Capital Link Fund I, LLC v. Capital Point Management, LP ( 2015 )

EFiled: Nov 25 2015 04:53PM EST
Transaction ID 58218247
Case No. 11483-VCN
COURT OF CHANCERY
OF THE
STATE OF DELAWARE
JOHN W. NOBLE 417 SOUTH STATE STREET
VICE CHANCELLOR DOVER, DELAWARE 19901
TELEPHONE: (302) 739-4397
FACSIMILE: (302) 739-6179
November 25, 2015
Martin S. Lessner, Esquire Bradley R. Aronstam, Esquire
Young Conaway Stargatt & Taylor, LLP Ross Aronstam & Moritz LLP
1000 North King Street 100 S. West Street, Suite 400
Wilmington, DE 19801 Wilmington, DE 19801
Douglas Herrmann, Esquire
Pepper Hamilton LLP
1313 North Market Street
Wilmington, DE 19801
Re: Capital Link Fund I, LLC v. Capital Point Management, LP
C.A. No. 11483-VCN
Date Submitted: November 9, 2015
Dear Counsel:
Plaintiffs in this action are Capital Link Fund I, LLC (“CLFI”), CT Horizon
Legacy Fund, LP (“Connecticut Fund”), Capital Point Partners, LP (“CPP” or “the
Partnership”), and Sema4 USA, Inc. (together, the “Plaintiffs”). Defendants in this
action are Capital Point Management, LP (“CPMLP” or the “General Partner”),
Capital Point Advisors, LP, Princeton Capital Corporation (“Princeton Capital”),
Princeton Investment Advisors, LLC (“Princeton Advisors”), Princeton Advisory
Capital Link Fund I, LLC v. Capital Point Management, LP
C.A. No. 11483-VCN
November 25, 2015
Page 2
Group, Inc., Alfred Jackson, Munish Sood, Gregory J. Cannella, Thomas Jones, Jr.,
Trennis L. Jones, and Martin Tuchman (together, the “Defendants”).
Plaintiffs bring this action against Defendants for breach of the Capital Point
Partners, L.P. Amended and Restated Limited Partnership Agreement (the
“Partnership Agreement”), breach of the covenant of good faith and fair dealing;
equitable rescission; breach of fiduciary duties; aiding and abetting breach of
fiduciary duties; fraud; and civil conspiracy to commit fraud.
I. BACKGROUND
In August 2008, Plaintiffs and CPMLP entered into a partnership to “invest
in [s]ecurities for long-term appreciation.”1 CPMLP served as general partner of
the Partnership, and CLFI and Connecticut Fund were among the limited partners.2
The Partnership Agreement governs the relationship among the parties, and
provides that “Seventy Percent in Interest of the Limited Partners may remove the
General Partner and/or the Investment Manager at any time without cause.”3
1
Verified Compl. (“Compl.” or the “Complaint”) Ex. A (“P’ship Agmt.”) § 1.8(a).
2
Compl. ¶ 1. A large majority of CPP’s limited partners are public pension funds.
Id. ¶ 30.
3
P’ship Agmt. § 2.8(a).
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C.A. No. 11483-VCN
November 25, 2015
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Following removal of the General Partner, “Eighty Percent in Interest of the
Limited Partners” may “designate a successor general partner within 90 days of the
effective date of such removal.”4
The Partnership Agreement requires consent of a majority-in-interest of
limited partners “before the General Partner can cause the Partnership to commit a
large percentage of its assets to one portfolio investment[] [or] hold a majority of
the voting shares of a portfolio investment.”5 The Partnership Agreement also
provides for a five-member board of advisors (the “Board of Advisors”) consisting
of representatives of the limited partners and “other persons unaffiliated with the
General Partner.”6 The Board of Advisors has authority to “review and approve or
disapprove [of] . . . the appropriateness of any action or inaction on the part of the
Partnership in any situation that poses, or may pose, a conflict of interest involving
the Partnership, the General Partner, the Investment Manager and their Affiliates.”7
4
Id. § 2.8(d); accord Compl. ¶ 38.
5
Compl. ¶ 6; accord P’ship Agmt. § 1.8(c)(i), (vi).
6
P’ship Agmt. §§ 2.3(b), 2.6; Compl. ¶ 35.
7
P’ship Agmt. § 2.6(b).
Capital Link Fund I, LLC v. Capital Point Management, LP
C.A. No. 11483-VCN
November 25, 2015
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Approval of the Board of Advisors does not, however, substitute for a majority
vote of the limited partners where such vote is required.8
CPMLP sent to the Board of Advisors “summary materials” describing and
seeking approval for a proposed transaction between CPP and a new affiliate of
CPMLP.9 The proposed transaction involved a sale of substantially all of CPP’s
assets in return for shares of the new affiliate, and would therefore require not only
Board of Advisors approval, but also approval of a majority in interest of the
limited partners.10 Though CPMLP received Board of Advisors approval for the
proposed transaction, the transaction never took place; instead, without notice to
the Board of Advisors or approval of the limited partners, CPMLP, in July 2014,
caused the Partnership to “sell all of its assets to Princeton Capital,” a different
CPMLP affiliate, in return for shares of Princeton Capital’s publicly traded
common stock (the “Transaction”).11 As part of the Transaction, Princeton Capital
entered into an “Investment Advisor Agreement” with Princeton Advisors, another
8
Compl. ¶ 35.
9
Id. ¶ 42.
10
Id. ¶ 43.
11
Id. ¶¶ 44-46.
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CPMLP affiliate, in which Princeton Capital pre-approved any related-party
transactions.12 The Investment Advisor Agreement also provides for payment of
fees to Princeton Advisors for managing the assets that Plaintiffs allege were
improperly transferred to Princeton Capital.13 The Transaction resulted in an
increase in Princeton Capital’s assets from $1 million to over $50 million (the
“Disputed Assets”).14
At a special meeting on March 6, 2015, Jackson (CPMLP’s Chairman and
Managing Partner), Sood, Thomas Jones, Trennis Jones, and Tuchman were
elected directors of Princeton Capital (collectively, the “Board”).15 The Board
hired Canella, CPMLP’s Chief Financial Officer, as Princeton Capital’s CFO, and
Sood as Princeton Capital’s Chief Executive Officer.16 Though the Transaction
closed on March 13, 2015, the limited partners first learned of it on April 14
through a public news article.17 CPMLP directly disclosed the Transaction to the
12
Id. ¶ 46.
13
Id.
14
Id. ¶ 47.
15
Id. ¶ 48.
16
Id. ¶ 50.
17
Id. ¶ 51.
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C.A. No. 11483-VCN
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limited partners on May 14 in CPP’s “Quarterly Portfolio Review,” at which time
the limited partners sought additional information.18 In response to numerous
requests, the limited partners received only general information until July 30, when
Princeton Advisors circulated to the Board of Advisors an invitation to the 2015
Annual Meeting of Stockholders (the “Annual Meeting”).19 The Annual Meeting
was postponed from August 11 to September 10,20 and Plaintiffs filed the
Complaint on the morning of September 9, 2015. During a teleconference on
September 9, Defendants agreed to postpone the Annual Meeting,21 and on
October 26, the Court ruled on the parties proposed Status Quo Orders, allowing
for the payment of $243,394 in asset management fees from Princeton Capital to
18
Id. ¶¶ 52-53.
19
Id. ¶¶ 53-54. The Complaint further alleges that Princeton Capital’s certificate
of incorporation requires that any nominations or issues to be considered at the
Annual Meeting be proposed by July 23, and that therefore the July 30 notification
date “ensured that no Limited Partner action could affect any item to be voted on at
the Annual Meeting.” Id. ¶ 55.
20
Id. ¶ 56.
21
Telephonic Hr’g on Pls.’ Mot. for Status Quo Order and Rulings of the Ct. 4, 7-8
(Sept. 9, 2015) (TRANSCRIPT); Letter from Martin S. Lessner, Esquire
Regarding Entry of a Scheduling Order and Status Quo Order 7 (Oct. 29, 2015)
(“Lessner Letter”).
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C.A. No. 11483-VCN
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Princeton Advisors for the third quarter of 2015, and $100,000 per quarter
thereafter (the “Management Fees”).22
II. CONTENTIONS
Defendants seek implementation of a status quo order permitting Princeton
Capital to disburse funds for two distinct purposes, neither of which the parties
addressed during the October 26 teleconference: (1) for payment of
“Administration Fees” from Princeton Capital to PCC Administrator, LLC (“PCC
Administrator”), which is a wholly owned subsidiary of Princeton Advisors, and
(2) for payment of legal fees to defend itself in this action.23 Plaintiffs seek
implementation of a status quo order preventing these additional disbursements,
alleging that they unnecessarily reduce the value of the Disputed Assets.24
22
Teleconference Regarding Competing Proposed Scheduling Orders 32 (Oct. 26,
2015) (TRANSCRIPT) (“Tr. of Oct. 26 Teleconference”).
23
Letter from Bradley R. Aronstam, Esquire Regarding Pls.’ Mot. for a Status Quo
Order and Enclosing Defs.’ Proposed Status Quo Order 2-3 (Oct. 29, 2015)
(“Aronstam Letter”).
24
Lessner Letter 4-6.
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C.A. No. 11483-VCN
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III. ANALYSIS
A. Status Quo Orders Generally
Courts generally implement status quo orders, as opposed to preliminary
injunctions, to maintain stability during contests for corporate office pursuant to 8
Del. C. § 225.25 While the parties here contest control of assets as opposed to
control of a company, the same rationales apply, namely, that an injunction
removing and replacing incumbent directors would be “both drastic and
impractical,” and may result in “disruptive changes in corporate administration.”26
Though status quo orders are generally the more appropriate interim remedy in the
context of a control challenge, the two are similar to the extent “that the purpose of
a preliminary injunction is to preserve the status quo.”27
25
See Donald J. Wolfe, Jr. & Michael A. Pittenger, Corporate and Commercial
Practice in the Delaware Court of Chancery, § 8.08[f] (2014).
26
Id. (citing Kumar v. Racing Corp. of Am., Inc., 1991 WL 67083, at *9 (Del. Ch.
Apr. 26, 1991)).
27
R & R Capital LLC v. Merritt, 2013 WL 1008593, at *8 n.74 (Del. Ch. Mar. 15,
2013), aff’d, 69 A.3d 371 (Del. 2013); accord Pharmalytica Servs., LLC v. Agno
Pharms., LLC, 2008 WL 2721742, at 3 n.6 (Del. Ch. July 9, 2008) (“The
appropriateness of entering a status quo order is based on considerations similar to
those consulted in determining whether other forms of interlocutory injunctive
relief are appropriate.”); Gimbel v. Signal Cos., Inc., 316 A.2d 599, 602 (Del. Ch.)
Capital Link Fund I, LLC v. Capital Point Management, LP
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B. Administration Fees
The Management Fees are paid from Princeton Capital to Princeton
Advisors as compensation for managing the Disputed Assets.28 The
Administration Fees, however, are quarterly reimbursements of “approximately
$100,000” paid from Princeton Capital to PCC Administrator for “expenses
incurred in connection with . . . financial reporting, compliance, investor relations,
the preparation of public filings, and governance matters.”29 While such fees are
not paid directly to portfolio companies, they are paid to PCC Administrator
employees, other than Jackson (though including Canella), for the preparation of
documents necessary to comply with the United States Securities and Exchange
Commission’s and the Internal Revenue Service’s periodic reporting
(“The preliminary injunction constitutes extraordinary relief generally employed to
do no more than preserve the status quo pending the decision of the cause at the
final hearing on proofs taken.” (internal quotation marks omitted)), aff’d, 316 A.2d
619 (Del. 1974).
28
Teleconference Regarding Competing Proposed Scheduling Orders 13 (Nov. 9,
2015) (TRANSCRIPT) (“Tr. of Nov. 9 Teleconference”); Tr. of Oct. 26
Teleconference 10-11.
29
Aronstam Letter 2.
Capital Link Fund I, LLC v. Capital Point Management, LP
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requirements.30 Therefore, such payments are necessary for the maintenance of the
assets currently controlled by Princeton Capital.
Further, while Plaintiffs initially opposed any payment other than those
“necessary to pay directly to the portfolio companies,” including payments to
employees of Princeton Capital or its affiliates,31 they later indicated a willingness
to allow payments to Princeton Capital employees “specifically for maintaining the
assets.”32 Therefore, because the Administration Fees are necessary to maintain
the assets in Princeton Capital’s control, the Court approves payment of quarterly
Administration Fees to PCC Administrator of $100,000, subject to a “true-up at the
end of the quarter in the event that the projected fees are [greater or] less than what
was required.”33
30
Tr. of Nov. 9 Teleconference 14, 25.
31
Tr. of Oct. 26 Teleconference 8-9.
32
Id. at 15.
33
Tr. of Nov. 9 Teleconference 15-16. Plaintiffs also seek to prevent Princeton
Capital from paying its independent director fees, arguing that such directors have
not performed any compensable actions. Id. at 11. While Defendants do not
dispute this specific contention, they argue, and the Court agrees, that it is
inappropriate at this stage to implement a blanket restriction preventing all
payment to independent directors (especially where such directors should further
Plaintiffs’ interests by ensuring proper management of the Disputed Assets). Id.
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C. Legal Fees
Defendants seek to use Princeton Capital assets to defend themselves in this
action.34 They argue that Princeton Capital is entitled to defend itself with its own
assets and that Jackson and Canella are entitled to advancement and
indemnification pursuant to Princeton Capital’s bylaws.35 Plaintiffs cite
Technicorp International II, Inc. v. Johnston36 to support their position. The
Technicorp court rejected the plaintiffs’ argument that the company was a nominal
defendant and the real parties in interest were the company’s controllers, and that
therefore the company’s payment of the controllers’ legal fees was improper.37
The court held that “the corporation customarily pays the legal costs of opposing
the § 220 or § 225 claim, even though the opposition often serves the interests (or
at 18. Defendants, therefore, may continue to make distributions to the
independent directors from the Disputed Assets to the extent such fees reasonably
accrue.
34
Aronstam Letter 2.
35
Tr. of Nov. 9 Teleconference 16-17.
36
2000 WL 713750 (Del. Ch. May 31, 2000).
37
Id. at *43.
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the position being taken) by the incumbent management,”38 though it ultimately
rejected the controllers’ fee request on other grounds.39
This case, however, presents issues not considered in Technicorp. Most
significantly, the corporation in Technicorp was a manufacturing company
consisting of assets independent from the allegedly improper transactions.40 Here,
however, as Plaintiffs argue, the bylaws containing mandatory advancement and
indemnification provisions govern a company that Defendants themselves created
and capitalized solely by means of the disputed transaction.41 In fact, Princeton
Capital held only $1 million in assets before the contested Transaction.42 The
Court is unwilling to sanction Defendants’ use of the Disputed Assets to pay its
legal costs in defense of the transaction resulting in the dispute. The fact that the
Disputed Assets are now controlled by an entity contractually obligated to
indemnify Defendants does not change the outcome, especially where such assets
38
Id.
39
Id. at *43-44.
40
Id. at *2.
41
Tr. of Nov. 9 Teleconference 24.
42
Compl. ¶ 47.
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constitute substantially all of the entity’s assets and Defendants seemingly used the
entity solely to effectuate the disputed transaction.43
IV. CONCLUSION
For the reasons above, the Court approves Defendants’ request to pay
quarterly Administration Fees of $100,000 subject to an end-of-quarter adjustment
and independent director fees, and rejects Defendants’ request to pay their legal
fees with the Disputed Assets. Counsel are requested to confer regarding the form
of an implementing status quo order.
Very truly yours,
/s/ John W. Noble
JWN/cap
cc: Register in Chancery-K
43
Id. ¶ 50.