4. Purpose of Transaction
On November 10, 1998, the Court of Chancery of the State of Delaware
denied defendants' motion to dismiss Gotham's claims in the action entitled
Gotham Partners, L.P. v. Hallwood Realty Partners, L.P., et al. C.A. No.
15754-NC. A copy of the memorandum opinion is attached hereto.
<PAGE>
Page 5 of 5 Pages
After reasonable inquiry and to the best of my knowledge and
belief, I certify that the information set forth in this statement is
true, complete and correct.
November 18, 1998
GOTHAM PARTNERS, L.P.
GOTHAM PARTNERS III, L.P.
By: Section H Partners, L.P.
its general partner
By: Karenina Corp.,
a general partner of Section H
Partners, L.P.
By:/s/ William A. Ackman
----------------------
William A. Ackman
President
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
GOTHAM PARTNERS, L.P. )
A New York Limited Partnership, )
)
Plaintiff, ) Civil Action No. 15754-
NC
)
v. )
)
HALLWOOD REALTY PARTNERS, L.P., )
HALLWOOD REALTY CORPORATION, )
THE HALLWOOD GROUP INCORPORATED, )
ANTHONY J. GUMBINER, BRIAN M. )
TROUP, WILLIAM L. GUZZETTI, ALAN G. )
CRISP, WILLIAM F. FORSYTH, EDWARD T. )
STORY, and UDO H. WALTHER )
)
Defendants. )
Submitted: June 19, 1998
Decided: November 10, 1998
MEMORANDUM OPINION
Lewis H. Lazarus, Michael A. Weidinger, Morris, James, Hitchens &
Williams, Wilmington, Delaware. OF COUNSEL: Philip H. Schaeffer,
Dwight A. Healy, Karen M. Asner, White & Case, New York, New York. Attorneys
for Plaintiff.
Michael D. Goldman, Stephen C. Norman, Matthew E. Fischer, of Potter, Anderson
& Corroon LLP, Wilmington, Delaware. OF COUNSEL: William J. McSherry,
Battle Fowler, LLP, New York, New York. Attorneys for Defendants.
STEELE, V.C.
<PAGE>
Plaintiff Gotham Partners, L.P. ("Gotham") owns 15% of the
outstanding limited partnership units in defendant Hallwood Realty
Partners, L.P. ("Hallwood"). Gotham challenges certain unit transactions
involving Hallwood, Hallwood's corporate general partner, Hallwood Realty
Corp. ("HRC"), and HRC's parent company, Hallwood Group Inc.
("Hallwood Group"). Gotham alleges that HRC executed a series of unit
purchases whereby it and certain HRC insiders acquired enough Hallwood units
to block the outside unit holders from ousting HRC as Hallwood's general
partner.
Hallwood's moves to dismiss this action under ss. 1003 of the
Delaware Revised Uniform Limited Partnership Act ("DRULPA").1 Hallwood
rests its entire motion on two propositions: (1) Gotham's claims are
entirely derivative in nature; and (2) Gotham has failed to plead facts
excusing pre suit demand to HRC's board of directors.2 I find that Gotham
states a prima facie individual claim that outside unit holders' voting
rights in Hallwood were adversely effected by the disputed transactions.
Secondly, I find that Gotham need only plead facts showing that HRC--not its
board of directors--was interested in the transaction and that Gotham has
done so.
- -------------------------
1 Codified at 6 Del. C. ss.ss. 17-101 to -1111 [hereinafter DRULPA ss._].
2 To simplify the discussion, I attribute the defendants' joint
legal positions in this matter to "Hallwood."
<PAGE>
I. BACKGROUND
According to the facts pled in Gotham's Second Amended Complaint,
Hallwood was organized in January 1990 as a real estate investment business.
HRC, a wholly-owned subsidiary of Hallwood Group, manages Hallwood.
Three of HRC's seven-member board are directors and/or officers of
HRC and Hallwood Group.3 (See Diagram 1.)
- -------------------------
3 Defendant Anthony J. Gumbiner ("Gumbiner") was and is HRC Chairman of
the Board as well as Chairman of the Board and CEO of Hallwood Group;
Brian M. Troup ("Troup") was and is an HRC Director and Hallwood Group
President and Chief Operating Officer; William Guzzetti ("Guzzetti")
was HRC President and a Director, and he was and is Hallwood Group
Executive Vice-President. Defendants Alan C. Crisp, William F.
Forsyth, Edward T. Story, Udo W. Walther were and are independent
directors of Hallwood.
Hallwood engages in diversified real estate-related investments and
management activities including acquisition, ownership, operation, and
management of commercial office buildings and industrial property.
Hallwood limited partnership units trade on the American Stock Exchange in
New York. Gotham alleges, however, that the market for Hallwood units is
highly illiquid (constituting about 1000 trades per day), and that Hallwood
units trade at a discount lower than Hallwood's net asset value per unit.
Gotham claims that the net asset value per unit at the time of the disputed
transactions was about $70 per unit. The rights and obligations of
Hallwood's limited partners and sole general partner, HRC, are set forth in
the Amended and Restated Agreement of Limited Partnership of Hallwood Realty
Partners, L.P. (the "Partnership Agreement").
The crux of Gotham's claim is that HRC entrenched itself by acquiring
approximately 25% of Hallwood's outstanding units in a series of transactions,
the terms of which Gotham alleges were unfair and tainted by self- dealing.
Gotham pleads facts showing that HRC increased its ownership of Hallwood
units from 5.15% to 29.4% 4 and argues that HRC now owns almost enough units
in Hallwood to defeat a vote of the limited partners seeking to terminate HRC
as Hallwood's general partner. Gotham describes the following four transactions
in which HRC increased its Hallwood unit holdings. Gotham alleges that
the transactions were all part of the HRC board's single master plan to
entrench itself that HRC's board approved at its October 12, 1994.5
- -------------------------
4 I assume that all HRC insiders executed their options, but this
inference is for the purposes of this motion to dismiss only.
5 Gotham substantiates that assertion by alleging that at that
meeting, HRC's directors received a "Unit Ownership Breakdown" table
which predicted the number of odd lots to be created by the reverse
split and a "Reverse Stock Split and Odd-Lot Tender Offer Projections"
table which calculated the percentage of units to be held by HRC and
its affiliates after each transaction.
A. The Reverse Split
At a February 27, 1995 board meeting, HRC authorized Hallwood
to execute a one-for-five reverse split of outstanding units. The reverse
split reduced the number of outstanding units and created a number of
fractional units.6 HRC estimated that the reverse split would create 30,000
fractional units. HRC approved Hallwood's mandatory buyback of the fractional
units at the prevalent market price of $11.88 per new unit. Purportedly to
obtain cash to finance the reverse split, HRC had Hallwood sell HRC 30,000
worth of new units at $11.88 per unit on the same day that Hallwood executed
the reverse split. The reverse split created only 22,633 fractional units,
and Gotham alleges that a March 3, 1995 memo shows HRC knew this when it
bought the 30,000 units. Gotham alleges that because Hallwood units are
illiquid, the market price paid by Hallwood to its fractional unit holders
and by HRC to Hallwood was unfairly low.
- -------------------------
6 For example, a Hallwood unit holder who held 3 units before the reverse
split was left with a 3/5 interest in the limited partner. Rather
than issue fractional certificates, Hallwood elected to cash out
fractional unit holders.
B. Grant of Options
HRC's next step to entrench itself, Gotham urges, was to cause
Hallwood to award 78,100 unit options to defendants Gumbiner, Troup, and
Guzzetti. On February 27, 1995, HRC's board of directors adopted the "Unit
Option Plan." The board set the option's exercise price at $11.875 and
approved option grant loans whereby Hallwood would loan the option holder an
amount covering the option exercise price and any tax-related expenses
incurred by the option holder. Gotham alleges that HRC did not carefully
consider the transaction, lacked information on the per unit asset value of
the granted options, and orchestrated the grant of options to further its
entrenchment. (In that respect, Gotham argues that the loan to option holders
facilitates the ability of option holders to respond to a unit holder vote on
HRC's termination by executing the options and voting against termination.)
C. Odd-Lot Repurchase
The third step in HRC's alleged entrenchment scheme was, according
to Gotham, to implement an odd-lot repurchase program. The reverse split had
not only created fractional units, but increased the number of unit holders
holding blocks of units not denominated in hundreds of shares.7 With the avowed
purpose of reducing administrative expenses for Hallwood, HRC (through its
Board of Directors) announced May 26, 1995, on behalf of Hallwood an odd-lot
purchase program. Afterwards, Hallwood bought 293,539 units at an average
price of $14 per unit and sold those units to HRC for the same amount.
Gotham argues that this sale allowed HRC to launch a tender offer for
Hallwood units without registering with the S.E.C. by disguising its
acquisition as a Hallwood buyback coupled with a single sale to HRC. It
points to an HRC file note that characterizes the odd-lot repurchases as
"purchased by HRP [Hallwood], on behalf of THGI [Hallwood Group, HRC's
parent] during the 1995 Odd Lot Buyback Program."8
- -------------------------
7 For example, a unit holder with 403 old units before the reverse
split would hold 80.6 new units. The mandatory fractional share buyback
would have forced the hypothetical unit holder to accept cash for the .6
share, leaving the holder with 80 shares. 80 shares is less than the
minimum 100 shares in which people normally trade. A block of less than
100 shares is called an odd lot, and it is more difficult to trade than
blocks of 100 shares.
8 Comp.P. 97 (citing October 1, 1996 file note).
D. Open Market Unit Repurchases
The final transaction affecting HRC's ownership of Hallwood units
was HRC's approval of a unit repurchase program by Hallwood because Hallwood
believes that, at current market prices, the repurchase represents a prudent
investment of the Partnership's funds."9 Hallwood's units traded in the $14.375
to $16.75 range at this time. On May 1, 1996, HRC announced it arranged for
Hallwood to purchase 74,760 units at $23.75 per unit from a single seller.
In July, Hallwood bought an additional 449 units at $26.73 per unit. Gotham
argues that the import of these transactions is twofold. First, it illustrates
the unfair price at which HRC appropriated units from Hallwood not half a
year before HRC approved these market repurchases. Second, the purchases
boosted HRC's holding of Hallwood units as a percentage of outstanding units
in furtherance of its entrenchment scheme.
- ---------------------------
9 Comp.P. 117 (quoting HRC Dec. 18, 1995 press release).
E. Claims of Breach of Fiduciary Duty
Gotham cites internal memos10 generated by HRC which track the
impact of the transactions described above on HRC's unit holdings and which
specifically track the percentage of outside unit holder votes needed to oust
HRC as general partner. It argues that the four transactions, all of which
took place or began in 1995, were part of a scheme by HRC to insulate itself
from removal by the limited partners (or a hostile acquirer.) In particular,
Gotham claims that the first three transactions, the reverse split, odd-lot
repurchase, and option grant, each breached the following contractual and
fiduciary duties:
- Partnership Agreement ss. 7.05, which requires that HRC engage
in self-dealing transactions only if the terms were substantially
equivalent to what Hallwood would obtain from an arms- length
transaction with a third party;
- Partnership Agreement ss. 7.10, which mandates review of
self-dealing transactions by an independent audit committee
composed of two HRC independent directors;
- a duty of loyalty and care to evaluate these transactions from
the perspective of what was best for Hallwood and all its
partners; and
- a duty of care to consider the financial and legal implications
of the deals approved by HRC on behalf of Hallwood, including
informing itself of the net asset value of Hallwood.
- -------------------------
10 I.e., October 12, 1994 board meeting materials; October 1, 1996 file
note; and March 3, 1995 memorandum.
Gotham alleges specific damages. It claims that the market price
obtained by Hallwood for the units sold to HRC was inadequate because the
few units traded in the illiquid market for Hallwood units were discounted
below the net asset value per unit of Hallwood. Gotham argues that the
$23.75 per share paid by Hallwood for the 74,760 units demonstrates that the
minority discount implicit in the market price would not apply to the large-
sized transactions executed between Hallwood and HRC and between Hallwood
and its unit holders. Compared with Hallwood's per unit net asset value,
Gotham urges, the price obtained by Hallwood and its limited partner unit
holders was unfairly low. (See Table I below.)
<TABLE>
Table 1
Alleged Financial Impact of Reverse Split, Odd-Lot Buyback, & Option
Grant
- ------------------------------------------------------------------------------
- ------------------------------------------------
<CAPTION>
A B C D E F
transaction # of transaction total cost net asset N.A.V. damages
Units price/unit value/unit transaction (C-E)
- ------------------------------------------------------------------------------
- --------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
reverse split 30,000 $11.88 $356,400.00 $70.00 $2,100,000.00 $1,743,600.00
- ------------------------------------------------------------------------------
- ------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------
odd-lot 293,539 $14.00 $4,109,546.00 $70.00 $20,547,730.00 $16,438,184.00
buyback
- ------------------------------------------------------------------------------
- ------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------
option grant* 78,100 $11.88 $927,437.50 $70.00 $5,467,000.00 $4,539,562.50
- ------------------------------------------------------------------------------
- ------------------------------------------------
</TABLE>
* Assumes that options are executed and that Hallwood's net asset value per
unit remains $70.00.
Note: Any differences in numbers in Table 1 and those pled in the complaint
are the result of rounding. The data contained in the tables are not findings
of fact, but used for illustrative purposes. The numbers contained in
Gotham's Complaint shall be the numbers used at trial, unless the evidence
subsequently shows otherwise.
Gotham claims that the transactions, including the market repurchases,
had the effect of entrenching the general partner. Table 2, which summarizes
information contained in Gotham's Complaint, demonstrates the alleged impact
of these transactions on the ability of the outside limited partner unit
holders to terminate HRC.
<TABLE>
Table 2
Impact of Disputed Transactions on Voting Rights
- ----------------------------------------- --------------------- --------------
- ------- --------------------- --------------------
<CAPTION>
A B C D
Transaction # of Units % of units HRC's % of outsiders
holdings (%) to terminate GP
- ----------------------------------------- --------------------- --------------
- ------- --------------------- --------------------
- ----------------------------------------- --------------------- --------------
- ------- --------------------- --------------------
<S> <C> <C> <C> <C>
reverse split 30,000 1.73% 6.88% 71.52%
- ----------------------------------------- --------------------- --------------
- ------- --------------------- --------------------
- ----------------------------------------- --------------------- --------------
- ------- --------------------- --------------------
odd-lot buyback 293,539 16.94% 23.83% 87.43%
- ----------------------------------------- --------------------- --------------
- ------- --------------------- --------------------
- ----------------------------------------- --------------------- --------------
- ------- --------------------- --------------------
open market repurchase #1
74,760 4.28% 24.67% 88.42%
- ----------------------------------------- --------------------- --------------
- ------- --------------------- --------------------
- ----------------------------------------- --------------------- --------------
- ------- --------------------- --------------------
open market repurchase #2
449 0.03% 24.68% 88.42%
- ----------------------------------------- --------------------- --------------
- ------- --------------------- --------------------
- ----------------------------------------- --------------------- --------------
- ------- --------------------- --------------------
option grant*
78,100 4.46% 29.35% 94.27%
- ----------------------------------------- --------------------- --------------
- ------- --------------------- --------------------
</TABLE>
* Assumes that options are executed after market repurchases.
Note: These tabulated results differ somewhat from the numbers pled in
the Complaint, In particular, I note Gotham pled that the odd-lot buyback and
the option grants respectively totaled "approximately 18%" and 4.7% of the
outstanding units. The discrepancies, however, are minor and immaterial to
these legal rulings. Furthermore, the data contained in the tables are not
findings of fact, but are used only for Illustrative purposes.
F. Prima Facie Claims
I find as a preliminary matter that Gotham has pled a prima facie
claim that Hallwood's limited partner unit holders have been injured by a
scheme to entrench the general partner. Gotham's complaint is a paradigm of
particularized allegations supported with purported HRC internal memos,
citations to the Partnership Agreement, and a legally sustainable theory of
relief. In toto, Gotham raises a viable claim that HRC intentionally executed
a series of transactions to obtain a de facto veto over any vote to remove
itself as Hallwood general partner. The Complaint alleges facts that, if
proved, show that HRC acquired its Hallwood units at the expense of
Hallwood's economic well being (a derivative claim) and the unit holder's
voting rights (a direct unit holder claim).11
- -------------------------
11 Avicus Partners, L.P. v. Brian, Del. Ch., C.A. No. 11001, mem. op. at
13, Allen, C. (Oct. 24, 1990) ("An entrenchment claim will be an
individual claim when the shareholder alleges that the entrenching
activity directly impairs some right she possesses as a shareholder,
such as the right to vote her shares. . . . If the stock is issued for
inadequate consideration, the corporation itself will be directly
injured as well and both individual and derivative wrongs might be
alleged.).
II. PARTIES' CONTENTIONS & RULINGS OF LAW
DRULPA ss. 1003 codifies a plaintiff partner's particularized
pleading requirement for bringing a derivative suit against a Delaware
limited partnership, a requirement which this Court has held is substantially
the same as the pleading standard for shareholder plaintiffs.12 Hallwood
employs a two-step argument to demonstrate Gotham's failure to plead facts
showing the plaintiff should be excused from seeking action from the general
partner on this matter. Hallwood argues (1) that Gotham's claims are
entirely derivative in nature and (2) that Gotham has failed to plead facts
showing demand futility. The latter reflects Hallwood's assertion that, as a
matter of law, a corporate general partner is incapable itself of making a
decision, interested or disinterested, and that, therefore, the body to which
Gotham was obligated to make demand was not Hallwood's general partner, HRC,
but HRC's board of directors.
- -------------------------
12 Litman v. Prudential-Bache Properties, Inc., Del. Ch., C.A. No.
12137, mem. op. at 6, Chandler, V.C. (Jan. 4, 1993) (Applying corporate
law's Aronson test (as modified by Levine and its progeny) to determine
whether limited partner pled demand futility with sufficient
particularity).
Gotham responds to these arguments by pointing to the sections in its
complaint where it alleges that HRC's purported entrenchment motive defeats
any possibility that it could unbiasedly evaluate Gotham's claims. Gotham pled
in the alternative that if the proper subcomponent of the general partner to
which demand should have been made was the board of directors, the board's
duty of loyalty to HRC's 100% majority shareholder, Hallwood Group,
conflicted with its duty of loyalty to Hallwood, because Hallwood Group stood
to profit from the unfair sale of Hallwood units to HRC. This, Gotham
concludes, prevented the board from evaluating the claims disinterestedly.
Moreover, Gotham adds that under our limited partnership statute and case
law, HRC, not its board, was the entity to which demand should be made.
Finally, Gotham replies that in so far as it pleads facts showing the
transaction interfered with unit holders' voting rights, its claims are
direct, not derivative.
For the following reasons, I find Hallwood's argument unpersuasive.
First, Gotham has pleaded facts showing that the disputed transactions impinged
upon the unit holder's right to terminate the general partner. The injury is
specific to the unit holders as a class as opposed to a harm inflicted upon the
limited partnership.13 Therefore, I apply corporate law precedent and hold that
this individual claim may proceed without pleading demand futility.14
- -------------------------
13 See In re Walt Disney Co. Deriv. Litig., Del. Ch., C.A. No. 15452,
slip op. at 62-63, Chandler, C. (Oct. 7, 1998) (comparing harm element
for shareholder claim that stock repurchase breached fiduciary duty
(diluted shareholder voting rights) with harm element in derivative claim
(diminished assets of corporation)).
14 The derivative suit is a corporate action grafted onto the limited
partnership form, and I look to corporate precedent to distinguish
between limited partnership derivative actions and direct limited partner
claims. Litman v. Prudential-Bache Properties, Inc., Del. Ch. 611 A.2d
12, 15 (1992) (holding the "determination of whether a fiduciary duty
lawsuit is derivative or direct in nature is substantially the same for
corporate cases as it is for limited partnership cases.").
In the general partnership context, barring express agreement to
the contrary, no correlative derivative litigation exists because in a
general partnership everyone has a right to manage the affairs of the
business, including the right to sue in court. See 6 Del. C. ss.
1518(1)(5) ("[S]ubject to any agreement between them, . . . [a] ll
partners have equal rights in the management and conduct of the
partnership business.").
Second, I reject the argument that a limited partner challenging
a corporate general partner's acts must make pre suit demand to the corporate
general partner's board of directors. Although the presence of a majority of
interested directors within a corporate general partner might be one way of
demonstrating demand futility as to the corporate general partner, there is
nothing in DRULPA that even hints at Hallwood's proposition that HRC's board
of directors is the organizational subcomponent to which Gotham's demand should
be made.15 Limited partnership cases dealing with demand against a corporate
general partner discuss demand in relation to the corporation itself, not its
internal decisionmaking apparatus.16
- ---------------------------------
15 See DRULPA ss.ss. 17-101(5), 1001, -1003.
16 Litman, 611 A.2d at 15 (holding "duties of a general partner and a director
are very similar"); Katell v. Morgan Stanley Group, Inc., Del. Ch.,
C.A. No. 12343, mem. op. at 12, Chandler, V.C. (June 15, 1995) (holding
that corporate general partner itself can only act through its agents,
but when corporate general partner appointed its parent's employees to
special committee, the threshold question was not whether the individuals
were independent, but whether the corporate general partner was); See also,
Seaford Funding L.P. v. M&M Assocs. II, Del. Ch. 672 A.2d 66 (1995).
Finally, the result implied by Hallwood's proposed rule defies logic.
It would require the Court to look into the form of entity of each general
partner in order to determine whether the entity's internal decisionmaking
individuals (or aggregate of individuals if that decisionmaker was also a
business entity) were independent. This would undermine this state's established
policy of respecting the legal fiction of the business entity.17 It runs counter
to the notion of the business judgment rule because it accords the business
entity no role as general partner. Hallwood's proposed rule looks not to the
person owing the fiduciary duty, but to individuals who make decisions in that
entity's best interest. Furthermore, Hallwood's approach runs counter to the
contractual freedom granted parties to a limited partnership by DRULPA ss.
17-1101(c) because it forces them to treat a corporate general partner's board
of directors as the de facto general partner. DRULPA already permits a limited
partnership to appoint individuals as general partner, and Hallwood's partners
could have elected to individually appoint the directors of HRC as its general
partners. No pre suit demand rule should force that result here because it would
ignore the reality that it is the general partner who owes the limited partners
fiduciary duties, not the management of the general partner, even though they
make the decisions for that business entity.18 I have found no case where the
general partner was a corporation and the issue was whether, in those
circumstances, the demand must be made to the corporation or to the corporate
general partner's board. The fact that the general partner is a corporation is
a fortuity; many general partners are not. Therefore, it should be sufficient
to make the demand upon the general partner, whatever its form. The manner in
which the response to the demand is made will depend upon whatever form of
internal governance the general partner utilizes, but that issue is purely
internal and should be of no concern to a court. Therefore, I hold that
Gotham must plead the futility of pre suit demand to HRC, the corporation
acting as general partner.
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17 See Harco Nat'l Ins. co. v. Green Farms, Inc., Del. Ch., C.A. No.
1131, mem. op., 15 Del. J. Corp. L. 1030, 1038 Hartnett, V.C. (Sept. 19,
1989)(noting the difficulty in persuading a Delaware Court to disregard
the corporate entity in context of corporate veil piercing claim).
18 Hallwood argues that if the Court fails to look to the decisionmaking of
the HRC board of directors and the presence of a majority of outside
directors within that board, limited partnerships with one corporate
general partner will be susceptible to an onslaught of derivative suits
whenever the general partner engages in a self-interested transaction.
Hallwood's argument is that even though the limited partnership agreement
permits such an interested transaction, the mere fact that the general
partner was interested will permit the plaintiff to plead demand futility
and challenge an otherwise valid transaction. I agree that even where the
limited partnership agreement permits self-dealing, limited partnerships
with only one general partner may be exposed to derivative challenges in
which the plaintiff limited partner will plead demand futility, but it is,
after all, that one general partner who owes the limited partners the duty
to act consistently with established fiduciary duty law.
Gotham's complaint sets forth three reasons why HRC was incapable of
fairly addressing Gotham's claims: (1) HRC's interest in entrenching itself
disabled it from acting as a disinterested general partner; (2) HRC's interest
in enriching itself at the expense of the Hallwood limited partners by paying
an unfairly low price for Hallwood units disabled it; and (3) HRC's approval of
the disputed transactions (i) without considering the fair value of the units;
(ii) without complying with its obligation to obtain terms comparable to
those available in deals with a third party; and (iii) without convening an
audit committee to review the disputed transactions (i-iii) all demonstrate
HRC's gross negligence in approving the disputed transactions, thereby
rebutting the presumption that HRC acted within its business judgment.
I do not address Gotham's third reason for excusing demand, which
implicates HRC's duty of care in approving the disputed transactions.
Either HRC's entrenchment motive or enrichment motive, as pled in
Gotham's Complaint, demonstrates a conflict of interest implicating the
general partner's duty of loyalty to the limited partner unit holders.19 I
find Gotham pled both allegations with particularity sufficient to excuse
Gotham's failure to make demand.20
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19 Aronson v. Lewis, Del. Supr., 473 A.2d 805, 815 (1984) ("Certainly,
if this is an 'interested' director transaction, such that the business
judgment rule is inapplicable to the board majority approving the
transaction, then the inquiry ceases. In that event, futility of demand
has been established by any objective or subjective standard."); Moran
v. Household Int'l, Inc., Del. Ch. 490 A.2d 1059, 1071 (1985)
(finding demand futility properly pled where plaintiff alleged facts
showing that poison pill was adopted to entrench board), aff'd Del.
Supr., 500 A.2d 1346 (1989); Katell v. Morgan Stanley Group, Inc.,
Del. Ch., C.A. No. 12343, mem. op. at 10-11, Chandler, V.C. (Jan. 14,
1993) (refusing to dismiss derivative claim for failure to plead demand
futility where plaintiff pled particularized facts showing general
partner's affiliate stood on other side of transaction).
20 DRULPA ss. 1003 ("In a derivative action, the complaint shall set forth
with particularity the effort, if any, of the plaintiff to secure
initiation of the action by a general partner or the reasons for not
making the effort.").
III. CONCLUSIONS
I find that Gotham has pleaded a direct limited partner claim that
HRC entrenched itself at the expense of the limited partner unit
holder's contractual right to terminate the general partner. For this claim,
no demand is required. As to its derivative claims, I hold that HRC was the
proper entity to which Gotham should direct its demand futility arguments. I
find that Gotham has pled particularized facts alleging HRC's enrichment and
entrenchment, which raise a reasonable doubt as to HRC's loyalty to the
limited partner unit holders. Accordingly, I hold that Gotham has met its
burden under our demand futility pleading rules. Hallwood's motion to dismiss
is denied.
IT IS SO ORDERED.
/s/
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Vice Chancellor
