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The United States District Court for the District of Minnesota decided a case where Plaintiff was a limited partner in an entity where the partnership interests were the subject of a Purchase Agreement entered into by the Defendants that controlled the limited partnership.  Plaintiff alleged that Defendants breached the Partnership Agreement by failing to honor Plaintiff’s Tag-Along Rights and also breached an implied duty of good faith and fair dealing by structuring the Purchase Agreement “in a wrongful effort to circumvent” its Tag-Along Rights.  Plaintiff sought a declaratory judgment, injunctive relief, and monetary damages “believed to total at least $300,000,000.00.”  Relevant portions of the cases were reviewed by the Court on a motion to dismiss. The limited partnership agreement was governed by Minnesota law.

The acquisition agreement was structured  to allow the Buyer to acquire partnership interests in a series of “Tranches,” and the Buyer was required to exercise them, if at all, in a specific order. The First Tranche consisted of a 20% ownership share in limited-partnership interests, to be purchased from one of the Defendant Sellers at a June 30 closing.  In the Second Tranche, the Buyer would acquire all general-partnership interests as well as a nearly-32% ownership share in limited-partnership interests. Those limited-partnership interests would include all the interests of all the non-Defendant Limited Partners, including the interest of Plaintiff. Finally, in the Third Tranche, the Buyer would acquire the remaining 20% in limited-partnership interests from Defendants.

The Buyer was also not required to exercise all of the Call Options—or any of them. If the Buyer failed to exercise any Call Option prior to the specified expiration date for the respective Tranche, all subsequent Call Options would immediately terminate and thereafter be null and void.

The Plaintiff believed that the Purchase Agreement, as a whole, set out a “series of related transactions” that constituted a Control Sale under the Partnership Agreement, thereby triggering its Tag Along Rights for the first June 30 closing.  Defendants responded that a Control Sale would only occur if the Buyer exercised the Call Option for the Second Tranche, since that is the only Tranche that would involve the acquisition of a majority of the general-partnership interests. And because the exercise of the Second Tranche Call Option would obligate defendants to exercise drag rights, Plaintiff’s  Tag-Along Rights would never come into play.

The Partnership Agreement provided that a Control Sale was a “sale, exchange, or other disposition . . . , in a single transaction or series of related transactions, . . . of Partnership Interests which includes a majority of all the General Partnership Interests[.]”  However, the Buyer would not purchase—and Defendants would not relinquish—any general-partnership interests at the June 30 closing. But Defendants were required to grant the Buyer an option to acquire all of the general-partnership interests at a later date. That raised the question whether the grant of an option to acquire partnership interests is a “sale, exchange, or other disposition” of those interests. Neither Party has cited Minnesota authority addressing this precise question.

The Court noted the ordinary meaning of all three words—”sale,” “exchange,” and “disposition”—presupposed a transfer or conveyance of something. Plaintiff disagreed and argued that “disposition” means something broader than “sale” and “exchange.” The Court resolved the issue by noting that when a catchall term like “other disposition” follows a series of specific words, the “[g]eneral words are construed to be restricted in their meaning by [the] preceding particular words.”  Accordingly, under the Partnership Agreement, a Control Sale only occurs when there is an actual transfer of “Partnership Interests which includes a majority of all the General Partnership Interests.” And a “Partnership Interest” consists of “the entire ownership interest of a Partner in the Partnership at any particular time[.]”

With that understanding, the Court held the June 30 grant of an option to acquire general-partnership interests did not fit the bill and the Tag-Along rights were not triggered. When Defendants extend the Buyer an option on June 30 to acquire general-partnership interests, there will be no agreement for the transfer of those interests. No transfer—and thus no Control Sale—would occur unless and until the Buyer exercised the Second Tranche Option and a closing occured sixty to ninety days after that.

Plaintiff also argued Defendants violated their duty to act in good faith under the Partnership Agreement by structuring the Purchase Agreement to hinder Plaintiff’s ability to exercise its Tag-Along Rights.  The Court stated under Minnesota law, every contract includes an implied covenant of good faith and fair dealing requiring that one party not ‘unjustifiably hinder’ the other party’s performance of the contract.  The duty governs the parties’ performance and prohibits a party from failing to perform for the purpose of thwarting the other party’s rights under the contract

The Court stated Plaintiff did not plausibly alleged the type of bad-faith conduct that would violate the covenant of good faith and fair dealing. Nothing in the Partnership Agreement prohibited what Defendants had done. No provision stopped them from using options to structure a potential transaction or from selling some of their limited-partnership interests before entering into a Control Sale to sell their general-partnership interests.

Key to the Court’s analysis was none of the quintessential examples of bad-faith conduct were alleged by Plaintiff. Defendants had not wrongfully repudiated the Partnership Agreement, improperly extracted a waiver of rights from Plaintiff, or “fail[ed] to perform” any of their own obligations “for the purpose of thwarting” Plaintiff’s rights.  At most, Defendants had structured the deal such that a Control Sale would occur later than it may otherwise have occurred.

Finally, the Partnership Agreement did not seem to give Plaintiff the per se right to sell immediately at the outset of a Control Sale. The implication of Plaintif’s allegations was that the call-option arrangement was a sham and that the Buyer has already functionally agreed to purchase the entire Partnership in a series of related transactions. But if that were true, the Partnership Agreement would not seem to require that Plaintiff be allowed to sell all of its partnership interests before the general partner sold any of its own.

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