IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
WHITESTONE REIT OPERATING
PARTNERSHIP, L.P., a Delaware limited
partnership,
Plaintiff,
v. C.A. No. 2022-0607-LWW
PILLARSTONE CAPITAL REIT, a Maryland
real estate investment trust,
Defendant.
MEMORANDUM OPINION
Date Submitted: October 18, 2023
Date Decided: January 25, 2024
Richard P. Rollo, Travis S. Hunter, John M. O’Toole & Morgan R. Harrison,
RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Counsel for
Plaintiff Whitestone REIT Operating Partnership, L.P.
Christopher P. Simon & David G. Holmes, CROSS & SIMON, LLC, Wilmington,
Delaware; Thomas R. Ajamie & Eric P. Chenoweth, AJAMIE LLP, New York, New
York; Mike O’Brien, MIKE O’BRIEN P.C., Houston, Texas; Counsel for Defendant
Pillarstone Capital REIT
WILL, Vice Chancellor
This case concerns the adoption of a “poison pill” to frustrate a redemption
right in the alternative entity context.
In December 2016, Whitestone REIT Operating Partnership, L.P. and
Pillarstone Capital REIT negotiated an agreement through which Whitestone
contributed real estate assets to a limited partnership. Whitestone received 80% of
the partnership units, which it had the right to unilaterally redeem under the terms of
the limited partnership agreement. If Whitestone were to exercise its redemption
right, Pillarstone (as general partner) has the discretion to assume and satisfy the
redemption through cash or Pillarstone equity.
In late 2021, Pillarstone learned that Whitestone might redeem its investment.
In response, Pillarstone adopted an unusual shareholder rights plan to deter a
redemption and protect itself. The rights plan had the desired outcome: Whitestone
feared negative economic consequences if it served a notice of redemption. Instead
of redeeming, it pursued litigation.
After trial, I conclude that Pillarstone’s adoption of the rights plan breached
the implied covenant of good faith and fair dealing. The limited partnership
agreement provides Whitestone with an express right to exit its investment by
tendering a notice of redemption. An obvious corollary of that provision is that
Pillarstone will not thwart Whitestone’s exercise of the right. Pillarstone’s actions
deprive Whitestone of the fruits of its bargain.
1
Judgment is entered in Whitestone’s favor on this claim. The rights plan is
unenforceable as to Whitestone. Whitestone may proceed to serve a notice of
redemption for some or all of its units without fear of damaging repercussions.
I. FACTUAL BACKGROUND
Unless otherwise noted, the following facts were stipulated to by the parties
or proven by a preponderance of the evidence at trial.1 Trial was held over two days
during which four fact witnesses and one expert witness testified live. 2 The trial
record includes 131 exhibits and 9 deposition transcripts.3
A. The Property Contribution
In 2016, plaintiff Whitestone REIT Operating Partnership, L.P.
(“Whitestone”) and defendant Pillarstone Capital REIT (“Pillarstone”) negotiated a
transfer of certain Whitestone properties to Pillarstone Capital REIT Operating
Partnership L.P. (the “Partnership”).4 Whitestone is a Delaware limited partnership
through which its general partner—non-party Whitestone REIT—conducts real
1
Pre-trial Stipulation and Order (Dkt. 173) (“PTO”).
2
Dkts. 186-88.
3
See Dkt. 186. Facts drawn from trial exhibits jointly submitted by the parties are referred
to according to the numbers provided on the parties’ joint exhibit list and cited as “JX__”
unless otherwise defined. Trial testimony is cited as “[Name] Tr.” Deposition transcripts
are cited as “[Name] Dep.” To the extent that conflicting evidence was presented, I have
weighed it and made findings of fact accordingly.
4
See JX 5 (“Contribution Agreement”); PTO ¶ II.7; Dee Tr. 104-05.
2
estate operations and activities.5 Pillarstone is a Maryland REIT and the general
partner of the Partnership.6 The Partnership, a Delaware limited partnership, was
formed in September 2016 to facilitate Whitestone’s contribution and act as a
holding company.7 Its only partners are Pillarstone and Whitestone.8
On December 8, 2016, Whitestone, Pillarstone, and the Partnership entered
into a Contribution Agreement.9 Whitestone contributed to the Partnership 14
commercial properties in Texas with a fair market value of approximately $84
million.10 The Partnership assumed debt related to those properties of approximately
$65 million.11 Whitestone received 13,591,764 Class A Partnership units (“Units”)
for the $18 million difference.12 The Contribution Agreement provided that “during
any period in which [Pillarstone] is not taxed as a real estate investment trust . . . [it]
shall not issue [common shares] to [Whitestone] upon redemption of . . . Units in an
amount that would cause [Whitestone] to own in excess of 10% of the outstanding”
5
PTO ¶ II.1.
6
Id. ¶ II.2.
7
Id. ¶ II.4.
8
JX 4 (“LPA”) at Ex. A; Chookaszian Tr. 220.
9
PTO ¶ II.7; see generally Contribution Agreement.
10
Contribution Agreement § 2.2(a); see also id. at Schedule 2.1; PTO ¶ II.4.
11
Dee Tr. 104-05. This assumed debt included Whitestone’s existing mortgage debt plus
additional indebtedness to Whitestone. See Contribution Agreement at Schedule 2.2; id.
§§ 2.2(b)(i)-(ii), 10.1.
12
Contribution Agreement § 10.1.
3
Pillarstone common shares.13 Pillarstone has never qualified nor elected to be taxed
as a REIT for U.S. federal tax purposes.14
In connection with Whitestone’s contribution of properties to the Partnership,
Whitestone and Pillarstone entered into an Amended and Restated Agreement of
Limited Partnership of the Pillarstone Capital REIT Operating Partnership L.P. (the
“LP Agreement”).15 The LP Agreement governs the relationship between
Whitestone and Pillarstone. Exhibit A to the LP Agreement reflects that Whitestone
owns 81.4% of the outstanding interests in the Partnership, with Pillarstone holding
the remaining 18.6%.16 As General Partner, Pillarstone has exclusive control over
the Partnership’s operations.17
Section 8.6 of the LP Agreement grants Whitestone a right to unilaterally exit
its investment by causing the Partnership to redeem its Units, subject to a minimum
threshold of 1,000 Units.18 If Whitestone exercises its redemption right by
delivering a Notice of Redemption to the Partnership (with a copy to Pillarstone),
Pillarstone is entitled “in its sole and absolute discretion” to assume the redemption
13
Id. § 5.3. A similar 10% limitation is found in an OP Unit Purchase Agreement.
Verified Compl. (Dkt. 1) (“Compl.”) Ex. E. § 4(h).
14
PTO ¶ II.10.
15
PTO ¶ II.8; see generally LPA.
16
LPA at Ex. A; see PTO ¶¶ II.1-2.
17
LPA § 7.1(A).
18
Id. § 8.6(A)-(B); see also Chookaszian Tr. 220, 310-11; Jassem Tr. 40.
4
from the Partnership.19 If Pillarstone assumes the redemption, Pillarstone as General
Partner can decide whether the redemption will be satisfied through cash (a “Cash
Amount”) or by issuing Pillarstone common shares to Whitestone (a “Shares
Amount”).20
The LP Agreement defines Cash Amount as the “amount of cash equal to the
Value on the Valuation Date of the Shares Amount.”21 The Shares Amount is the
product of the number of Units offered for redemption by a redeeming party
multiplied by a conversion factor.22 For purposes of Whitestone’s redemption right,
“Shares” refer to Pillarstone common shares.23
B. The Separation Negotiations
By late 2020, Whitestone and Pillarstone were considering a separation.24 Jim
Mastandrea was then the Chief Executive Officer of both Whitestone and
19
LPA § 8.6(C)-(D) (providing that Pillarstone “may, in its sole and absolute discretion
. . . elect to . . . assume directly and satisfy a Redemption Right”).
20
Id.; see also id. § 7.1(A)(21).
21
Id. at Defined Terms. “Value” is the “amount that a holder of one Partnership Unit would
receive if each of the assets of the Partnership were to be sold for its fair market value on
the Specified Redemption Date, the Partnership were to pay all of its outstanding liabilities,
and the remaining proceeds were to be distributed to the Partners.” Id. The “Specified
Redemption Date” means the tenth business day following the “Valuation Date,” or the
date Pillarstone receives the Notice of Redemption. Id.
22
Id. The conversion factor is 1.0. See id.
23
Id.
24
Chookaszian Tr. 220-24; JX 16 at 6.
5
Pillarstone.25 To address this conflict, each company formed a special committee to
negotiate separation terms.26 Pillarstone director Dennis Chookaszian served as the
chair of Pillarstone’s special committee, and Jeff Jones led Whitestone’s special
committee.27
A key point of discussion was the value of the Partnership’s real estate
assets.28 An October 2020 broker opinion from Jones Lange LaSalle valued the
Partnership’s eight properties at $73,764,531.29 Based on this assessment,
Pillarstone calculated the value of Whitestone’s Units to be approximately $48
million.30
Chookaszian and Jones discussed various options to separate the parties,
including Whitestone exercising its redemption right.31 Jones and Mastandrea told
Chookaszian that Whitestone did not intend to redeem at that time.32 Instead, in June
25
Chookaszian Tr. 221; see Chookaszian Dep. 40-41, 56, 153, 160.
26
Chookaszian Tr. 221.
27
Id. at 221-22; see JX 18.
28
Chookaszian Tr. 222; see JX 16.
29
JX 15 at 4; see also JX 16 at 6.
30
JX 16 at 6; see also Chookaszian Tr. 223; Jassem Tr. 23; Jassem Dep. 57-58.
31
Chookaszian Tr. 224-26.
32
Id. at 226; JX 60 at 2.
6
2021, Whitestone signed a non-binding letter of intent (the “LOI”) that contemplated
a sale of Whitestone’s Units to Pillarstone.33
The transaction reflected in the LOI was Chookaszian’s construct.34
Whitestone would receive a fixed $10 million 10-year note at an interest rate of 3%
($3 million total) plus a contingent payment in 10 years based on the net value of the
Partnership’s properties.35 Whitestone could potentially receive $49 million by
2031.36
Whitestone’s General Counsel Peter Tropoli formed a view that the
transaction contemplated by the LOI was unfavorable to Whitestone.37 Among other
issues, Tropoli believed that the transaction would result in a significant “write-
down” of Whitestone’s investment in the Partnership.38 He told Mastandrea that he
believed exercising the redemption right would produce “a far more favorable
outcome” for Whitestone.39 Tropoli’s views about the LOI were relayed to
33
JX 26; see Chookaszian Tr. 226.
34
Chookaszian Tr. 227.
35
JX 26 at 2.
36
Id. at 3.
37
Tropoli Tr. 364-66.
38
Id. at 365-66.
39
Id. at 366.
7
Chookaszian around early August 2021.40 Both Mastandrea and Chookaszian
reacted negatively to Tropoli’s feedback.41
In August 2021, Mastandrea asked John Dee—a Pillarstone director and
Whitestone’s then-Chief Operating Officer—to draft a resolution for Whitestone’s
board that would prevent Whitestone from exercising its redemption right.42 The
resolution was Mastandrea’s attempt to cause the transaction contemplated by the
LOI to close.43 The Whitestone board rejected the proposed resolution.44
C. The Rights Agreement
Around this time, Pillarstone learned that Whitestone might redeem its
Partnership investment.45 Chookasian began to consider adopting a “shareholder
rights plan” in response.46 Although he lacks legal training, Chookaszian knew
about rights plans from serving on other boards and teaching business school
classes.47 He believed that a rights plan would protect Pillarstone “from an adverse
40
Id. at 367, 369-70.
41
See id. at 369-70; Chookaszian Dep. 155-56.
42
Dee Tr. 158-59; see also JX 130 at 251, 295.
43
Dee Tr. 166-67; see also JX 130 at 251.
44
Dee Tr. 162-63; see also JX 28 at 5.
45
Chookaszian Tr. 235-36; see also JX 85 ¶¶ 8-9; JX 102 No. 8; JX 36 at 1 (noting that
Whitestone “had made statements during the negotiations concerning a separation of . . .
Pillarstone and Whitestone . . . that Whitestone . . . may exercise its conversion rights”).
46
Chookaszian Tr. 239-40; see also Chookaszian Dep. 36, 154-55; JX 102 No. 9; Jassem
Tr. 26-27; Jassem Dep. 90; Dee Tr. 153-55; Dee Dep. 23.
47
Chookaszian Tr. 320-21.
8
action by either Whitestone or a third party” by making it “unattractive [for] anybody
attempting to convert [or] redeem.”48
On December 10, 2021, Pillarstone’s board convened to consider “a
recommendation” from Chookasian about a “shareholder rights plan.”49
Chookaszian relayed that Whitestone “may be working on a transaction that could
have implications for Whitestone[’]s holding of 81.4% ownership of Pillarstone’s
operating partnership units . . . which are convertible into Pillarstone’s common
shares [and] that Whitestone . . . may exercise its conversion rights.”50 “Because of
Whitestone[’]s disclosure of a consideration of converting the . . . Units,”
Chookasian “recommended that Pillarstone consider implementing a shareholder
rights plan to protect its shareholders.”51
Chookaszian discussed “several options” with the Pillarstone board, including
“a shareholder rights plan, in anticipation of Whitestone . . . potentially converting
the . . . Units into [Pillarstone] common shares, which could be detrimental to the
shareholders of Pillarstone.”52 Chookaszian proposed that the board form an
48
Id. at 262; see also Chookaszian Dep. 41.
49
JX 36 at 1; see Chookaszian Tr. 244-46.
50
JX 36 at 1; see Chookaszian Tr. 333. The discussion of Whitestone’s “conversion rights”
in the December 10, 2021 minutes refers to Whitestone’s contractual redemption right.
Chookaszian Tr. 246; Chookasian Dep. 62.
51
JX 36 at 1; Chookaszian Tr. 334.
52
JX 36 at 3.
9
independent committee given the dual fiduciaries at Pillarstone and Whitestone.53
Pillarstone’s board then formed a special committee of Chookaszian and director
Kathy Jassem for the purpose of evaluating a “shareholder rights plan.”54
On December 21, the Pillarstone board met to consider the special
committee’s recommendations.55 At the meeting, Chookaszian explained that
adopting what the minutes call “the Plan” would provide Pillarstone with “some
protection” from Whitestone’s potential redemption.56 Jassem relayed that the
special committee felt “the Plan . . . would enhance the ability of both Pillarstone
and Whitestone . . . to be fair and equitable in their negotiations to separate [the] two
companies.”57
On December 26, Pillarstone’s board met to consider resolutions “for
adopting, approving and implementing the proposed Shareholder Rights Plan.”58
Chookaszian and Jassem voted in favor of approving the resolutions.59 The third
53
Id. at 2.
54
Id.
55
JX 44. A Pillarstone board meeting also occurred on December 11, 2021. The substance
of the meeting minutes is redacted. JX 37.
56
JX 44 at 1; see also Chookaszian Tr. 253; Chookasian Dep. 88.
57
JX 44 at 2. Portions of the relevant discussion are redacted for privilege. Id.
58
JX 46 at 1; see Chookaszian Dep. 97.
59
JX 46 at 1.
10
member of Pillarstone’s board—Paul Lambert—abstained “due to his service on the
board of trustees of Whitestone.”60
Pillarstone and American Stock Transfer & Trust Company LLC, as rights
agent, subsequently executed a Rights Agreement dated as of December 27, 2021.61
The Rights Agreement provides that dilution will follow the occurrence of a
“Triggering Event,” including an “Acquiring Person” becoming the “Beneficial
Owner of 5% or more of [Pillarstone’s] Common Shares then outstanding.”62 This
potential dilution creates an economic disincentive for Whitestone to redeem its
Units.63 By delaying Whitestone’s redemption, the Rights Agreement allowed
Pillarstone to “buy time” and improve its leverage in separation negotiations.64
Chookaszian told Whitestone director Jones about the Rights Agreement.65
Pillarstone’s December 30 board minutes reflect that Chookaszian reportedly told
Jones the “Plan was filed to protect the Pillarstone minority shareholders and was
60
JX 46; see Chookaszian Tr. 254-55.
61
JX 48 (“Rights Agreement”).
62
Id. § 1(a); see id. § 1(c)(iv). There are currently 657,084 Pillarstone common shares
outstanding. PTO ¶ II.3.
63
Dee Tr. 179; Chookaszian Tr. 260, 266; see also Chookaszian Dep. 65-66, 69, 83, 90-
91, 99-101, 104-07; Jassem Tr. 42, 55-56; Jassem Dep. 100, 130-31; Dee Dep. 66-67.
64
Chookaszian Tr. 262, 271-72; see also Chookaszian Dep. 66, 92, 94, 99, 128.
65
JX 51 at 1.
11
intended to allow the parties to have the time to reach a fair resolution for all
parties.”66
Chookaszian similarly told Whitestone’s then-CEO Dave Holeman that
Pillarstone adopted the Rights Agreement to cause Whitestone to negotiate a
separation preferable to Pillarstone.67 Chookaszian suggested to Holeman that
Pillarstone would consider selling the Partnership properties—an outcome that
Whitestone favored.68 But in July 2022, Chookaszian informed Holeman that
Pillarstone would not agree to a sale.69
D. This Litigation
Whitestone concluded that it could not tender a Notice of Redemption without
triggering the Rights Agreement.70 It turned to litigation.
On July 8, 2022, Whitestone filed a Verified Complaint in this court
advancing three claims against Pillarstone.71 Count I is a claim for breach of the LP
Agreement.72 Count II is a claim for breach of fiduciary duty.73 And Count III is a
66
Id.; see Chookaszian Tr. 272.
67
Chookaszian Tr. 301-02.
68
Id.
69
Id. at 302; Chookaszian Dep. 70-73.
70
See Tropoli Tr. 375, 397.
71
Dkt. 1.
72
Compl. ¶¶ 84-90.
73
Id. ¶¶ 91-98.
12
claim for breach of the implied covenant of good faith and fair dealing.74 As relief,
Whitestone seeks a declaration that the Rights Agreement is unenforceable and an
award of damages.75 Pillarstone both moved to dismiss and answered the complaint,
asserting 13 affirmative defenses.76
On July 21, 2022, Whitestone filed a motion to preserve the status quo.77 On
September 8, I entered a status quo order confirming that Whitestone’s redemption
right would not be exercised and limiting the non-ordinary course transactions that
the Partnership could undertake pending the resolution of this action.78 A slew of
emergency disputes have arisen since then, causing the court to walk a fine line
between ensuring that Pillarstone does not render Whitestone’s redemption right
illusory while allowing the Partnership’s real estate business to function.79
Amid these disputes, on December 12, 2022, Pillarstone filed a motion for
summary judgment.80 Pillarstone’s arguments included that it was mathematically
74
Id. ¶¶ 99-104.
75
See id. at ¶¶ 105-06.
76
Dkts. 7, 8.
77
Dkt. 4.
78
Status Quo Order (Dkt. 26).
79
See Dkts. 34, 38, 40, 46, 53, 56, 58, 63, 69, 73, 75, 78, 83, 90, 100-01, 116, 125, 127,
198, 200-202.
80
Dkts. 51-52.
13
impossible for Whitestone to trigger the Rights Agreement.81 I denied the motion
because it was based on an unreasonable reading of the Rights Agreement.82
A two-day trial was held from July 17 to July 18, 2023.83 Whitestone
subsequently moved to add the Partnership as a defendant for remedial purposes.84
Emergency motions to show cause and to enforce the status quo order persisted.85
After post-trial briefing and argument, this matter was submitted for decision on
October 18.86
II. LEGAL ANALYSIS
Whitestone seeks to hold Pillarstone liable for adopting and enforcing the
Rights Agreement under three alternative theories: breach of contract, breach of the
implied covenant of good faith and fair dealing, and breach of fiduciary duty. To
prevail on any of these claims, Whitestone must prove the claim’s elements by a
preponderance of the evidence.87 Pillarstone, however, has “the burden to prove
81
See Opening Br. in Supp. of Def.’s Mot. for Summ. J. (Dkt. 52) 20.
82
Tr. of Mar. 3, 2023 Oral Arg. and Rulings of the Ct. (Dkt. 111) 54-55; see also Dkt. 99.
83
Dkt. 186.
84
Dkt. 194. That motion is denied. See infra note 164.
85
Dkts. 198, 200-01.
86
Dkts. 217, 219.
87
See Dieckman v. Regency GP LP, 2021 WL 537325, at *19 (Del. Ch. Feb. 15, 2021),
aff’d, 264 A.3d 641 (Del. 2021) (TABLE).
14
each element of [its] affirmative defenses by a preponderance of the evidence.”88
Proof by a preponderance of the evidence means that something is more likely than
not.89
The bulk of the parties’ briefing is spent on Whitestone’s breach of contract
arguments. Yet I believe that another theory—the implied covenant—is more apt.90
The parties agreed that, in exchange for Whitestone’s contribution of commercial
properties to the Partnership, it would receive Units and the right to unilaterally exit
its investment by causing the Partnership to redeem the Units. These express terms
have the corresponding condition that Pillarstone would not engage in self-interested
conduct to frustrate Whitestone’s redemption right. The record shows that
Pillarstone breached this obligation, causing harm to Whitestone.
Because Whitestone proved that Pillarstone breached the implied covenant of
good faith and fair dealing, I need not resolve the remaining contract and fiduciary
88
TA Operating LLC v. Comdata, Inc., 2017 WL 3981138, at *21 (Del. Ch. Sept. 11, 2017).
89
Taylor v. State, 748 A.2d 914 (Del. 2000) (TABLE) (“[T]o establish something by a
preponderance of the evidence means to prove that something is more likely so than not
so.”).
90
Pillarstone argues that Whitestone’s implied covenant claim must fail because it amounts
to “bootstrapping” of its breach of contract claim. Not so. Whitestone’s claim for breach
of the implied covenant of good faith and fair dealing was appropriately brought in the
alternative to its breach of contract claim. See Trumbull Radiologists, Inc. v. Premier
Imaging TRI Hldgs. LLC, 2021 WL 5577249, at *6 (Del. Super. Nov. 29, 2021) (explaining
that “implied covenant claims can be retained and litigated simultaneously and parallel to
breach of contract claims as an alternative form of relief”).
15
duty claims. Whitestone is entitled to one recovery. The Rights Agreement cannot
be enforced against Whitestone, which can now freely tender a Notice of
Redemption.
A. The Implied Covenant of Good Faith and Fair Dealing
“The implied covenant [of good faith and fair dealing] is inherent in all
contracts,” including limited partnership agreements.91 At its core, the implied
covenant “embodies the law’s expectation that ‘each party to a contract will act with
good faith toward the other with respect to the subject matter of the contract.’”92 It
“ensures that parties do not ‘frustrat[e] the fruits of the bargain’ by acting ‘arbitrarily
or unreasonably.’”93
“The [implied] covenant is ‘best understood as a way of implying terms in
the agreement,’ whether employed to analyze unanticipated developments or to fill
gaps in the contract’s provisions.”94 As such, parties to an agreement can hold one
another accountable for violating implied “contract[] terms that are so obvious . . .
91
Baldwin v. New Wood Res. LLC, 283 A.3d 1099, 1116 (Del. 2022); see also Gerber v.
Enter. Prods. Hldgs., LLC, 67 A.3d 400, 420, 426 & n.49 (Del. 2013), overruled on other
grounds by Winshall v. Viacom Int’l, Inc., 76 A.3d 808 (Del. 2013).
92
Sheehan v. Assured P’rs, Inc., 2020 WL 2838575, at *11 (Del. Ch. May 29, 2020)
(quoting Allied Cap. Corp. v. GC-Sun Hldgs., L.P., 910 A.2d 1020, 1032 (Del. Ch. 2006)).
93
Baldwin, 283 A.3d at 1116 (quoting Dieckman v. Regency GP LP, 155 A.3d 358, 367
(Del. 2017)).
94
Dunlap v. State Farm Fire and Cas. Co, 878 A.2d 434, 441 (Del. 2005) (quoting E.I.
DuPont de Nemours & Co. v. Pressman, 679 A.2d 436, 443 (Del. 1996)).
16
that the drafter would not have needed to include the conditions as express terms in
the agreement.”95 “The reasonable expectations of the contracting parties are
assessed at the time of contracting.”96
Still, the implied covenant is “a limited and extraordinary legal remedy” and
the existing contract terms control.97 The implied covenant cannot be used to rewrite
an agreement or “rebalanc[e] economic interests after events that could have been
anticipated, but were not, that later adversely affected one party to [the] contract.”98
“But when the contract is ‘truly silent’ about the issue, and the express terms of the
partnership agreement naturally imply certain corresponding conditions, [parties]
are entitled to have those terms enforced according to the[ir] reasonable expectations
. . . at the time of contracting.”99
Because a claim for breach of the implied covenant is contractual, the
elements are those of a breach of contract claim. Whitestone must prove “a specific
95
Dieckman, 155 A.3d at 361.
96
Id. at 367.
97
Nemec v. Shrader, 991 A.2d 1120, 1128 (Del. 2010); see also
Dunlap, 878 A.2d at 441 (“Existing contract terms control . . . such that implied good faith
cannot be used to circumvent the parties’ bargain, or to create a ‘free-floating duty . . .
unattached to the underlying legal document.’” (citation omitted)).
98
Baldwin, 283 A.3d at 1117 (quoting Oxbow Carbon & Minerals Hldgs., Inc., LLC, 202
A.3d 482, 507 (Del. 2019)).
99
Id.
17
implied contractual obligation, a breach of that obligation by [Pillarstone], and
resulting damage to [Whitestone].”100 I consider each element in turn.
1. The Implied Term
Section 8.6 of the LP Agreement entitles Whitestone to redeem its Units.
“[A]t any time on or after” six months of the issuance, it has “the right . . . to require
the Partnership to redeem” its Units by delivering a Notice of Redemption.101
Whitestone can exercise this right “from time to time, without limitation as to
frequency, with respect to part or all of the Partnership Units that it owns.”102 The
LP Agreement places few limitations on the exercise of this redemption right.103
Whitestone argues that a “Further Action” provision in Section 15.4 of the LP
Agreement should be read to limit Pillarstone’s conduct vis-à-vis Whitestone’s
redemption right.104 Section 15.4 states: “The parties shall execute and deliver all
documents, provide all information and take or refrain from taking action as may be
necessary or appropriate to achieve the purposes of [the LP] Agreement.”105 This is
100
Kuroda v. SPJS Hldgs., L.L.C., 971 A.2d 872, 888 (Del. Ch. 2009) (citing Fitzgerald v.
Cantor, 1998 WL 842316, at *1 (Del. Ch. Nov. 10, 1998)).
101
LPA § 8.6(A)-(B).
102
Id.
103
The limitations include a minimum redemption of at least 1,000 Units as well as general
compliance with applicable legal requirements. See id.; see also id. § 8.6(E).
104
See Pl.’s Post-trial Opening Br. (Dkt. 193) (“Pl.’s Opening Br.”) 48.
105
LPA § 15.4.
18
a boilerplate clause often found in contracts governing real property transactions.106
It does not expressly pertain to a redemption of Units.
But the plain terms of Section 8.6 imply a corresponding condition: that
Pillarstone will not frustrate Whitestone’s redemption right. Whitestone’s right to
redeem is largely unrestricted. The bargained-for terms of the LP Agreement
provide that Whitehouse can redeem “at any time” and “without limitation as to
frequency.”107 An explicit term preventing Pillarstone from undertaking self-
interested actions to impede Whitestone from redeeming was unnecessary.108
“Partnership agreement drafters, whether drafting on their own, or sitting across the
table in a competitive negotiation, do not include [such] obvious and provocative
conditions in an agreement . . . .”109
106
See Liberty Prop. L.P. v. 25 Mass. Ave. Prop. LLC, 2009 WL 224904, at *7 n.29 (Del.
Ch. Jan. 22, 2009) (“Many model forms and practice guides for real property transactions
recommend the inclusion of a further assurances clause, usually as a ‘miscellaneous’ or
‘general’ provision, that obligates the parties to take what reasonable further action may be
necessary to complete the transactions contemplated by the agreement or to carry out the
agreement’s purpose.” (citing forms and practice guides)).
107
LPA § 8.6(A)-(B).
108
See Dieckman, 155 A.3d at 361, 368 (concluding “a requirement that the general partner
not engage in misleading or deceptive conduct to obtain safe harbor approvals” was “so
obvious” that the parties would not have contracted for it); In re CVR Refining, LP
Unitholder Litig., 2020 WL 506680, at *15 (Del. Ch. Jan. 31, 2020) (implying a term in a
limited partnership agreement requiring a general partner not to “subvert price-protection
mechanisms” for limited partners).
109
Dieckman, 155 A.3d at 368; see also Intermec IP Corp. v. TransCore, LP, 2023 WL
5661585, at *15 (Del. Super. Aug. 23, 2023) (finding post-trial that the implied covenant
was implicated in a contract where the issue was “not discussed at all” at the time of
19
Further, nothing in the record indicates that the parties anticipated at the time
of contracting that Pillarstone might adopt a rights plan to impair Whitestone’s
exercise of its redemption right. The LP Agreement was negotiated to reflect that
Whitestone could tender a Notice of Redemption at its option. Whitestone
reasonably expected that it could do so without penalty.110 It was not until years
later that Pillarstone contemplated a rights plan, which Whitestone first learned
about in late December 2021.111
Chookaszian believes that Whitestone could have bargained for greater
protections in the LP Agreement because “any person with governance knowledge”
knows that “shareholder rights plans . . . could exist.”112 I suppose that the drafters
might have had some general awareness of poison pills as a defensive mechanism.113
The Rights Agreement, however, is a different beast. It is intended to mitigate a
general partner’s financial fallout caused by a limited partner’s exercise of a
contracting but was an “obvious” term that did not “change any bargained-for
protections”).
110
See Pl.’s Opening Br. 54-55. Pillarstone’s post-trial answering brief leaves unrefuted
Whitestone’s argument that the LP Agreement drafters did not consider that Pillarstone
might adopt a rights agreement to frustrate Whitestone’s redemption rights, among other
arguments. See Def.’s Post-trial Answering Br. (Dkt. 207) (“Def.’s Answering Br.”) 33-
34; Pl.’s Post-trial Reply Br. (Dkt. 213) (“Pl.’s Reply Br.”) 26; Emerald P’rs v. Berlin, 726
A.2d 1215, 1224 (Del. 1999) (“Issues not briefed are deemed waived.” (citation omitted)).
111
See Tropoli Tr. 372.
112
Chookaszian Dep. 67.
113
See, e.g., Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985).
20
contractual right to exit its investment in a limited partnership. There is no reason
to suspect that Whitestone anticipated this unique turn of events.
2. Pillarstone’s Breach
Pillarstone’s adoption of the Rights Agreement deprives Whitestone of “the
fruits of the bargain” reflected in Section 8.6 of the LP Agreement.114 Pillarstone
believed that Whitestone exercising its redemption right would be “to the detriment
of,” “adverse” to, “potentially be very damaging” to, and “unfair to” Pillarstone.115
The Rights Agreement was adopted in direct response to Pillarstone learning in
August 2021 that Whitestone might redeem its investment in the Partnership.116 It
114
Smith v. Scott, 2021 WL 1592463, at *6 (Del. Ch. Apr. 23, 2021); see also Nemec, 991
A.2d at 1126 (stating that the implied covenant applies “when the party asserting the
implied covenant proves that the other party has acted arbitrarily or unreasonably, thereby
frustrating the fruits of the bargain”); Veloric v. J.G. Wentworth, Inc., 2014 WL 4639217,
at *17 (Del. Ch. Sept. 18, 2014) (“The implied covenant of good faith and fair dealing
‘requires a party in a contractual relationship to refrain from arbitrary or unreasonable
conduct which has the effect of preventing the other party to the contract from receiving
the fruits of the bargain.’” (citation omitted)); Baldwin, 283 A.3d at 1120 (explaining the
importance of the implied covenant to “protect an agreement’s spirit against underhanded
tactics that deny a party the fruits of its bargain”).
115
Chookaszian Dep. 37-38, 41, 80; see Chookaszian Tr. 262 (“There’s an economic
disincentive, which is what a rights plan does, and the economic disincentive is there for
one very specific reason: to buy time . . . We didn’t want [Whitestone] to exercise [its
redemption right] . . . .”).
116
See Jassem Tr. 26-27; JX 102 No. 8-9; supra notes 45-46, 48-49 and accompanying
text. Pillarstone advanced 13 affirmative defenses in its answer. Defs.’ Answer and
Affirmative Defenses (Dkt. 7) (“Answer”) at 42-45. They were given little attention in
Pillarstone’s post-trial briefing. Pillarstone argues that Whitestone’s claims fail because
rights plans are permitted under Maryland law. Def.’s Answering Br. 37. That has no
bearing on whether the Rights Agreement amounts to a breach of the implied covenant of
good faith and fair dealing. Pillarstone also invokes an advice of counsel defense to suggest
that it cannot be held liable for adopting the Rights Agreement. See id. at 38; LPA § 7.9(B).
21
was intended to benefit Pillarstone while impeding Whitestone’s right to redeem,
thereby averting Pillarstone’s obligation to perform.117
Pillarstone used the Rights Agreement “to buy time” and “slow things down”
to force Whitestone into negotiations more favorable to Pillarstone.118 By
weakening Whitestone’s redemption right, Pillarstone could renegotiate
Whitestone’s exit at a discount. This was not “a fair solution for both parties,” as
Pillarstone suggests.119 Rather, it was an effort to undermine Whitestone’s ability to
invoke Section 8.6 of the LP Agreement. Pillarstone’s acts deprived Whitestone of
the benefit of its bargain and are contrary “to the scope, purpose, and terms of the
parties’ contract.”120
Pillarstone makes two arguments to suggest that its actions were taken in good
faith and consistent with the LP Agreement. Neither succeeds.
But this defense was not raised in Pillarstone’s pleading or identified in responding to
relevant interrogatories. See Answer at 42-45; JX 104 No. 10. Regardless, Pillarstone did
not prove this defense at trial. Cf. Boardwalk Pipeline P’rs, LP v. Bandera Master Fund
LP, 288 A.3d 1083, 1123 (Del. 2022).
117
E.g., Chookaszian Tr. 271-74; Jassem Tr. 41-42; see also Chookaszian Dep. 66, 92, 94,
99, 128; Jassem Dep. 99-100; JX 36 at 3.
118
See Chookaszian Tr. 272, 274.
119
JX 36 at 3; see Chookaszian Tr. 336.
120
Gerber, 67 A.3d at 419.
22
First, Pillarstone asserts that Whitestone’s redemption could “result in a
coercive, rushed, and discounted liquidation of partnership assets.”121 In other
words, Pillarstone maintains that it was reasonably concerned about a fire sale of the
Partnership’s properties to fund a redemption.122 But Chookaszian conceded at trial
that Pillarstone could raise the necessary cash to fund a redemption in six to twelve
months.123
Second, Pillarstone argues that it implemented the Rights Agreement to
protect against some perceived takeover threat.124 The record provides no support
for this premise. When the Rights Agreement was adopted, Pillarstone insiders
controlled more than 90% of Pillarstone’s outstanding common and preferred
votes.125 For that group to be diluted below a majority, Pillarstone would have to
issue new stock.126 But no new Pillarstone shares can be issued without Pillarstone’s
consent,127 and no third party (including Whitestone) can force Pillarstone to issue
new shares.128 In addition, because Whitestone can only receive Pillarstone shares
121
Chookaszian Tr. 236; JX 85 at ¶ 8.
122
Chookaszian Tr. 237.
123
Id.
124
Def.’s Answering Br. 12; see Chookaszian Dep. 41-49, 116; Jassem Tr. 55.
125
JX 129 at 30; see also Chookaszian Dep. 118; Jassem Tr. 27-28; Dee Tr. 181-84.
126
Dee Tr. 184; Dee Dep. 88-89.
127
PTO ¶ II.12.
128
Dee Tr. 184-86; Dee Dep. 89.
23
in connection with a redemption if Pillarstone elects to satisfy it with a Shares
Amount, Pillarstone’s consent is effectively required for Whitestone to acquire a
Pillarstone stake.129 Whitestone is also contractually limited from obtaining more
than 10% of Pillarstone’s outstanding common shares—an amount insufficient to
control Pillarstone.130
Pillarstone suggests that a third-party “threat” could arise if Whitestone were
to be acquired or transferred its shares to another entity.131 But Pillarstone’s prior
written consent is needed for Whitestone to transfer its Units to a third party.132 And
even if a third party became the beneficial owner of 35% or more of Whitestone’s
combined voting power, a change of control would occur under the Contribution
Agreement, allowing the Partnership to purchase Whitestone’s Units at a discount.133
In any event, there is no evidence that a legitimate takeover threat existed.134
129
See PTO ¶ II.12.
130
See id. ¶ II.11; Chookaszian Tr. 284; see also Dee Tr. 186 (“Q. And issuing 10 percent
of the general partner’s common shares would not dilute the general partner’s trustees,
insiders, and executives below a majority. Right? A. Yes.”).
131
See Def.’s Answering Br. 12.
132
LPA § 11.3; see Chookaszian Tr. 288-90.
133
See Contribution Agreement § 1.1 (defining “Change of Control”); id. § 12.10;
Chookaszian Tr. 291-92. Since Whitestone owns 13,591,764 Units, triggering the change
of control provision would allow the Partnership to purchase Whitestone’s Units for around
$18 million—about a third of the recovery Whitestone seeks in this litigation.
134
Pillarstone’s witnesses at trial either speculated or relied on hearsay to support their
stated beliefs that a takeover was threatened. See Chookaszian Dep. 116, 118-20, 122-23;
Jassem Tr. 28-29; Jassem Dep. 102-03, 138, 140-41; Dee Tr. 186-97; Dee Tr. 80-81, 93-
94. None of Pillarstone’s witnesses could explain how a takeover was even possible.
24
3. Resulting Damage
The Rights Agreement harmed Whitestone by creating an economic
disincentive to Whitestone’s exercise of its redemption right. Tropoli emphatically
testified that Whitestone would redeem but for the Rights Agreement.135 Whitestone
has yet to send a Notice of Redemption in accordance with the LP Agreement
because it fears dilution.136 These concerns are well founded.
A “Triggering Event” for purposes of the Rights Agreement includes a person
becoming the “Beneficial Owner” of at least 5% of Pillarstone’s common shares.137
Although a person is generally deemed a Beneficial Owner of any shares it has the
right to obtain under conversion, exchange, or similar rights,138 the Rights
135
Tropoli Tr. 375. Of course, Whitestone is also currently prevented from redeeming by
the Status Quo Order.
136
See id. at 397-98. Pillarstone insists that the Rights Agreement has not harmed
Whitestone because Whitestone has never tendered a Notice of Redemption—that is,
Whitestone’s claim is unripe. Def.’s Answering Br. 18. Delaware courts have rejected
similar ripeness arguments. See Carmody v. Toll Brothers, Inc., 723 A.2d 1180, 1188 (Del.
Ch. 1998) (denying a motion to dismiss because the plaintiff advanced ripe claims
challenging a poison pill that had the “current adverse impact” of preventing the
“shareholders’ present entitlement to receive and consider” certain corporate actions); see
also Moran v. Household Int’l, Inc., 490 A.2d 1059, 1072 (Del. Ch. 1985) (recognizing
that a rights plan caused harm because it had a “present depressing effect . . . on shareholder
interests, regardless of whether the rights are in fact ever triggered”), aff’d, 500 A.2d 1346
(Del. 1985).
137
See Rights Agreement § 1(a); id. § 11(a)(ii).
138
Id. § 1(c)(iv) (defining “Beneficial Ownership” to include securities “which such Person
. . . directly or indirectly, has the right . . . to acquire (whether such right is exercisable . . .
immediately or only after the passage of time, upon the satisfaction of conditions . . . upon
compliance with regulatory requirements, or otherwise) pursuant to any agreement,
arrangement or understanding (whether or not in writing) . . . upon the exercise of
25
Agreement contains an exception directly implicating Whitestone.139 Under
Section 1(c)(z) of the Rights Agreement:
[N]o Partnership Unit Holder shall be deemed the
“Beneficial Owner” of . . . any securities which may be
issued to such . . . Unit Holder in exchange for such . . .
Unit Holder’s . . . Units . . . pursuant to the . . . [LP
Agreement], unless and until such . . . Unit Holder delivers
a Notice of Redemption . . . to the . . . Partnership, at which
time such . . . Unit Holder shall be deemed the “Beneficial
Owner” of . . . such securities.140
Given this provision, before a Notice of Redemption, Whitestone is not considered
a Beneficial Owner of the Pillarstone common shares it could receive via its
redemption right. But after a Notice of Redemption for any number of Units,
Whitestone is considered the Beneficial Owner of all Pillarstone common shares it
could obtain through redeeming.141
Whitestone owns 13,591,764 Units, which could be exchanged for 13,591,764
Pillarstone common shares (subject to the 10% limitation) if Whitestone were to
conversion rights, exchange rights, rights (other than the Rights), warrants or options, or
otherwise”); see infra note 150 and accompanying text (defining “Right”).
139
See id. § 1(c)(z).
140
Id. A “Partnership Unit Holder” is a partner in the Partnership. See id. § 3(g); PTO
¶ II.1. “Partnership OP Units” are Units. Rights Agreement § 3(g). The “Operating
Partnership Agreement” is the LPA. Id. at Ex. C; PTO ¶ II.8.
141
See Rights Agreement § 1(c)(z); Chookaszian Tr. 275-77. The language of Section
1(c)(z) does not limit “Beneficial Ownership” to just the Pillarstone common shares
Whitestone might obtain for the Units it offered for redemption in a Notice of Redemption.
See Rights Agreement § 1(c)(z).
26
redeem.142 Under Section 1 (c)(z) of the Rights Agreement, if Whitestone delivers
a Notice of Redemption for even a single Unit, it is considered the Beneficial Owner
of 13,591,764 Pillarstone common shares.143 These shares are then included in the
calculation of whether Whitestone is an “Acquiring Person” under the Rights
Agreement.144 Section 1(c) of the Rights Agreement provides:
With respect to any Person, for all purposes of this [Rights
Agreement], any calculation of the number of [Pillarstone]
Common Shares outstanding at any particular time,
including for purposes of determining the particular
percentage of the outstanding [Pillarstone] Common
Shares of which such Person is the Beneficial Owner, shall
. . . include the number of Common Shares not outstanding
at the time of such calculation that such Person is
otherwise deemed to beneficially own for purposes of this
[Rights Agreement].145
Accordingly, after a Notice of Redemption, Whitestone would be deemed the
Beneficial Owner of about 95% of Pillarstone’s common shares then outstanding,
142
See LPA at Defined Terms (defining “Shares Amount” to mean the number of
Pillarstone common shares determined by multiplying (a) the total Units offered for
redemption and (b) the “Conversion Factor”); id. (defining “Conversion Factor,” which is
1.0); see also supra notes 20, 22-23 and accompanying text.
143
See supra notes 140-42 and accompanying text.
144
Subject to irrelevant exceptions, an “Acquiring Person” is a “Person . . . who . . . is the
Beneficial Owner of 5% or more of the [Pillarstone] Common Shares then outstanding.”
Rights Agreement § 1(a). “Common Shares when used with reference to [Pillarstone] or
without reference, shall mean the common shares of beneficial interest . . . of [Pillarstone].”
Id. § 1(h).
145
Id. § 1(c).
27
qualifying it as an Acquiring Person under the Rights Agreement.146 That is true—
and the Rights Agreement would be triggered—regardless of whether Pillarstone
elected to satisfy Whitestone’s redemption through a Cash Amount or a Shares
Amount.147
This result risks economic harm to Whitestone that is contrary to its
expectations under the LP Agreement. Triggering the Rights Agreement
“immediately” gives Pillarstone common and preferred shareholders the ability to
buy additional common shares,148 which is a so-called “flip-in” provision.149 The
146
For example, 657,084 Pillarstone common shares (outstanding before a Notice of
Redemption) plus 13,591,764 shares (considered outstanding because of a Notice of
Redemption) is 14,248,848; and 13,591,764 divided by 14,248,848 is about 95.4%. For
purposes of the 5% calculation, the Pillarstone common shares that existing Pillarstone
stockholders might receive under the Rights Agreement are disregarded. See Rights
Agreement § 1(c)(iv) (providing that “a Person shall not be deemed the “Beneficial Owner”
of . . . securities which such Person has the right to acquire upon exercise of Rights at any
time prior to the occurrence of a Triggering Event”); id. at 1 (defining a “Right”).
147
Whitestone contends that the use of “or” in Section 8.6(C)-(D) of the LPA is conjunctive
and permits Pillarstone to satisfy the redemption with a mix of cash and equity. See Pl.’s
Opening Br. 46. For purposes of this decision, I need not determine whether the LP
Agreement permits a mix because the flip-in provision can be triggered regardless. See
infra notes 154-58 and accompanying text.
148
Rights Agreement § 11(a)(ii) (“[I]n the event any Person shall become an Acquiring
Person, then, immediately upon the occurrence of such event . . . (B) each holder of a Right
. . . shall thereafter have the right to receive . . . such number of [Pillarstone] Common
Shares as shall equal the result obtained by” a formula provided).
149
JX 72 at 21 (“Flip-In Trigger. If any person . . . becomes an Acquiring Person, each
holder of a Right (other than Rights beneficially owned by an Acquiring Person . . . which
Rights will thereupon become null and void) will thereafter have the right to receive upon
exercise of a Right that number of [Pillarstone] Common Shares having a market value of
two times the Purchase Price.”).
28
Rights Agreement gives one common share purchase right (a “Right”) to each
Pillarstone common share,150 and ten Rights to each Pillarstone Class C preferred
share.151 There are 2,976,524 total Rights outstanding.152 The number of Pillarstone
common shares each Right holder can purchase is calculated by dividing the
“Purchase Price” by 50% of the then-current market price of a common share.153
The purchase of these shares would reduce the ownership stake Whitestone can
obtain in Pillarstone through a redemption and diminish the value of Whitestone’s
redemption consideration.
Pillarstone insists that, if a Notice of Redemption were to put the flip-in
provision in play, Whitestone would be unharmed because a redemption would be
satisfied through a Cash Amount.154 Since Pillarstone is not currently taxed as a
150
See Rights Agreement at 1 (defining a “Right” as “a dividend of one preferred share
purchase right . . . for each [Pillarstone] Common Shares outstanding”); JX 72 at 32;
JX 129 at 30.
151
JX 72 at 32; JX 129 at 30.
152
There are 657,084 Pillarstone common shares; 256,636 Series A preferred shares
(convertible into 53,610 common shares); and 231,944 Series C preferred shares
(convertible into 2,319,440 common shares). JX 72 at 32. 657,084 plus 2,319,440 is
2,976,524.
153
Rights Agreement § 7(b) (defining “Purchase Price”). The number of additional shares
that could be purchased after the flip-in provision is triggered is determined by dividing $7
(subject to adjustment) by 50% of the then-current market price of a Pillarstone common
share. See id. § 11(a)(ii)(B).
154
Def.’s Answering Br. 26-27; see Jassem Tr. 58. If it were so obvious that a redemption
could only be satisfied through a Cash Amount, why would Pillarstone go through the
trouble of adopting the Rights Agreement in the first place? And why would Pillarstone
consistently refuse to stipulate that it would satisfy a redemption in cash without requiring
29
REIT, Whitestone cannot acquire more than 10% of Pillarstone’s outstanding
Common Shares.155 This limitation would (if enforceable and unwaived) allow
Pillarstone to issue as many as 73,009 Pillarstone common shares to Whitestone in
the event of a redemption.156
The math changes, however, if any Rights were exercised to acquire new
Pillarstone common shares in the 30 business days between a Notice of Redemption
and satisfaction of a Shares Amount redemption. In that case, the number of
Pillarstone common shares available to each Rights holder would increase while the
price of these common shares decreased.157 If the price of Pillarstone common
shares were low enough and sufficient Rights were exercised, Pillarstone could
satisfy a redemption for all of Whitestone’s Units with a Shares Amount without
running afoul of the 10% limitation.158
Whitestone to first send a Notice of Redemption (thereby triggering the Rights
Agreement)? See Def.’s Answering Br. 27 (explaining that Pillarstone was unwilling to
stipulate to this unless Whitestone first sent a Notice of Redemption); JX 125.
155
See PTO ¶¶ II.11-12; Contribution Agreement § 5.3; Compl. Ex. E. § 4(h).
156
This calculation is based on the 657,084 Pillarstone common shares currently
outstanding plus the new shares issued to Whitestone through the exercise of its redemption
right. See Pl.’s Opening Br. 43 (citing Dkt. 18 at ¶ 11; Dkt. 52 at 16 n.5).
157
See Rights Agreement § 11(a)(ii); Pl.’s Reply Br. Ex. C.
158
Pillarstone’s preadoption modeling of the Rights Agreement estimates that if Pillarstone
common shares were priced at $0.34, Whitestone would own about 8.9% of the outstanding
common shares if all Rights flipped in. See Pl.’s Reply Br. Ex. C. At the time of this
decision, the most recent closing price of Pillarstone common shares was $0.02. See
Pillarstone Capital REIT (PRLE), Yahoo! Finance, https://finance.yahoo.com/quote/prle/
(last visited January 24, 2024).
30
* * *
Setting aside the complexities of the Rights Agreement and the various
scenarios that could be implicated by a Notice of Redemption, it is evident that the
Rights Agreement harms Whitestone. Whitestone bargained for a nearly unlimited
right to redeem, at the time and for the number of Units it unilaterally chose.159 The
Rights Agreement was adopted by Pillarstone to discourage and delay a
redemption.160 The very existence of the Rights Agreement puts in doubt whether
Whitestone can exit its investment in the Partnership without suffering negative
economic consequences. Whitestone should not be required to expose itself to
financial peril to exercise a contractual right (or, alternatively, be deterred from
exercising it and forced into separation negotiations on terms benefitting
Pillarstone).161 If it were, Whitestone would be deprived of the bargain it reasonably
expected (and negotiated for) in Section 8.6 of the LP Agreement.
B. The Appropriate Remedy
Whitestone proved that Pillarstone’s adoption of the Rights Agreement
amounts to a breach of the implied covenant of good faith and fair dealing that has
caused it harm. Whitestone proffers two approaches to expectation damages that
159
See LPA § 8.6(A)-(B); see also supra note 18 and accompanying text.
160
See Chookaszian Tr. 265-66, 271, 274; Jassem Tr. 42-43.
161
See Chookaszian Tr. 301-02; see also supra notes 34-38 and accompanying text.
31
measure the amount “necessary to put [it] in as good a position as it would have
occupied had there been full performance of the contract.”162 The first is monetary
damages of $51,200,600 plus interest, reflecting a possible valuation of the
Partnership’s assets as of December 31, 2021.163 The second approach asks me to:
(1) declare the Rights Agreement unenforceable as to Whitestone or enjoin its
enforcement against Whitestone; (2) permit Whitestone to tender a Notice of
Redemption; (3) allow Pillarstone to determine the current value of the Partnership’s
assets; and, as necessary, (4) later enter a monetary judgment against Pillarstone for
the difference between the amount Whitestone would have received in or around
December 2021 and the current value.164
Am. Gen. Corp. v. Cont’l Airlines Corp., 622 A.2d 1, 8 (Del. Ch. 1992), aff’d, 620 A.2d
162
856 (Del. 1992) (TABLE).
163
See JX 121 at 6.
164
Pl.’s Opening Br. 64-65; see Tr. of Oct. 18, 2023 Post-trial Arg. (Dkt. 219) 49-51.
Whitestone acknowledges that it will need to file a separate action should it seek a
monetary judgement against the Partnership since the Partnership is not a party to this case.
See Pl.’s Opening Br. 64-65.
On August 28, 2023, Whitestone filed a motion to amend its complaint under Court
of Chancery Rule 15(b) to add the Partnership as a party. Pl.’s Mot. to Conform Pleadings
to the Evid. (Dkt. 194). This motion was purportedly in response to Pillarstone’s
suggestion that the court lacked the authority to grant monetary relief against the
Partnership as a non-party. The motion is denied. It would be prejudicial to both the
Partnership and Pillarstone to add the Partnership as party after trial. E.g., In re Mindbody,
Inc., S’holder Litig., 2023 WL 2518149, at *42 (Del. Ch. Mar. 15, 2023) (“Whether to
permit post-trial amendment is a matter for this court’s discretion. The primary
consideration is ‘prejudice to the opposing party.’” (citation omitted)). The Partnership
had no opportunity to present a defense and has rights and obligations different from
Pillarstone. Regardless, the relief I am granting does not require the Partnership to be
joined as a party.
32
The latter approach to a remedy is appropriate. It both addresses the harm to
Whitestone caused by the Rights Agreement and maintains the parties’ contractual
expectations in the LP Agreement. To award $51 million today would require me
to find that a hypothetical redemption by Whitestone would have been for all of its
Units. It is possible, though, that Whitestone would have redeemed a lesser amount.
Awarding money damages would also bypass the provisions of the LP Agreement
allowing Pillarstone to decide whether to assume the redemption from the
Partnership, whether to satisfy the redemption through a Cash Amount or Shares
Amount, and what value to attribute to the Partnership’s assets.165 To preserve the
parties’ bargain, these steps should be followed in the course set out by the LP
Agreement.
Accordingly, the Rights Agreement is declared unenforceable against
Whitestone. Whitestone may proceed to tender a Notice of Redemption for the
number of Units it chooses, consistent with Section 8.6 of the LP Agreement.166 The
parties must thereafter follow the framework prescribed by the LP Agreement. Any
further relief must await future proceedings.
165
See LPA § 8.6(A)-(D).
166
The Status Quo Order is hereby vacated insofar as Whitestone may tender a Notice of
Redemption. Under its terms, the remainder of the Status Quo Order will be vacated
upon the entry of a final order and judgment.
33
III. CONCLUSION
Pillarstone breached the implied covenant of good faith and fair dealing.
Judgment on Count III is entered for Whitestone. Counts I and II, which are brought
in the alternative to Count III, are moot. The parties shall confer on a proposed final
order and judgment to implement this decision and file it within 10 days.
34