Minnesota Court Finds Structuring of Sale Transaction Did Not Violate Duty of Good Faith and Fair Dealing | Stinson – Corporate & Securities Law Blog

The United States District Court for the District of Minnesota ruled on a case in which the plaintiff was a limited partner in a company in which the company’s interests were the subject of a purchase agreement entered into by the defendants who controlled the limited partnership. Plaintiff alleged that defendants violated the partnership agreement by neglecting plaintiff’s tag-along rights and also violated an implied duty of good faith and fairness by entering into the sales contract “in an unlawful attempt to circumvent his tag-along rights “. The plaintiff is seeking declaratory judgment, interim relief, and monetary damages “which are believed to be at least $ 300,000,000.00.” Relevant parts of the cases were reviewed by the court with a view to a motion to dismiss. The partnership agreement was governed by Minnesota law.

The acquisition agreement was designed so that the buyer could acquire shares in a number of “tranches” and the buyer was required to exercise them in a specific order, if at all. The first tranche consisted of a 20 percent share of ownership in limited partnerships, which was to be bought by one of the defendant sellers on June 30th. In the second tranche, the buyer would acquire all general partner shares as well as an ownership share of almost 32% in limited partner shares. These limited partners ‘shares would include all of the unlawful limited partners’ shares, including the plaintiff’s shares. Finally, in the third tranche, the buyer would acquire the remaining 20% ​​of the limited partner’s shares from the defendants.

The buyer was also not required to exercise all or any of the call options. If the buyer does not exercise a call option before the specified expiration date for the respective tranche, all subsequent call options would end immediately and then be null and void.

Plaintiff believed that the sales agreement as a whole was a “series of related transactions” that constituted a control sale under the partnership agreement, thereby triggering his tag-along rights to the first deal on June 30th. The defendants replied that a control sale would only take place if the buyer exercised the option to purchase the second tranche, as this was the only tranche that would include the acquisition of the majority of the general partner shares. And since exercising the call option of the second tranche would require the defendants to exercise drag rights, the plaintiff’s tag-along rights would never come into play.

The partnership agreement stipulated that a control sale was a “sale, exchange, or other disposition. . . , in a single transaction or a series of related transactions,. . . of the shares, which comprise the majority of all general shares[.]“However, the buyer would not buy any general shares at the close of June 30th – and the defendants would not give up. However, the defendants were obliged to give the buyer an option to acquire all personally liable company shares at a later date. This raised the question of whether the granting of an option to acquire company shares is a “sale, exchange or other disposal” of these shares. Neither party has cited the Minnesota authorities dealing with this exact issue.

The court found that the common meaning of all three words – “sale”, “exchange” and “disposition” – implied a transfer or transfer of something. The plaintiff disagreed, arguing that “disposal” meant something broader than “sale” and “exchange”. The Court solved the problem by stating that when a collective term such as “other disposition” follows a series of specific words that “[g]Common words are restricted in their meaning by [the] before certain words. ”Accordingly, under the partnership agreement, a control sale will only occur if there is an actual transfer of“ partnership shares that encompass the majority of all general partnership interests ”. And a “partnership share” consists of “a partner’s total ownership share in the partnership at a given point in time”[.]”

Against this background, the court deemed the granting of an option to purchase general partner shares on June 30th to be inappropriate and the tag-along rights were not triggered. If the defendants grant the buyer an option to acquire personally liable companies on June 30, no agreement will be made to transfer those shares. There would be no transfer – and thus no control sale – unless and until the buyer has exercised the option of the second tranche and a closing took place sixty to ninety days thereafter.

The plaintiff also argued that the defendants breached their duty of good faith under the partnership agreement by drafting the sales contract in a way that prevented the plaintiff from exercising his tag-along rights. The court found, under Minnesota law, that every contract contains an implied commitment of good faith and fairness, which requires that one party not “unreasonably obstruct” the performance of the other. The obligation regulates the performance of the parties and prohibits one party from failing to perform for the purpose of thwarting the rights of the other party under the contract

The court found that the applicant has not plausibly alleged the type of malicious conduct that would violate the bond of good faith and fair trade. Nothing in the partnership agreement prohibited what the defendants had done. Nothing prevented them from using options to structure a potential transaction or from selling some of their limited partnership interests before making a control sale to sell their general partners.

Crucial to the court’s analysis was that the plaintiff did not allege any of the main examples of malicious behavior. The defendants had not wrongly rejected the partnership agreement, had not illegally forced the plaintiff to renounce his rights or “failed”[ed] perform their own obligations in order to thwart the plaintiff’s rights. At most, the defendants had structured the transaction in such a way that a control sale would take place later than it might otherwise have taken place.

Finally, the partnership agreement did not appear to give the plaintiff per se the right to sell immediately at the start of a control sale. Plaintiff’s allegations implied that the call option agreement was a bogus agreement and that the buyer had already functionally agreed to purchase the entire partnership in a series of related transactions. However, if it were, the partnership agreement would appear not to require that the plaintiff be allowed to sell all of his partnership shares before the general partner sold his own.