Blackmore Partners, L.P. v. Link Energy LLC
2004 Del. Ch. LEXIS 164, 864 A.2d 80, 2004 WL 5383957 (2004)
Rule of Law:
A complaint alleging breach of the duty of loyalty can survive a motion to dismiss even without specific allegations of director self-interest or lack of independence, if the well-pleaded facts support a reasonable inference of disloyal conduct by directors who approved a transaction that disproportionately harms one class of security holders while benefiting another.
Facts:
- Link Energy LLC was formed in November 2002 to assume and continue the business of EOTT Energy Partners, L.P. after its emergence from Chapter 11 bankruptcy.
- As part of EOTT Energy Partners' bankruptcy restructuring, its former common unit holders received 3% of Link's newly issued equity units, and former unsecured note holders received 9% senior unsecured notes issued by Link and a pro rata share of the Link equity units.
- Link's capital structure was highly leveraged, and its business forecasts were not being met, prompting management and the board to consider alternatives to continuing operations.
- In March 2004, Link announced it was in negotiations to sell all of its operating assets, disclosing that its equity unit holders would likely receive a minimal amount, if any, after creditors were paid.
- Following this announcement, certain unit holders, including a representative of Blackmore, contacted Link to propose an "Alternative Proposal" involving an equity infusion to keep the company independent and avoid redeeming the 9% notes, which Link management communicated they would discuss.
- On March 31, 2004, Link publicly announced the sale of substantially all its assets to Plains All American Pipeline, L.P. for $290 million, without any further contact with the unit holders regarding their alternative proposal.
- The sale proceeds were allocated such that $265 million would repay debt, and an additional $25 million was distributed to the 9% note holders as a "kicker" for waiving certain covenants, resulting in no distributions to Link's equity unit holders, whose interests were rendered valueless.
Procedural Posture:
- Blackmore Partners, L.P. filed a purported class action suit against Link Energy LLC and its Director Defendants in the Delaware Court of Chancery on May 5, 2004, alleging breach of fiduciary duty.
- On June 15, 2004, all defendants filed a motion to dismiss the complaint pursuant to Court of Chancery Rule 12(b)(6).
- On August 2, 2004, Blackmore filed an amended class action complaint.
- On August 18, 2004, the defendants renewed their Rule 12(b)(6) motion to dismiss, arguing failure to state a claim and that an exculpatory clause barred duty of care claims.
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Issue:
Does a complaint alleging a breach of fiduciary duty of loyalty by directors survive a motion to dismiss, even if it lacks specific allegations that a majority of directors were interested in the transaction or lacked independence, when the complaint's facts reasonably infer disloyal conduct that disproportionately harmed equity holders?
Opinions:
Majority - Lamb, Vice Chancellor
Yes, a complaint can survive a motion to dismiss when it reasonably infers disloyal conduct, even without specific allegations of director self-interest or lack of independence. The court held that the well-pleaded allegations of fact, if true, could support a reasonable inference of disloyal conduct by the Director Defendants. The court noted that Link’s LLC Operating Agreement contained an exculpatory clause based on 8 Del. C. § 102(b)(7), which barred claims for breach of the duty of care, thus focusing the inquiry on the duty of loyalty or bad faith. While a lack of specific allegations of self-interest or independence is often a fatal flaw in a breach of loyalty claim, the court stated that this is not invariably the case. Here, the complaint alleged that the directors approved a transaction that disadvantaged equity unit holders, rendering their units valueless, despite evidence suggesting Link was neither insolvent nor on the verge of bankruptcy and that its assets exceeded liabilities by at least $25 million. The court reasoned that a properly motivated board of directors would not have agreed to a proposal that wiped out the common equity value and surrendered all of that value to the company’s creditors, raising a reasonable inference of disloyalty or intentional misconduct. Citing Orban v. Field, the court reiterated the principle that directors taking action directed against a class of securities should be required to justify their action. Therefore, the court concluded that the complaint adequately stated a claim for breach of the duty of loyalty or other misconduct not protected by the exculpatory provision in Link’s operating agreement, and denied the motion to dismiss.
Analysis:
This case clarifies the pleading standard for breach of the duty of loyalty, particularly when an exculpatory clause shields directors from duty of care claims. It establishes that while specific allegations of self-interest or lack of independence are typically required, a complaint may still survive a motion to dismiss if the alleged facts reasonably infer disloyal conduct, especially when a transaction dramatically disfavors one class of security holders (equity holders) while disproportionately benefiting another (creditors). This ruling provides a lower threshold for plaintiffs to get past the initial dismissal stage in certain circumstances, underscoring the court's vigilance in protecting equity holders when directors appear to prioritize creditors without sufficient justification. It suggests that highly disadvantageous outcomes for equity can themselves be circumstantial evidence of disloyalty at the pleading stage, shifting the burden to directors to justify their actions later.
