IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
MKE HOLDINGS LTD. and )
DAVID W. BERGEVIN, )
)
Plaintiffs, )
)
v. ) C.A. No. 2018-0729-SG
)
KEVIN SCHWARTZ, DAVID )
BUCKERIDGE, ANGELOS )
DASSIOS, DAVID BROWNE, )
ROBERT BERENDES, JEFFREY R. )
GROW, KENNETH AVERY, ADAM )
FLESS, ALEXANDER )
CORBACHO, and PAINE SCHWARTZ )
PARTNERS, LLC, )
)
Defendants, )
)
and )
)
VERDESIAN LIFE SCIENCES, LLC, )
)
Nominal Defendant. )
MEMORANDUM OPINION
Date Submitted: June 17, 2019
Date Decided: September 26, 2019
Thomas E. Hanson, Jr., of BARNES & THORNBURG LLP, Wilmington, Delaware,
Attorney for Plaintiffs.
Blake Rohrbacher, of RICHARDS, LAYTON & FINGER, P.A., Wilmington,
Delaware; OF COUNSEL: John F. Hartmann and Abdus Samad Pardesi, of
KIRKLAND & ELLIS LLP, Chicago, Illinois, Attorneys for Defendants and
Nominal Defendant.
GLASSCOCK, Vice Chancellor
This matter requires me to construe an LLC operating agreement. My father
was an engineer. He frequently remarked that machinery would not be so poorly
designed if the designer were condemned personally to keep it operating.1 I am a
lawyer. I am struck that LLC agreements would be better drafted if the drafters were
compelled to litigate over them, or worse, construe them as judges. In any event,
such is the task I must undertake here.2
This suit was brought derivatively by members of an LLC, Verdesian Life
Sciences, LLC (“Verdesian”), alleging breaches of duty by the managers under
Verdesian’s operating agreement. That agreement attempts to supplant common-
law fiduciary duties by imposing contractual duties, in a manner I found, at first read,
confusing and internally inconsistent. Before me is the Defendants’ Motion to
Dismiss. After harmonizing the provisions of the LLC agreement and applying
contractual duties to the facts alleged, I find the Defendants’ Motion must be granted.
The Plaintiffs also bring direct claims. Those claims will be addressed in a separate
opinion.
My reasoning is below.
1
“. . . with nothing but a screwdriver and a rusty pair of pliers.”
2
With nothing but an aging brain and a no. 2 pencil.
I. BACKGROUND
I draw the following facts from the Plaintiffs’ First Amended Verified
Complaint (the “First Amended Complaint”) and to a limited extent documents
incorporated therein.3 The allegations of the First Amended Complaint, as discussed
below, are assumed true for purposes of this Motion.
A. The Parties
Plaintiff MKE Holdings, Ltd. (“MKE”) is an Indiana corporation and a
Member of Nominal Defendant Verdesian.4 MKE holds 261,887 Class A Units of
Verdesian.5
Plaintiff David W. Bergevin6 founded Northwest Agricultural Products, LLC
in 1989.7 Bergevin sold Northwest Agricultural Products, LLC to Verdesian in
2013, and, as a result of the acquisition, became a Member of Verdesian.8 Bergevin
holds 365,471 Class A Units of Verdesian.9
3
The incorporated documents are the LLC operating agreement of Verdesian, a KPMG report on
a potential acquisition by Verdesian, and a presentation on the same acquisition provided to
members of Verdesian. I note that these documents, and others, were produced to Plaintiff MKE
Holdings, Ltd. by the Defendants pursuant to a books and records demand, production which was
made by agreement that the documents would be considered incorporated in any future litigation
between the parties. See Defs.’ Opening Br. in Support of Defs.’ Mot. to Dismiss Pls.’ First Am.
Compl., Ex. 2; see also June 17, 2019 Oral Arg. Tr. 112:17–113:2.
4
First Am. Compl. ¶ 12.
5
Id.
6
Bergevin is a resident of the State of Washington. Id. ¶ 13.
7
Id. ¶ 36.
8
Id.
9
Id. ¶ 13.
2
Nominal Defendant Verdesian is a Delaware limited liability company with a
principal place of business in Cary, North Carolina.10 It was formed by Defendant
Paine Schwartz Partners, LLC (“Paine”) in 2012.11 Verdesian develops, licenses,
manufactures, markets, and distribute fertilizers, pesticides, and related agricultural
products.12 It employs a business strategy focused on acquisition, targeting
“companies holding proprietary specialty plant health technologies.”13 Verdesian is
managed by an eight-member Board of Managers (the “Board of Managers,” or, the
“Board”), and each member of the Board is appointed by the “Paine Members,” a
group of entities defined in Verdesian’s LLC operating agreement, as described in
more detail below.14
Defendant Paine is a Delaware limited liability company with a principal
place of business in San Mateo, California.15 Paine was founded in 200616 and is a
successor entity to Fox Paine & Company (“Fox Paine”).17 Affiliates of Paine own
over seventy percent of the Class A Units of Verdesian.18 Paine also has a
10
Id. ¶ 24.
11
Id. ¶ 26.
12
Id.
13
Id.
14
Id. ¶ 29; see also Defs.’ Opening Br. in Support of Defs.’ Mot. to Dismiss Pls.’ First Am. Compl.,
Ex. 1, Second Amended and Restated Limited Liability Company Agreement of Verdesian Life
Sciences, LLC, dated June 20, 2014 [hereinafter Operating Agreement].
15
First Am. Compl. ¶ 23.
16
Id. ¶ 14.
17
Id.
18
Id. ¶ 27.
3
contractual relationship with Verdesian whereby Paine is paid management service
fees based on Verdesian’s financial performance, and paid transaction fees on certain
Verdesian acquisitions.19
Defendant Kevin Schwartz is the President, Chief Executive Officer (“CEO”),
and a Founding Partner of Paine.20 Schwartz has served as a Manager of Verdesian
since August 2012.21
Defendant David Buckeridge is a Partner at Paine, and previously was the
Operating Director of Fox Paine.22 Buckeridge has served as a Manager of
Verdesian since August 2012.23
Defendant Robert Berendes is the Operating Director of Paine.24 Berendes
has served as a Manager of Verdesian since August 2014.25 Berendes has worked
at, among other places, McKinsey & Company (“McKinsey”). He is also the
Chairman of the Board of Directors of Indigo Ag, Inc. (“Indigo), a potential
competitor to Verdesian.26
19
Id. ¶ 54.
20
Id. ¶ 14.
21
Id.
22
Id. ¶ 15.
23
Id.
24
Id. ¶ 16.
25
Id.
26
Id.
4
Defendant Jeffrey R. Grow is the Chairman of Verdesian and served as its
CEO from August 2012 to September 2016.27 Grow has served as a Manager of
Verdesian since August 2012.28
Defendant Kenneth Avery is the current CEO of Verdesian, replacing Grow
in September 2016.29 Avery has served as a Manager of Verdesian since September
2016.30
Defendant Adam Fless is the Managing Director of Paine.31 Fless has served
as a Manager of Verdesian since August 2017.32
Defendant Alexander Corbacho is a Principal of Paine.33 Corbacho has served
as a Manager of Verdesian since August 2017.34
Defendant Angelos Dassios is a Partner at Paine.35 Dassios served as a
Manager of Verdesian from 2012 to 2016, and continues to serve as a member of the
Board of Manager’s audit committee.36
27
Id. ¶ 17.
28
Id.
29
Id. ¶ 18.
30
Id.
31
Id. ¶ 19.
32
Id.
33
Id. ¶ 20.
34
Id.
35
Id. ¶ 21.
36
Id.
5
Defendant David Browne is a former Director of Paine, a position he left in
June 2017.37 Browne served as a Manager of Verdesian from 2012 to 2017, and
continues to serve as a member of the Board of Manager’s audit committee.38
B. Verdesian Life Sciences, LLC’s Operating Agreement
Verdesian was formed in August 2012 to sell agricultural products, such as
fertilizers and pesticides, the rights to which it planned to obtain through an
acquisition strategy targeting entities with proprietary technology.39 According to
Verdesian’s Operating Agreement (the “Operating Agreement”), the “full and
exclusive discretion” to “manage and control, have the authority to obligate and
bind, and make all decisions affecting the business and assets of [Verdesian]” was
vested in the Board of Managers.40 “Members” of Verdesian are listed in the
Operating Agreement, and include, among others, MKE and Bergevin.41
1. The Board of Managers of Verdesian
The Board of Managers—per the Operating Agreement—consists of up to
eight members (each individually a “Manager”, and collectively, the “Managers”)42
and the current Board has seven members.43 All Managers are appointed by the
37
Id. ¶ 22.
38
Id.
39
Id. ¶ 26.
40
Id. ¶ 29; Operating Agreement § 6.1.
41
Operating Agreement, Appendix B, “Member.”
42
First Am. Compl. ¶ 29; Operating Agreement § 6.2(a).
43
First Am. Compl. ¶ 29.
6
“Paine Members,”44 which is a defined term in the Operating Agreement meaning
“Paine & Partners Capital Fund III AIV III, L.P., Paine & Partners Capital Fund III
Co-Investors, L.P., Verdesian Co-Investment, L.P. and Verdesian Co-Investment
Blocker, Inc.”45 The Paine Members, all affiliates of Paine, own over seventy
percent of the Class A Units of Verdesian.46
According to the Operating Agreement, a “Manager shall perform his duties
as a manager in good faith, in a manner he reasonable believes to be in or not opposed
to the best interests of the Company, and with the care that an ordinarily prudent
person in a similar position would use under similar circumstances.”47 However,
this standard is explicitly subject to another subsection of the Operating Agreement,
whereby:
. . . whenever in this Agreement a Manager or Member is permitted or
required to make a decision (i) in its, his or her discretion or under a
grant of similar authority, such Manager or Member shall be entitled to
consider only such interests and factors as such Manager or Member
desires, including its, his or her own interests, and shall, to the fullest
extent permitted by applicable law, have no duty or obligation to give
any consideration to any interest of or factors affecting the Company or
any other Person, or (ii) in its his or her good faith or under another
44
Id.
45
Operating Agreement, Appendix B, “Paine Members.” The Operating Agreement technically
indicates that the Paine Members have the right to appoint six of the eight Managers; the remaining
two are appointed by the “Rollover Members,” unless the “Rollover Members” ownership drops
below fifteen percent, in which case, those two remaining Managers are appointed “by the
Members owning a majority of the outstanding Units.” Id. § 6.2(a).
46
First Am. Compl. ¶ 27.
47
Id. ¶ 30; Operating Agreement § 6.4(b).
7
express standard, such Manager or Member shall act under such express
standard and shall not be subject to any other or different standards.48
Additionally, the Members, by agreeing to the Operating Agreement, “acknowledge
that the Managers may or could have conflicts of interest to the extent that they are
requested or obliged to make decisions . . . with respect to . . . the rights of the
Members.”49 The Members “to the fullest extent permitted under the LLC Law . . .
waive any such conflicts of interest directly or indirectly associated with decisions,
and agree that each such Manager shall be entitled to make decisions and
determinations as Member or Manager in his, her or its self-interest.”50
Further according to the Operating Agreement, “to the extent that, at law or
in equity, a Manager . . . has duties, including fiduciary duties, and liabilities relating
thereto to the Company . . . such Person acting under this Agreement shall not be
liable to the Company . . . for its good faith reliance on the provisions of this
Agreement . . . .”51 Furthermore, “[n]otwithstanding anything contained in this
Agreement to the contrary, to the fullest extent permitted under the LLC Law, the
Members of Verdesian hereby waive any fiduciary duty of the Managers, so long as
such Person acts in a manner consistent with [the Operating Agreement].”52
48
Operating Agreement § 6.4(e).
49
Id. § 6.9(b).
50
Id.
51
Id. § 6.9(a).
52
Id. § 6.9(b).
8
The Operating Agreement also provides that Managers, as “Covered
Person[s],” are not liable “to the Company . . . for any loss, damage or claim incurred
by reason of any act or omission performed or omitted by such Covered Person in
good faith on behalf of the Company and in a manner reasonably believed to be
within the scope of the authority conferred on such Covered Person by this
Agreement.”53 Managers, specifically, are also not liable “to the Company or to any
Member for any actions taken in good faith and reasonably believed to be in or not
opposed to the best interests of the Company, or for errors of judgment, neglect or
omission.”54
The Managers are charged with managing “the affairs of [Verdesian].”55
Under the Operating Agreement, Verdesian will “[c]ause to be prepared and
distributed to each Member holding Class A, Class A-1 or Class A-2 Units audited
annual financial statements within ninety (90) days after the end of each fiscal year
or as soon thereafter as is reasonably practicable and monthly unaudited financial
statements within forty-five (45) days after the end of each month.”56
53
Id. § 6.7(b).
54
Id. § 6.4(d).
55
Id. § 6.4(a).
56
First Am. Compl. ¶ 31; see also Operating Agreement § 7.2(e).
9
C. MKE and Bergevin Become Members of Verdesian
After its formation in August 2012, Verdesian made its first acquisitions
between September 2012 and April 2013.57 Verdesian acquired Biagro Western
Sales, Inc. (“Biagro”),58 Northwest Agricultural Products, LLC (“NAP”),59 and Plant
Syence Ltd. (“Plant Syence”).60 NAP was founded by Plaintiff Bergevin in 1989.61
Verdesian acquired NAP from Bergevin in February 2013 for $34 million.62
Bergevin invested $7 million of the proceeds of his sale of NAP back into
Verdesian.63 Bergevin received 278,441 Class A Units and became a Member of
Verdesian.64 Bergevin also became a guest of the Board of Managers.65
Verdesian later acquired INTX Microbials, LLC (“INTX”),66 which was
formed in 2002, from Plaintiff MKE in a two-part transaction, one part in September
2013, and the second part in January 2014.67 Verdesian acquired INTX from MKE
57
First Am. Compl. ¶ 34.
58
“Biagro . . . manufactured and sold phosphite plant nutrition and fertilizer products, including
Nutri-Grow and Nutri-Phite.” Id. ¶ 35.
59
“NAP . . . offer[ed] specialty agricultural products, including Sterics, which enhance the
absorption of phosphorous, and PolyAmines, an amino acid that delivers essential micronutrients.”
Id. ¶ 36.
60
Id. ¶ 34. “[Plant] Syence . . . was a supplier of plant nutritional solutions to the agriculture and
horticulture markets.” Id. ¶ 35.
61
Id. ¶ 36.
62
Id.
63
Id.
64
Id.
65
Id.
66
“INTX . . . manufactured biological products for agricultural crop production. Among other
products, INTX offered legume seed inoculants, biological growth promoters and adjuvants for
agriculturally applied pesticides.” Id. ¶ 37.
67
Id. ¶¶ 37–38.
10
for $32 million.68 MKE invested $5 million of the proceeds of its sale of INTX back
into Verdesian.69 MKE received 198,887 Class A Units and became a Member of
Verdesian.70 MKE’s principal also became a guest of the Board of Managers.71
Verdesian’s revenue for 2013 was $53 million and it had an Adjusted
EBITDA in 2013 of $14.5 million.72 Paine received management fees from
Verdesian of $196,630 in 2013.73 Paine also received, in 2012 and 2013, a combined
$3.7 million in transaction fees related to Verdesian’s acquisition of Biagro, NAP,
Plant Syence, and INTX.74
D. Verdesian’s Acquisition of Specialty Fertilizer Products, LLC
During a May 15, 2014 meeting of the Board of Managers, Verdesian’s
management announced it had executed a purchase agreement to acquire Specialty
Fertilizer Products, LLP (“SFP”) for $313.5 million.75 SFP’s revenue for 2013 was
$68.1 million and it had an Adjusted EBITDA of $26.6 million.76
68
Id. ¶ 37.
69
Id. ¶ 38.
70
Id. Verdesian first purchased sixty-five percent of INTX in September 2013, and at that time
MKE reinvested $3 million into Verdesian. Id. Verdesian purchased the remaining thirty-five
percent of INTX in January 2014, at which time MKE reinvested $2 million into Verdesian. Id.
71
Id.
72
Id. ¶ 40.
73
Id. ¶ 54.
74
Id.
75
Id. ¶¶ 43, 52. “SFP was a wholesaler of plant health products and fertilizers to retailers in the
Midwest.” Id. ¶ 43.
76
Id. ¶ 43.
11
1. Concerns Related to the Specialty Fertilizer Products, LLC
Acquisition
On April 10, 2014, as part of the SFP acquisition, KPMG prepared a due
diligence report for Verdesian.77 KPMG’s report (the “KPMG Report”) noted that
year-to-date sales for SFP in March 2014 were fifteen percent lower than for the
same period the previous year.78 The KPMG Report also detailed SFP’s introduction
“in the second half of [fiscal year] 2013” of a “bulk and early fill sales program.”79
Prior to this program, SFP’s “sales season peaked in spring during the planting
season.”80 The bulk and early fill sales programs “incentiviz[ed] dealers with
discounts” in order “to increase dealer demand, accelerate business growth, enhance
operational capacity and allow access to a high volume market.”81 According to
KPMG, the 2013 “programs were successful and, as a result, sales peaked a second
time in FY 13 during Q3 and Q4.”82 In other words, SFP’s 2013 sales results
included two sales peaks.83 KPMG noted that there was “a risk [that] this double
sales peak will not recur next year,” as the bulk and early fill programs had
77
Id. ¶ 46.
78
Id.
79
Id. ¶ 47.
80
Id.
81
Id.
82
Id.
83
Id.
12
accelerated sales from the first quarter of 2014 into the fall of 2013.84 As a result,
KPMG wrote, “FY 13 includes a onetime benefit due to the business shift.”85
United Suppliers, Inc. (“United Suppliers”), one of SFP’s primary retail
customers, also provided commentary on SFP.86 United Suppliers warned Verdesian
that SFP had presold a significant amount of product in 2013, and would therefore
be unable to achieve the same level of sales in the future.87 In other words, United
Suppliers represented to Verdesian’s Managers that SFP had “stuff[ed] the
channel.”88 United Suppliers did, however, expect its order with SFP to increase
year-over-year.89
2. Verdesian Proceeds with the Specialty Fertilizer Products, LLC
Acquisition
With knowledge of the KPMG Report and the communications with United
Suppliers, Verdesian’s Managers decided to acquire SFP.90 Verdesian funded the
$313.5 million acquisition of SFP through $200 million in third-party debt financing
and $160 million in new equity financing.91 On June 1, 2014, as part of the new
equity financing, Verdesian issued a “Notice of Preemptive Rights” and offered its
84
Id.
85
Id.
86
Id. ¶ 49.
87
Id.
88
Id. ¶ 49–50.
89
Defs.’ Opening Br. in Support of Defs.’ Mot. to Dismiss Pls.’ First Am. Compl., Ex. 4, Report
from KPMG titled ‘Project Fertilizer,’ dated April 10, 2014, at 9.
90
First Am. Compl. ¶ 51.
91
Id. ¶¶ 52, 103.
13
existing unitholders the opportunity to purchase additional Class A Units at a price
of $47.11.92 In soliciting this new equity financing from Verdesian’s Members, the
Managers did not specifically disclose the findings of the KPMG Report or the
communications with United Suppliers.93 Instead, the Managers indicated that
SFP’s 2013 earnings were a reliable indicator of its future performance.94 The
Managers also sent to the Members a presentation on the SFP acquisition, prepared
for the rating agencies, which indicated that “SFP underperformance y-o-y driven in
part by transition of portion of business from spring planting season to autumn as
part of an Early Fill program. Expect meaningful uptick in summer and fall
months.”95 The Managers also represented to the Members that Verdesian, with
SFP, would have an enterprise value of $514 million.96
In connection with the new equity financing, MKE contributed $3 million and
Bergevin contributed $4.1 million.97 The SFP acquisition closed on July 1, 2014.98
Paine, by contract, receives a management service fee based on Verdesian’s
financial performance and transaction fees on certain Verdesian acquisitions.99
92
Id. ¶ 103.
93
Id. ¶ 52.
94
Id. ¶ 104.
95
Defs.’ Opening Br. in Support of Defs.’ Mot. to Dismiss Pls.’ First Am. Compl., Ex. 7, Verdesian
Life Sciences LLC Ratings Agency Presentation, dated May 2014, at 48.
96
First Am. Compl. ¶ 104.
97
Id. ¶ 52.
98
Id. ¶ 51.
99
Id. ¶¶ 28, 54.
14
Accordingly, Paine received a transaction fee of $6 million for Verdesian’s
acquisition of SFP.100 In 2014, Verdesian’s Adjusted EBITDA (including SFP) was
$45.3 million.101 In 2014 and 2015, following the acquisition of SFP, Paine received
management service fees of $1,145,053 and $1,205,798, respectively.102 In 2013,
Paine had received a management service fee of less than $200,000.103
E. Verdesian Acquires QC Corporation
On September 30, 2014, Verdesian acquired QC Corporation (“QC”) from
Paine.104 Paine had previously acquired QC and managed it separately from
Verdesian.105 QC had environmental liabilities (mostly related to neighboring
properties and employees) as well as other liabilities, which are now borne by
Verdesian.106 As of August 31, 2017, QC holds an intercompany loan receivable of
$18 million.107
F. The Management of Verdesian
1. The Officers
Defendant Grow, who served as Verdesian’s CEO from August 2012 to
September 2016, received bonus compensation from 2014 to 2016 totaling more
100
Id. ¶ 54.
101
Id. ¶ 152.
102
Id. ¶ 54.
103
Id.
104
Id. ¶ 58.
105
Id.
106
Id. ¶ 59.
107
Id.
15
than $1 million and received option grants of 228,055 Class M-1 Units and 97,968
Class M-2 Units.108
Defendant Avery, who took over as Verdesian’s CEO in 2016, received
65,000 Class M-1 Units in 2016.109 Avery’s hire as CEO, to replace Grow, was
made with little Board deliberation.110 Directly before becoming Verdesian’s CEO,
Avery worked for Monsanto Company, and previously worked for Delta and Pine
Land Company, Eagle Materials, and Arthur Anderson.111 Avery had previously
been suspended from practicing before the Securities and Exchange Commission.112
In 2013, the Managers hired as Verdesian’s Chief Financial Officer (“CFO”)
non-party Frank Pirozzi (“Pirozzi”), who had no prior experience as a CFO or with
mergers and acquisitions.113
2. Operating Performance in 2016 and 2017
In August 2016, Verdesian performed an “Operational Expenses
Assessment,” which recommended a reduction in workforce and changes in
Verdesian’s management structure.114 The Assessment also noted that “Verdesian’s
total cost (salary, bonus, T&E) for corporate services and sales force are high for
108
Id. ¶ 55.
109
Id.
110
Id. ¶ 66.
111
Id. ¶ 18.
112
Id. ¶ 66.
113
Id. ¶¶ 63, 65.
114
Id. ¶ 68.
16
this size company in this space.”115 Since Avery has taken over as CEO, and under
the Managers’ control, Verdesian has continued to engage in advance sales of
products at discounted prices, has changed financial reporting practices (related to
finished goods inventory and accrual for product returns), and has consistently paid
bills late.116
Verdesian’s year-to-date EBITDA in August 2016 was $15.3 million.117 Its
EBITDA for the same period in August 2017 had dropped to $6.92 million.118 Even
as Verdesian’s operating performance has declined, as measured by Adjusted
EBITDA or EBITDA, the Managers of Verdesian have spent liberally on corporate
perks, corporate meetings, and corporate retreats.119
On June 28, 2017, Moody’s downgraded Verdesian’s credit ratings and
indicated a negative ratings outlook.120 S&P Global Ratings would also later lower
its credit rating for Verdesian on January 9, 2019.121
In 2018, Verdesian hired McKinsey to develop initiatives to drive sales and
reduce costs.122 McKinsey was paid over $900,000 for its work, and the initiatives
115
Id. ¶ 68 (internal quotations omitted).
116
Id. ¶ 70.
117
Id. ¶ 69.
118
Id.
119
Id. ¶¶ 72–73.
120
Id. ¶ 74.
121
Id. ¶ 87.
122
Id. ¶ 86
17
it developed purported to provide the opportunity for a $6 million increase in 2018
revenue.123 Verdesian derived no material benefit from McKinsey’s initiatives.124
G. Verdesian’s Class P Offering
MKE received its K-1 for 2016 for Verdesian in May 2017, and afterwards
inquired to the Managers about the loss in value of its interest in Verdesian due to
Verdesian’s poor performance.125 Instead of addressing Verdesian’s performance,
the Managers responded that Verdesian was being positioned for a sale.126 The
Managers represented that a sale was being targeted for the fourth quarter of 2018
or the first quarter of 2019, and that Class A unitholders would be able to recoup
their investments in such a sale.127 Verdesian’s Adjusted EBITDA for 2017 was
$30.2 million.128
On August 20, 2018, Verdesian issued an Offering Notice to its Members,
notifying them of its intent to issue a new class of preferred units, Class P Units.129
Each Class P Unit would be offered at $44.30 per unit.130 At that price, Verdesian
was valued at a six percent loss relative to its value after acquiring SFP in July
123
Id.
124
Id.
125
Id. ¶ 75.
126
Id. ¶ 76.
127
Id.
128
Id. ¶ 152.
129
Id. ¶ 79.
130
Id. ¶ 80.
18
2014.131 During the intervening time, Verdesian’s EBITDA had decreased by thirty-
three percent.132 The new Class P Units also had a distribution preference: in the
event of a sale, Class P unitholders would receive double the Class P Unit price.133
Class P Units’ preference would supersede Class A Units’ first priority in the event
of a distribution from a liquidity event.134 Verdesian’s management was also
allowed to participate in the Class P offering.135
On September 13, 2018, MKE and Bergevin sent a letter to Verdesian asking
it to retract the offering of Class P Units.136 Verdesian responded by letter on
September 14, 2018.137 Verdesian refused to retract the offering and indicated that
it believed the offering to be fair because Class A unitholders could participate.138
In separate communications with MKE, Verdesian indicated that it could find a
buyer for MKE’s Class A Units at price not to exceed $30.55.139
Verdesian closed the Class P offering on November 30, 2018.140 Prior to the
Offering, Paine Members and Buckeridge together held eighty-five percent of
131
Id. ¶ 81.
132
Id. ¶ 80.
133
Id. ¶ 81.
134
Id. ¶ 92.
135
Id. ¶ 83.
136
Id. ¶ 88.
137
Id.
138
Id.
139
Id.
140
Id. ¶ 90.
19
Verdesian’s Class A Units.141 Paine Members purchased 397,165 Class P Units,
Verdesian’s management (Grow and Avery) purchased 11,396 Class P Units, and
Buckeridge, indirectly, purchased 5,201 Class P Units.142 None of the minority
Class A unitholders (that is, the non-Paine-related Class A unitholders) participated
in the Class P offering.143 Given the Class P Units’ preference in the event of a sale,
Verdesian would have to be sold for $560 million in order for all Class A unitholders
to receive proceeds sufficient to fully return their investment.144
H. MKE’s Books and Record Demand
MKE made a books and record demand on Verdesian on October 12, 2017.145
Verdesian made productions to MKE on November 28, 2017, December 5, 2017,
December 7, 2017, and December 22, 2017.146 These productions included audited
financial statements, which had never been provided to MKE (or Bergevin) despite
being required by the Operating Agreement.147 Following the productions,
Verdesian continued to fail to provide MKE and Bergevin with audited financial
statements going forward; the audited financial statements for 2017 were due to
them, per the Operating Agreement, on April 1, 2018.148
141
Id. ¶ 91.
142
Id. ¶ 90.
143
Id.
144
Id. ¶ 92.
145
Id. ¶ 45.
146
Id. ¶¶ 112–115.
147
Id. ¶ 31.
148
Id.
20
I. Procedural History
MKE and Bergevin filed a Complaint on October 9, 2018. They then filed
the First Amended Complaint on January 14, 2019.149 The Defendants filed a
Motion to Dismiss the First Amended Complaint on March 1, 2019. I heard Oral
Argument on the Motion to Dismiss on June 17, 2019, and considered the Motion
submitted for decision on that date.
II. ANALYSIS
The Plaintiffs bring four counts against the Defendants: breach of contract
(the Operating Agreement), breach of fiduciary duty, fraud, and aiding and abetting.
The Plaintiffs have brought the breach of Operating Agreement and breach of
fiduciary duty counts (at least in part) derivatively. The Defendants have moved to
dismiss the derivative claims under Court of Chancery Rule 23.1, the fraud claim
under Rule 9(b), and all claims under Rule 12(b)(6). The Defendants further argue
that many, if not all, of the Plaintiffs’ claims are time barred. I analyze the derivative
claims below.
A. Derivative Claims
The Plaintiffs’ derivative claims arise from the SFP acquisition, the QC
acquisition, management of Verdesian after those acquisitions (specifically: advance
149
The Defendants had previously moved to dismiss the initial Complaint on November 16, 2018.
D.I. 10.
21
sale of products in 2018 and 2019, changes in accrual practices, overspending on
corporate perks, the hiring of certain executives, and changes in financial accounting
practices of inventory), and Verdesian’s maintenance of the fee agreement with
Paine.150 The Defendants argue that the derivative claims should be dismissed
because the Plaintiffs failed to make a demand on the Board when, per the
Defendants, it was not futile to do so. The Defendants further contend that many of
the derivative claims are stale. The Defendants also argue that all of the derivative
claims should be dismissed for failure to state a claim because the complained of
actions by the Managers do not violate the Operating Agreement. I find this last
argument compelling and accordingly dismiss all the derivate claims brought by the
Plaintiffs under Rule 12(b)(6).
1. Assumption of Demand Futility
The Defendants have moved to dismiss the Plaintiffs’ derivative claims, in
part, because the Plaintiffs failed to first make a demand upon the Board of Managers
as required by Court of Chancery Rule 23.1.151 The Plaintiffs pled in their First
Amended Complaint that such demand would have been futile.152 Here five of the
150
Pls.’ Answering Br. in Opp’n to Defs.’ Mot. to Dismiss Pls.’ First Am. Compl., at 24–25, 51–
52. To the extent that the Plaintiffs include the Defendants’ failure to provide audited financial
statements among their derivative claims, I disagree; such a claim is direct, not derivative. See
generally Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1035 (Del. 2004) (stating
standard). Accordingly, I reserve decision consistent with my treatment of direct claims in this
Memorandum Opinion.
151
Ct. Ch. R. 23.1.
152
6 Del. C. § 18-1003.
22
seven current Managers are either directors or executives of Paine; two former
Managers of Verdesian are or were directors or executives of Paine. Paine’s indirect
majority ownership of, and contractual fee-generating relationship with, Verdesian
are central to the Plaintiffs’ derivative claims. The Defendants argue that the
Managers involved in the transactions and activity questioned by the Plaintiffs do
not face a substantial likelihood of liability and are therefore capable of being
impartial. As a result, per the Defendants, the other Managers affiliated with Paine
who have since joined the Board can likewise be impartial, despite their business
and personal connections to other Paine-affiliated Managers. I need not decide the
question of demand futility because the Plaintiffs have not, as explained below, met
the comparatively lower standard for failure to state a claim.153
2. The Plaintiffs Have Failed to State Derivative Claims for Which
Relief Can be Granted
In considering a motion to dismiss under Chancery Court Rule 12(b)(6), I
assume as true all well-pled allegations of fact in the complaint, and likewise accept
153
See In re Tyson Foods, Inc., 919 A.2d 563, 582 (Del. Ch. 2007) (“[Reviews of motions under
Rule 12(b)(6), as opposed to 23.1,] differ, however, in the level of detail demanded of the
plaintiffs’ allegations and the directors at whom the inquiry is directed. In the context of a motion
to dismiss under Rule 23.1, the Court considers the directors in office at the time a plaintiff brings
a complaint, and plaintiffs may not rely upon the notice pleading standards of Rule 8(a). In the
context of a motion to dismiss for failure to state a claim, on the other hand, the directors relevant
to the Court’s decision will usually be those in office at the time the challenged decision was made,
and the standard, while perhaps more rigorous in derivative cases than in some others, does not
reach so high a bar as Rule 23.1. In both cases this Court must make all inferences in favor of
plaintiffs, but in the Rule 23.1 context such inferences may only be drawn from particularized
facts, while in the former case I may draw from general, if not conclusory, allegations.”).
23
as true all inferences that can be reasonably drawn in favor of the Plaintiffs from
those well-pled allegations of fact.154
a. The Verdesian Operating Agreement Imposes a Good Faith
Standard
A contractual duty (if any) created by an LLC operating agreement is a matter
of contract interpretation and therefore appropriate for review on a motion to
dismiss.155 The Operating Agreement here eschews common-law duties, and
imposes contractual duties in their stead. I find that the sole duty imposed on
Managers by the Operating Agreement is good faith.
Verdesian was formed as a Delaware limited liability company and, therefore,
pursuant to Delaware law its operating or governing agreement may eliminate the
fiduciary duties its managers would otherwise owe.156 The Operating Agreement
contains such a provision, which waives “any fiduciary duty of the Managers, so
long as such Person acts in a manner consistent with [the Operating Agreement].”157
In the place of common law fiduciary duties, the Operating Agreement imposes
contractual duties on the Managers.
154
E.g. Himawan v. Cephalon, Inc., 2018 WL 6822708, at *2 (Del. Ch. Dec. 28, 2018).
155
See Allied Capital Corp. v. GC-Sun Holdings, L.P., 910 A.2d 1020, 1030 (Del. Ch. 2006)
(“[T]he proper interpretation of language in a contract is a question of law. Accordingly, a motion
to dismiss is a proper framework for determining the meaning of contract language.”).
156
6 Del. C. § 18-1101(c).
157
Operating Agreement § 6.9(b).
24
The Operating Agreement first states the standards that govern each Manager,
who must act in “good faith, in a manner he reasonably believes to be in or not
opposed to the best interests of the Company, and with the care that an ordinarily
prudent person in a similar position would use under similar circumstances.”158 This
tripartite standard, in its first part, imposes a subjective duty not to act in ways
inimical to the entity, that is, “good faith.” The second requirement provides that
the Manager must act “in a manner he reasonably believes to be in or not opposed
to the best interests of” Verdesian. This appears to contain good faith within the
hedge of reason; that is, Managers must act in objective good faith. Finally, the
Manager must employ the “care that an ordinarily prudent person in a similar
position would use under similar circumstances.” This is a simple negligence
standard, which is a higher standard than the common law imposes on a corporate
fiduciary. What is the purpose of this unusual recitation of disparate duties, in light
of the rejection of common-law duties, and in terms of the contractual standard of
review I must apply to managerial actions? Reading the Operating Agreement as a
whole, as I must, it becomes clear that the ordinary prudence standard is aspirational;
the balance of the Operating Agreement makes manifest that the Managers are only
liable for action taken in bad faith.
158
Id. § 6.4(b).
25
The Operating Agreement provides that Managers are explicitly expected and
permitted to make conflicted decisions159 and that the Members “waive any such
conflicts of interest.160 The Operating Agreement then eschews liability for a
Manager’s action “taken in good faith and reasonably believed to be in or not
opposed to the best interests of the Company, or for errors of judgment, neglect or
omission.”161 Therefore, while the contractual duty prescribed by the Operating
Agreement includes an ordinary prudent person standard, any liability for an action
that deviates from an ordinary prudence, but is nonetheless taken in good faith and
is reasonably believed to be in or not opposed to the best interest of Verdesian, is
exculpated. In this respect the Operating Agreement applies in a manner similar to
the common-law duties in a corporation with an exculpation clause. The standards
of conduct for a corporate fiduciary are the fundamental duties of loyalty and care,
to act only in the corporate interest and in an informed manner. Liability for
damages resulting from mere uninformed decisions may be exculpated under the
DGCL,162 however; if so, liability attaches only for breaches of loyalty and for
actions taken in bad faith, and not for grossly negligent actions. Similarly, I find,
159
Id. § 6.9(b).
160
Id. (“The members hereby acknowledge that the Managers may or could have conflicts of
interest to the extent that they are requested or obliged to make decisions or determinations as
Members or Managers, in each case directly or indirectly with respect to, or that otherwise affect,
the rights of members . . . the Members hereby waive any such conflicts of interest.”).
161
Id. § 6.4(d).
162
8 Del. C. §102(b)(7).
26
the Operating Agreement here directs the Mangers to operate in good faith and with
ordinary care. It effectively exculpates Mangers for conflicted, negligent and other
detrimental decisions, however, so long as taken in good faith.
In determining that good faith is the contractual duty established by the
Operating Agreement, I have construed, as I must, the contract as a whole. I note
that the Plaintiffs make a facile argument based on their contention that one
provision of the Agreement revivifies common-law duties of loyalty and care. They
point to the language waiving such duties: “[n]otwithstanding anything contained in
this Agreement to the contrary, to the fullest extent permitted under the LLC Law,
the Members of Verdesian hereby waive any fiduciary duty of the Managers, so long
as such Person acts in a manner consistent with [the Operating Agreement].”163 As
I understand their theory, it is this: the company has performed poorly, raising an
inference at least of negligence; negligent conduct is not “consistent” with the
standard of care—ordinary prudence—provided for in the Agreement; thus, on a
finding that negligence is implied, I must impose the default duties, and the duty of
care standard—gross negligence—becomes the standard of review. Moreover,
despite the express waiver, conflicted decisions must be afforded entire fairness
review.
163
Operating Agreement § 6.9(b).
27
The Defendants contend that similar arguments have been rejected by our
courts, and point to cases following Norton v. K-Sea Transportation Partners,
L.P.164 I do not find that case dispositive, because the “so long as” clauses there
refer to the subjective beliefs of the fiduciary, not (as here) objective consistency
with the Agreement. I find, however, that Plaintiff’s reading of the Operating
Agreement would be nonsensical. It would eviscerate, and make surplus, the good
faith standard and conflict-waiver provisions of the Operating Agreement. No
reasonable drafter, or reader, would construe an explicit waiver of all duties but good
faith—including a waiver of conflict and gross negligence—to be contingent on the
actor avoiding simple negligence. The natural reading of the “so long as . . .
consistent” language is that the waiver of duties applies to actions taken consistent
with those managerial tasks assigned the Managers, and that it is not directed at a
standard of care. There is no ambiguity here; only multiple reasonable readings of
contract language create ambiguity,165 and, in the context of the agreement as a
whole, the Plaintiffs’ reading is not reasonable. I further note that the Plaintiffs
appear to concede (in their First Amended Complaint, in briefing, and at Oral
164
67 A.3d 354 (Del. 2013).
165
ConAgra Foods, Inc. v. Lexington Ins. Co., 21 A.3d 62, 69 (Del. 2011) (“[W]hen we may
reasonably ascribe multiple and different interpretations to a contract, we will find that the contract
is ambiguous.”) (quoting Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1160 (Del. 2010)).
28
Argument) that bad faith is the operative contractual standard.166 The Plaintiffs’
argument, nonetheless, was both clever and contextually based. Bad drafting leads
to such arguments.
Reading the Operating Agreement as a whole, I find that in order to be liable
for breach of the contractual duty, a Manager must act in bad faith. That is the
standard under which I review the actions of the Managers to determine if the
derivative portions of the complaint state a claim.
b. Verdesian’s Acquisition of Specialty Fertilizer Products,
LLC
Verdesian acquired SFP in July 2014. The Defendants argue that the
Plaintiffs’ derivative claim regarding that acquisition is stale because the statute of
limitations has lapsed. The Plaintiffs contend that the statute of limitations should
be tolled. I need make no determination on tolling because I find that, in any event,
the Plaintiffs have failed to plead a claim on which relief can be granted; that is, the
Plaintiffs have failed to plead facts leading to a reasonable inference that the
acquisition of SFP was done in bad faith.
The Plaintiffs allege that the Managers approved Verdesian’s acquisition of
SFP in bad faith because the Managers had knowledge of the KPMG Report and
United Suppliers’ testimonial, which showed that SFP had “stuffed the channel” and
166
First Am. Compl. ¶¶ 128–44; Pls.’ Answering Br. in Opp’n to Defs.’ Mot. to Dismiss Pls.’ First
Am. Compl., at 54; June 17, 2019 Oral Arg. Tr. 64:7–67:23.
29
thereby inflated its financial results for 2013. The Managers, through their positions
at Paine, indirectly had an interest in the transaction because Paine received
transaction fees for acquisitions and management fees based on Verdesian’s
financial results. The SFP acquisition was sizeable. According to the Plaintiffs, the
Managers were driven to acquire SFP because of the large transaction fee, and the
increased management fee which would accrue to Paine associated with
consolidated financial performance of Verdesian and SFP.
The logical conclusion of the Plaintiffs’ theory is that the Defendants were
driven to acquire a company that they knew would immediately decrease in value,
in order to realize a one-time transaction fee and a larger management service fee
for the controller. Per the Plaintiffs, this self-dealing by the Defendants was not
permissible under the Operating Agreement, even with its conflict of interest
provisions. In a common law fiduciary duty case conflicted transactions are
inherently suspect,167 but here the applicable contractual standard allows the
Managers to make decisions that benefit themselves. Therefore, the fact that the
Managers benefitted or acted to increase the benefit they could realize (through their
positions at Paine to whom the benefits ran) does not by itself indicated a breach of
167
See Weinberger v. UOP, Inc., 457 A.2d 701, 710 (Del. 1983) (“When directors of a Delaware
corporation are on both sides of a transaction, they are required to demonstrate their utmost good
faith and the most scrupulous inherent fairness of the bargain.”).
30
their contractual duty to Verdesian, unless the decision taken was inimical to
Verdesian’s interest.
In order to breach the Operating Agreement, the SFP acquisition must have
been against the best interest of Verdesian viewed from the perspective of the
Managers. With the benefit of hindsight, the Plaintiffs argue that SFP has not
performed well, but that does not imply that the Managers did not believe at the time
that the acquisition of SFP was in the best interests (or not opposed to the best
interests) of Verdesian. The Plaintiffs’ argument that the Managers approved a bad
acquisition in the interests of Paine, as the Defendants point out, has a fatal flaw:
Paine (through its affiliates) owned over seventy percent of Verdesian, the company
the Managers, per Plaintiffs theory, intended to reduce in value with the acquisition
of SFP. This would simply not be rational self-interested behavior on behalf of Paine
or the Managers at Verdesian’s expense. It is not reasonable to infer bad faith from
the SFP transaction, based on the Mangers’ desire to drive fees to Paine, because the
value of the transaction and management service fees to Paine is dwarfed by the
potential loss to Paine from Verdesian’s acquisition of SFP for several hundred
million dollars. Furthermore, I note, the Paine affiliates themselves participated in
the equity financing related to the SFP acquisition. The theory that the Managers
caused Verdesian to acquire SFP in bad faith, on these grounds, is not plausible.
31
The Plaintiffs theorized at oral argument that Paine was positioning Verdesian
for sale and had bought SFP knowing of its inflated results, with the intent to offload
it (as part of a sale of Verdesian a whole), presumably before SFP sales went bust
the following year.168 Under this theory, Verdesian acquired SFP in July 2014,
creating a $6 million transaction fee for Paine, with the intent to sell Verdesian
before financial results from 2014 (which, I note, was at that point half over) showed
that the results from 2013 had been inflated and were not sustainable. This theory
stretches credulity. First, the Managers would have to ensure that any sale of
Verdesian would occur quickly, within months, if not weeks, of completing the SFP
acquisition, so that the 2014 financial results did not reveal the one-time effect of
stuffing the channel. Second, and even more problematic, the Plaintiffs’ argument
involves drawing an inference that the Managers not only knowingly (and
intentionally) paid too much for SFP, but also planned to sell SFP (as part of
Verdesian) at a profit via fraud, to a buyer who would not discover the channel
stuffing through its own due diligence. This is simply not, to my mind, a reasonable
inference. I note that the Plaintiffs in their First Amended Complaint fault the
Managers for not performing sufficient due diligence on SFP,169 and yet, the
168
June 17, 2019 Oral Arg. Tr. 73:6–73:21.
169
First Am. Compl. ¶ 44.
32
Plaintiffs’ theory rests on the Managers’ confidence that they could find a buyer who
would perform even less diligence.170
The Plaintiffs contend that a prominent red flag existed for Verdesian’s
acquisition of SFP in the form of warnings that the revenue generated in 2013,
through fall early fill and bulk sales programs, would not be repeated the following
year. The Plaintiffs have not pled that the Defendants overlooked this red flag
(which would not lead to liability on the part of the Managers). Instead, they alleged
that the potential for inflated 2013 sales numbers was known and disregarded in bad
faith, for the purpose of ensuring Paine would reap fees from the acquisition. Under
Rule 12(b)(6) I must draw reasonable inferences in favor of the Plaintiffs, who must
plead a breach of the contractual standard—bad faith—in the Operating Agreement
to survive the Defendants’ Motion. The Plaintiffs, however, have failed to
adequately plead bad faith given the Managers’ (and Paine’s) financial interest in
the acquisition being valuable to Verdesian. The Plaintiffs’ theory of bad faith, that
the Managers acted against company interest to benefit the controller, which stood
to be harmed the most by a bad acquisition, relies on an unreasonable inference that
170
I note that, had this been the Managers’ plan and had it been successful, the Plaintiffs
themselves would have shared in the ill-gotten gain.
33
I cannot draw. Accordingly, the derivative claim related to the SFP acquisition is
dismissed.171
c. Verdesian’s Acquisition of QC Corporation
Verdesian acquired QC in September 2014. The Plaintiffs allege that this
acquisition was undertaken by the Managers in bad faith to transfer an
underperforming company with environmental liabilities from Paine to Verdesian,
and that the Managers were additionally motivated by the fees the transaction would
generate for Paine.172 As with the SFP acquisition, the Defendants argue that the
Plaintiffs’ claim related to QC is stale, and otherwise should be dismissed under Rule
12(b)(6). I find the latter supports dismissal, and thus need make no determination
on the former.
While the QC transaction presents a conflict of interest for the Paine appointed
Managers, that conflict is permissible according the Operating Agreement. The
Plaintiffs do not argue otherwise. Instead, the Plaintiffs allege that the Managers
approved the transaction in bad faith to transfer liabilities borne completely by Paine
(as the previous owner of QC) to Verdesian (of which Paine is the indirect majority
owner and would therefore bear the majority, but less than the whole, of any
171
Nothing in this Memorandum Opinion should be read as determinative of the Plaintiffs’ direct
claim of fraud based on the Defendants’ sale of equity relating to the SPF acquisition, on which I
reserve decision.
172
First Am. Compl. ¶ 133. In briefing and at Oral Argument, the Defendants argue that no
transaction fee was paid by Verdesian in relation to the QC acquisition.
34
liabilities). The Plaintiffs further allege that the Managers were motivated by fees
and bonuses to be paid to Paine (and therefore themselves). Proof that the
transaction was not in the best interest of Verdesian, per the Plaintiffs, is in QC’s
post-acquisition performance. The Plaintiffs, however, make no factual allegation
as to what that performance has been, or that the acquisition, net, harmed Verdesian.
They only allege the liabilities, and note that QC carries an $18 million intercompany
loan. They are unable to point to facts indicating that Verdesian overpaid for QC,
and their allegations of bad faith are purely conclusory.
The fact that the Managers acquired a company that had liabilities does not by
itself suggest that the acquisition was inimical to the best interests of Verdesian.
While a conflicted transaction is normally suspect, the contractual standard that
governs here specifically allows such activity by the Managers. Without more, I am
unable to draw an inference that the Managers acted in bad faith, and any derivative
claim associated with the acquisition of QC is dismissed under Rule 12(b)(6).
d. Mismanagement
The Plaintiffs have alleged that the Managers have made a number of poor
decisions. These decisions include hiring choices, continued use of advance sales
and discounts, changes in certain financial accounting practices, and lavish
spending. I refer to these derivative claims as the “mismanagement” claims. The
Plaintiffs make conclusory allegations that these decisions were made in bad faith
35
and out of self-interest. Furthermore, the Plaintiffs consistently argue that the
Managers are, for all intents and purposes, beholden to (if not direct stand-ins for)
Paine. However, I note, Paine itself stands to lose to the extent Verdesian is
mismanaged.
The Managers have made decisions with which the Plaintiffs do not agree,
and over the last few years Verdesian’s performance has declined, including its
financial performance (which, I note, diminishes Paine’s management fees). It does
not, however, reasonably follow that these decisions were made knowingly against
the best interests of Verdesian. The Plaintiffs suggest no motive for bad faith on
what they contend is mismanagement by the Managers, save loyalty to Paine. Paine
is the majority owner of Verdesian and benefits when Verdesian increases it value;
Paine also benefits from management service fees tied to Verdesian’s financial
performance. Intentional mismanagement of Verdesian would harm both of Paine’s
sources of gain from Verdesian. As a result, the inference that the Plaintiffs ask me
to draw—that the Managers’ decisions were taken in subjective bad faith out of
loyalty to Paine—is not reasonable on these facts. What is left is simply an
allegation that the Defendants are poor or incompetent mangers, a fact, if true, that
does not subject them to liability to Verdesian. The mismanagement derivative
claims are therefore dismissed under Rule 12(b)(6).
36
e. Continuing to pay Management Fees
The Plaintiffs argue that the Managers should have caused Verdesian to
withdraw from its agreement with Paine, under which Verdesian pays Paine
management service fees based on Verdesian’s financial performance. The
Plaintiffs’ derivative claim for failure to withdraw from the contract with Paine rests
in large part on the allegation that the contract provided unwarranted benefits to
Paine (related to the SFP acquisition, the QC acquisition, and the allegations of
mismanagement) without benefit to Verdesian. I have already found that the
Plaintiffs have not sufficiently pled the bad faith necessary to show these
acquisitions and actions violated the Operating Agreement. The First Amended
Complaint does not allege, let alone plead in a non-conclusory way, that the
Managers had the opportunity to withdraw from the Paine management contract or
that breach would have been efficient. Finally, the Complaint does not disclose that
the arrangement with Paine, net, was inimical to Verdesian. I cannot, therefore, infer
bad faith. This derivative claim is therefore dismissed for failure to state a claim.
B. Direct Claims
The Plaintiffs have also brought direct claims against the Managers. Some of
these claims, it appears, are directly related to the actions supporting the derivative
actions dismissed above; presumably, my decision here should apply to those direct
claims. In addition, the Plaintiffs bring claims unrelated to those above: they
37
contend that the Managers breached the Operating Agreement by failing to provide
the Plaintiffs with audited financial statements, committed fraud in relation to
soliciting equity financing for the SFP acquisition, and breached the Operating
Agreement with the Class P Unit issuance.
So as to avoid redundant and advisory opinions, it would be helpful to have
the parties consult and inform me, in light of my decision here with respect to the
standard of review and the derivative claims, which direct claims remain. I will then
address those claims promptly, based on the existing briefing.
III. CONCLUSION
For the forgoing reasons, I find that the Plaintiffs’ derivative claims brought
on behalf of Verdesian fail under Rule 12(b)(6), and accordingly are dismissed. The
parties should confer and inform me for which direct claims the Motion to Dismiss
remains pending; those claims will be addressed in a separate opinion.
38