MEMORANDUM OPINION

LAMB, Vice Chancellor

I. INTRODUCTION

This matter arises out of a 1996 tender offer to purchase the limited partnership interests of Marriott Hotel Properties II Limited Partnership (the "Partnership"). The corporate parent of the Partnership's general partner was the offeror. When the tender offer initially failed to attract sufficient tenders, the offeror raised the offering price by 25% and succeeded in acquiring slightly more than a majority stake in the Partnership. Within months of closing the tender offer, the general partner, in a change from its prior distribution policy and the projections forecast in the tender offer circular, more than doubled the size of its cash distributions to limited partners.

This and related cases were consolidated by court order, and are the subject of two prior opinions of this court. In the first, former Chancellor Allen denied a motion for preliminary injunctive relief. In the second, I granted a voluntary dismissal, permitting the refiling of the complaint in the United States District Court for the Southern District of Florida, where a nearly identical complaint had already survived a motion to dismiss and was scheduled for trial. After some defection in plaintiffs' ranks, however, the District Court dismissed the action for want of subject matter jurisdiction. I later granted leave to revive the dismissed action here. An amended class action complaint was filed on January 29, 1999 by Cary W. Salter, the sole remaining representative plaintiff.

The amended complaint alleges, among other things, that the defendants were under a duty to pay a fair price to the limited partners for their Partnership units. Plaintiff argues first that the tender offer should be treated as a merger, subjecting the defendants, as controlling entities, to a duty of entire fairness. Alternatively, plaintiff argues that the partnership agreement creates either an express or implied right to a fair valuation process. Finally, plaintiff contends that he and his fellow limited partners were coerced into tendering or were inadequately informed when they did so.

Defendants filed a motion to dismiss, and with respect to one claim, a motion for summary judgment. Having reviewed the record on the motions, I conclude that the complaint states disclosure claims relating to projected future distributions. Also, additional discovery is warranted to determine whether the general partner suppressed the level of distributions (and, with it, the value of the partnership units) until after the parent could close its offer.

II. FACTUAL HISTORY

For the purposes of the motion to dismiss, I take as true all well-pleaded facts in the complaint and draw any reasonable inferences therefrom in plaintiffs favor. Moreover, to the extent necessary, I have examined the disclosure documents disseminated in connection with the transactions at issue in order to determine what was actually disclosed. This practice is, in the circumstances, permissible and necessary.

A. The Parties

When this putative class action began, there were three representative plaintiff limited partners, Cary W. Salter, Mackenzie Patterson Special Fund 2, L.P. ("Mackenzie Fund") and George Wasserman. As of the filing of the "Amended Consolidated Class Action Complaint" on January 29, 1999, Salter is the only remaining representative plaintiff.

Defendants are: the general partner — Marriott MHP Two Corporation ("General Partner"), its parent — Host Marriott Corporation ("Host" or "Host Marriott"), an entity wholly-owned by Host and formed for the purpose of carrying out the tender offer — MHP II Acquisition Corporation, and four individuals sued in their capacities as the directors and principal executive officers of the General Partner.

B. The Formation of the Partnership

The Partnership was formed in 1988 to acquire, own and operate three hotels in the United States and to have a 50% interest in a fourth. A total of 745 limited partnership units ("Units") were sold for a stated price of $100,000 each (or $89,247, if paid in cash at the time of subscription). As disclosed in the private placement memorandum ("PPM"), pursuant to which the Units were sold, the hotels were subject to long-term management agreements with Marriott Hotels, Inc., at the time a wholly-owned subsidiary of Marriott Corporation.

C. The Limited Partners' Rights Were Narrow

The terms of the partnership agreement placed the General Partner firmly in control of the affairs of the Partnership. Four of its provisions illustrate the point.

• Marriott MHP is named as the General Partner and can be removed by the limited partners only in narrowly defined circumstances amounting to cause.

• The General Partner is given "the exclusive right and power to conduct the business and affairs of the Partnership and to do all things necessary to carry on the business of the Partnership in accordance with the provisions of this Agreement and applicable law. . . ."

• The voting rights of the limited partners are restricted to extraordinary transactions, such as the sale of the Partnership's assets, a merger or a dissolution.

• Although the limited partners have the right to assign their entire economic interest in the partnership without the General Partner's consent, the General Partner has the right to decide, in its "absolute discretion," whether or not to admit an assignee of a limited partner's interest as a substituted limited partner. A limited partner's right to vote terminates upon the assignment of his interest, and only by becoming a substituted limited partner does the assignee of that interest become entitled to vote.

The limited partners' restricted power either to assign the voting right or to replace the General Partner significantly curtailed their ability, even acting collectively, to exercise control over the Partnership or to transfer control thereof to any other person. This is hardly surprising in the context of an investment formed for the purpose of acquiring interests in four hotel properties managed by Marriott.

While the limited partners could not exercise direct control over the Partnership or profit by selling such control to a third party not endorsed by the General Partner, an investment in the Partnership Units offered significant economic benefits. For investors, the Partnership's "principal investment objectives" were "(i) to provide semiannual cash distributions from operations of [its] Hotels . . .; (ii) to benefit from potential long-term appreciation . . .; and (iii) to preserve investor capital. . . ." There was also the possibility of a significant distribution of excess funds obtained in a refinancing of over $250 million in outstanding mortgage debt (the "Refinancing"). The partnership agreement required that all "Cash Available for Distribution . . . shall be distributed at least semi-annually . . ." However, the General Partner could reduce the amount to be distributed as it "reasonably determines [is] necessary to provide for the . . . operation of the Partnership."

As initially structured, Host Marriott, directly and indirectly, had only a de minimis interest in the partnership equity. Therefore, in contrast with the limited partners' expectation of distributions as a source of income, Host Marriott derived its economic benefits through the management agreements.

The partnership agreement affirms the fiduciary duty owed by the General Partner to the Partnership and the limited partners, arising from 6 Del. C. § 17-403 and the common law. Section 5.03(I) of that agreement provides:

The General Partner shall be under a duty to conduct the affairs of the Partnership in good faith and in accordance with the terms of this Agreement. . . . Nothing contained in the Agreement is intended or shall be construed to contract away the fiduciary duty of the General Partner to the limited partners.

Further, provisions of the partnership agreement recognize that, in dealing with Host Marriott or its affiliates, the General Partner would have a conflict of interest. For example, section 5.02(B)(ii) of the partnership agreement provided for an independent appraisal process to value the hotels in the case of a sale of one or more hotels to Host Marriott.

The agreement does not explicitly address the circumstance of Host making a tender offer to acquire Units. In fact, as originally framed, the agreement denied Host Marriott the right to vote any limited partnership interests, even those purchased by it from a limited partner. As discussed, infra, the limited partners voted to amend this provision in connection with the transaction at issue.

D. The Partnership Is Successful

Hotel operating profit exceeded projections, allowing the General Partner to make annual cash distributions to Unitholders in excess of those projected at the time of formation. Through 1995, the Partnership distributed nearly $97,000 per Unit versus a projected $69,000. The complaint also alleges that the Partnership's cash on hand increased dramatically. By 1995, the Partnership had $46,961,000 of cash on hand, a $14 million increase from the prior year.

The complaint alleges that the "increases in hotel operating profit and growth in value of the Partnership's properties . . . did not benefit the limited partners because the General Partner did not increase distributions to Unitholders." Instead, the complaint alleges, "annual distributions were frozen at $15,000 per Unit in 1993, 1994 and 1995," thus distorting the limited partners' perception of Unit value.

The mortgage debt on the hotels was due to mature on March 21, 1996. Rather than complete a refinancing, the General Partner arranged a six-month extension to September 21, 1996. In connection with the extension, the Partnership applied $9.2 million of the amount accumulated in a lender reserve account to pay down principal. Moreover, the Partnership added $19.1 million of other cash to that reserve. Plaintiff alleges that the General Partner failed to timely refinance the mortgages on the Partnership's hotels before Host Marriott made its tender offer in order to coerce limited partners into tendering.

E. The Tender Offer

On April 18, 1996, Host began a tender offer for any and all of the outstanding Units at a price of $125,000 per Unit, conditioned on obtaining at least 50.1% of the outstanding Units (the "Offer"). The General Partner, due to its "substantial conflicts of interest with respect to the Offer" made "no recommendation to any Unitholder whether to tender or to refrain from tendering his or her Unit." Rather, the limited partners were urged to make up their own minds about the merits of the tender offer. The tender offer circular ("Offer to Purchase") reported that:

• "Parent [Host Marriott] has at all times had the ability to control . . . General Partner."

• "No unaffiliated person has been retained to represent the limited partners and to act solely on their behalf to negotiate or evaluate the Offer. If an unaffiliated person had been engaged, the terms and conditions of the Offer might have been different, and possibly more favorable to Unitholders who elect to tender their Unit."

• "The Offer Price (as well as the other terms and conditions of the Offer) was established by Host Marriott, which is the indirect parent of the General Partner, and is not the result of arm's length negotiations."

• "Parent believes that the Partnership's properties have increased in value over the last several years and, although there can be no assurances, may continue to appreciate in value."

• "The Purchaser and Parent are making the Offer with a view to making a profit."

F. The Amendments to the Partnership Agreement

Host Marriott conditioned the Offer on the approval by the limited partners of certain amendments to the partnership agreement (the "Amendments"). Most significantly, Host sought changes in the partnership agreement to permit affiliates of the General Partner (such as the acquirer) to vote Units acquired and to remove the prohibition against the transfer of more than 50% of the partnership Units within a 12-month period (the "Consent Solicitation"). The General Partner disseminated disclosure materials to the limited partners, asking the limited partners to consider and vote upon the Amendments, but making no recommendation.

Plaintiff complains that "the defendants chose to use their Tender Offer as an opportunity to coerce the limited partners into approving five unfair Amendments by delaying the solicitation until the commencement of the Tender Offer, and then making the approval of all five Amendments a condition for completing the Tender Offer." In fact, while the Offer was conditioned upon the successful completion of the Consent Solicitation, the two were conducted separately; thus, a Unitholder was able to make a valid tender without consenting to the Amendments and was able to consent to the Amendments without tendering.

The Amendments were approved by the limited partners and became effective in conjunction with the successful completion of the Offer.

G. The Offer to Purchase Makes Certain Projections and Disclosures

Plaintiff challenges various elements of the disclosure provided by Host Marriott and the General Partner in the Offer to Purchase.

First, the Offer to Purchase disclosed that Host Marriott engaged American Appraisal Associates ("American") for the purpose of obtaining a fairness opinion on the financial terms and conditions of the Offer. American's analysis, appended to the Offer to Purchase, concluded that $125,000 was fair to the Unitholders from a financial point of view because the estimated value of the Units ranged from a low of $65,000 per Unit to a maximum of $146,000 per Unit, with a mid-point of $104,000 per Unit.

Plaintiff alleges that the appraisal results were manipulated to reduce the stated value of the hotels and the Units. Plaintiff alleges that the value of the hotels had more than doubled by the time of the Offer. (The fact that the Partnership was valued at $237,334 per Unit in 1998, as discussed infra, leads to a dispute about whether the gains in value can fairly be attributed to events arising after the Offer closed.)

Second, plaintiff challenges the description of the Partnership's cash reserves. The "Net Asset (Break Up) Analysis," which was based on appraisals of the hotels and the "[c]ash and cash equivalents that were added to calculate the net value to Unitholders," is alleged to exclude cash available at "break up" of approximately $71,000 per Unit. According to plaintiff, the cash value available through break up is patently inconsistent with a valuation of $104,000 per Unit. By misrepresenting the value of the Partnership's cash and cash equivalents, Host allegedly induced the limited partners to tender their shares for a lower price than they would have had the amount of available cash been disclosed properly.

Third, the Offer to Purchase projected 1996 distributions of $11,612 per Unit and 1997 distributions of $16,880 per Unit. These predictions were coupled with statements indicating that debt service requirements "could adversely affect cash distributions from the Partnership." Plaintiff argues that the projections of future distributions were false and misleading when made, because the defendants knew when making those projections that distributions would increase once the Offer closed.

Fourth, plaintiff attacks the disclosure related to Host's motivations in making the Offer. According to plaintiff, the Offer to Purchase failed to disclose that Host expected to benefit by virtue of increased cash distributions in the future and by including the Partnership's assets on Host's balance sheet.

Finally, the Complaint claims that the disclosures made by Host Marriott in the Offer to Purchase about the prospects and expected terms of the delayed refinancing coerced Unitholders to tender. The pertinent language from the Offer to Purchase describes the prospects for future financing as follows:

The General Partner has informed Host Marriott that it is exploring various options to refinance at least the current $257 million of mortgage debt . . . [and] believes that . . . a [commercial mortgage-backed securities] financing would offer more favorable long-term interest rates than bank financing and would afford Unitholders a better opportunity to continue to receive cash distributions. The securitized financing the General Partner is currently considering would likely have a term of approximately 10-11 years, substantially restrict the ability of the Partnership to sell [its properties] during the term and prohibit the Partnership from prepaying any debt during the term without paying a substantial premium. In addition, the interest rate would likely be fixed for the entire term at a spread of 1.50% to 1.60% over the yield of the U.S. Treasury Note with the same maturity as the term of the debt.

The Offer to Purchase described the steps taken in furtherance of the expected refinancing and opined as to the availability of funds after the refinancing, as follows:

[I]n connection with the contemplated refinancing of the mortgage debt of the [properties], the General Partner may use the funds in reserve accounts established by the Partnership for the costs and expenses associated with the refinancing, to pay down principal, to establish escrow accounts (if required) or for distribution to Unitholders. At March 31, 1996 there was approximately $19.1 million (approximately $25,381 per Unit) in the primary reserve account. In addition, if the Partnership's outstanding mortgage debt were refinanced at its previous level of $266 million, there would be approximately $9.2 million in excess proceeds (approximately $12,226 per Unit) available to the Partnership. Based upon the current market for refinancing, [defendants] believe that a significant portion of the current reserve accounts will be needed to (i) establish escrow accounts or reserves, (ii) pay the costs and expenses of refinancing, and/or (iii) pay down debt.

Plaintiff contends that the defendants misrepresented the Partnership's ability to make a distribution of excess funds from a refinancing. Partly because the PPM had discussed this option as a possible course of action as early as 1993, plaintiff alleges that the failure to describe a large refinancing distribution as a realistic alternative led limited partners to conclude that the only way to enjoy a sizeable return of their capital in the near future would be to tender into the Offer.

H. The Motion for a Preliminary Injunction Fails

On May 17, 1996, the plaintiffs moved for a preliminary injunction against consummation of the Offer. Plaintiffs made two separate but related claims. They argued first that the price was inadequate because it should have included a control premium and, second, that defendants had a duty to ensure that the limited partners received a fair price, either as a matter of law or as a consequence of certain provisions of the partnership agreement.

Chancellor Allen denied the motion, holding, on a preliminary basis, that the structural elements of the Partnership giving Host Marriott effective control over the management and disposition of the assets of the Partnership precluded a finding that the limited partners were entitled to any premium for the passage of "control." In particular, he noted the provisions of the partnership agreement giving the General Partner "absolute discretion" over the admission of persons as substituted limited partners and the legal consequence of that provision. Thus, he found that the "absolute discretion" enjoyed by the General Partner under the partnership agreement was entirely inconsistent with the existence of a fiduciary duty to locate or approve a sale at a higher price to a third party.

Chancellor Allen also grounded his denial of the preliminary injunction motion on the well-established precedent that Host was under no fiduciary duty to offer a "fair" price for the limited partnership interests, so long as the tender offer did not entail coercion and was made with full disclosure. As Chancellor Marvel explained, "it would not be appropriate under equitable principles . . . to bind an offeror [making a noncoercive tender offer on full information] to an implied commitment to pay additional consideration for tendered shares in an amount made up of the difference between the price offered and what might ultimately be found to be the intrinsic value of the shares in question." Reaching a preliminary conclusion that the Offer was not structurally coercive and that disclosures were not defective, Chancellor Allen denied the motion.

Although Chancellor Allen perceived no justification to enjoin the Offer, his final remark was that "[t]he theories of plaintiffs that the general partner has intentionally arranged matters ( i.e., the recent opportunity to refinance) in a way to push limited partners to sell, and that, in the context of the Partnership Agreement, it has an obligation to pay to limited partners a fair price and has violated that obligation, are matters that may be litigated hereafter."

I. The Tender Offer Is Ultimately Successful

By the May 15, 1996 end date of the Offer, only approximately 30% of the limited partnership Units had been tendered. Consequently, Host raised the price to $150,000 and extended the offer until June 13, 1996. The revised Offer was successful, although only 50.4% of the limited partnership Units were tendered.

Two of the three original plaintiffs, MacKenzie and Wasserman, chose not to tender their Units. Salter, on the other hand, decided (or, as he would have it, was coerced) to tender.

J. The Refinancing is Accomplished

On September 23, 1996, the General Partner completed the refinancing for a total of $266 million. Of this amount, $222.5 million was attributable to the mortgage debt on the partnership's hotels and $43.5 was attributable to the Partnership's 50% stake in the Santa Clara property. As described by the Partnership's Form 10-Q, filed October 21, 1996, the refinancing was completed on terms very similar to those discussed in the Offer to Purchase. The Form 10-Q also announced that 1996 partnership distributions would be increased to at least $20,000 per Unit.

K. Distributions Increase Dramatically

Although the Offer to Purchase projected distributions of $11,612 per Unit for 1996 and $16,880 per Unit for 1997, the actual distributions per Unit were several times higher than projected. As described in the complaint:

Having obtained the Units and control it sought, Host Marriott immediately doubled the per Unit distributions. In 1995, distributions were $4,615 per Unit in April and $10,385 per Unit in October. In 1996, distributions were $4,615 per Unit in April (just prior to the Tender Offer), and $33,123 per Unit by the end of 1996, following the Tender Offer's consummation. In 1997, distributions were $27,204. Thus the average annual distribution after Host owned a majority of the Units was $30,164 or double the average annual distribution prior to Host's purchase of those Units. . . . The Hotels' performance has improved only slightly during the year following the Tender Offer. Defendants failed to disclose their plan to increase operating distributions following the Tender Offer [and] . . . affirmatively stated that there was a strong risk that future distributions would actually decrease.

L. The December 1998 Merger

The complaint alleges that in December 1996 and January 1997, Host Marriott and its affiliates "were actively exploring the possibility of engaging in a business combination with a so-called `paired-share' REIT." During the fourth quarter of 1997, Host Marriott began internal consideration of the possibility of reorganizing itself into a stand-alone real estate trust ("REIT"). In April 1998 Host publicly announced its decision to pursue the transaction, which closed in December of that year.

The transaction involved the merger of the Partnership into a subsidiary of a newly created "Operating Partnership" owning approximately 125 hotels. In the merger, Units were converted into units of the Operating Partnership, thus providing former Unitholders with interests in a much larger and more diversified entity.

The proposed exchange value of the partnership's Units, $237,334, was determined using appraisals and a fairness opinion from American dated March 1, 1998. Host attributed the change in Unit value following the Offer to increased profitability of the Partnership and decreased capitalization rates in the hotel industry.

III. DISCUSSION

A. Applicable Standards 1. Motion to Dismiss

"[W]hen evaluating a motion to dismiss for failure to state a claim, the truthfulness of all well-pleaded allegations in the complaint is to be assumed." Further, the plaintiff is entitled to all reasonable inferences that can be drawn from the complaint. "However, `[c]onclusions . . . will not be accepted as true without specific allegations of fact to support them.'" The motion to dismiss will be denied unless it appears with "reasonable certainty" that the plaintiff could not prevail on any set of facts that can be inferred from the pleading. 2. Summary Judgment

Relying on the Larson affidavit, discussed below, defendants have moved for summary judgment with respect to the claim that they failed to make distributions to which plaintiff was entitled. A motion for summary judgment will be granted when no genuine issue as to material fact exists and the moving party is entitled to judgment as a matter of law. The moving party has the burden of clearly proving that no material factual dispute exists and the court resolves any doubt against the moving party. Finally, if "a more thorough development of the record would clarify the law or its application," the court may, in its discretion, deny summary judgment.

B. Plaintiff's Contentions and Legal Theories

Plaintiff's theories of liability are varied and conceptually intertwined. Ultimately, one pertinent fact (and inferences reasonably drawn therefrom) precludes granting defendants' motions with respect to claims relating to their projections of and control over distributions to limited partners. Also, to the extent that the complaint states a disclosure claim and plaintiff was thereby not fully informed about the nature of his claim when he tendered his shares, he did not acquiesce in defendants' alleged misconduct. For the reader's convenience, I think it useful to discuss the allegations that survive defendants' motions and then to explain briefly why certain of plaintiffs other theories cannot be sustained.

First, plaintiff's claims are as follows.

1. Applicability of the Entire Fairness Standard to Transactions Between Host Marriott and the Limited Partnership

Plaintiff argues that the entire fairness standard must apply to the Offer. This result is warranted, according to plaintiff, because the combined effect of the Offer and the Amendments was like that of a merger and Host, therefore, stood on both sides of the transaction. The absence of any process to ensure fairness to the limited partners, according to plaintiff, warrants a finding against the defendants.

2. Alleged Breaches of the Partnership Agreement

Although conceding that the subject of a tender offer by Host Marriott for limited partnership interests "was not contemplated by the parties" or treated expressly in the partnership agreement, the Complaint alleges that the Offer nevertheless breached that contract. Plaintiff's theories are: (a) the Offer should have been governed by the terms of § 5.02(B)(ii) of the partnership agreement, (b) Host Marriott breached the implied covenant of good faith and fair dealing, and (c) Host Marriott breached the implied obligation to pay a fair price in the Offer.

3. Alleged Breaches of Fiduciary Duty

Broadly speaking, the defendants are alleged to have breached their fiduciary duties as follows: (a) by failing to seek out the highest available price in the sale of the limited partnership, (b) by offering and paying an unfair price, (c) in the case of the General Partner and its directors, by (1) inadequately responding to the threat posed by the Offer to the limited partners and the Partnership and (2) disloyally manipulating the Partnership's affairs so as to benefit Host instead of the limited partners, (d) by coercing the Unitholders into tendering, and (e) by disseminating a false and misleading Offer to Purchase in connection with the Offer.

C. Summary of Conclusions

Because of the interplay between several of plaintiff's theories, I think it useful to summarize my conclusions at the outset.

• The challenged transaction was a tender offer, and not a merger. Therefore, the entire fairness standard does not apply to the transaction simply because Host controlled the General Partner;

• Plaintiff's contract claims are dismissed;

• Plaintiff's Revlon claim is dismissed;

• The General Partner was under no fiduciary duty to protect the limited partners from the Offer. Viewing the evidence in the light most favorable to plaintiff, however, further discovery is necessary to determine whether the General Partner acted disloyally in limiting distributions, i.e., whether the General Partner managed distributions of Partnership cash in contemplation of and to facilitate the Offer;

• The Offer was not actionably coercive;

• Plaintiff's disclosure claims will be dismissed except for those relating to the projected distributions.

D. Claims Relating to Distributions Will Survive Defendants' Motions

1. Was the Disclosure Regarding Distributions Materially Misleading?

The law is well-settled that "in extending an offer to the limited partners to buy their limited partnership Units the general partner owes a duty of full disclosure of material information respecting the business and value of the partnership which is in its possession." The legal test for materiality, identified by the United States Supreme Court in TSC Industries, Inc. v. Northway, Inc. and adopted by the Delaware Supreme Court in Rosenblatt v. Getty Oil Co., is stated as follows:

An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote. . . . It does not require proof of a substantial likelihood that disclosure of the omitted fact would have caused the reasonable investor to change his vote. What the standard does contemplate is a showing of a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder. Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the "total mix" of information made available.

Where, as here, the lone source of disclosure is a fiduciary having a conflicting interest, an obligation of complete candor is imposed on the fiduciary and judicial scrutiny of the disclosure is more exacting.

Defendants projected a short-term decrease in the amount of cash distributions to limited partners. The Offer to Purchase projected distributions extending for ten years, never exceeding $30,000. Although the possibility of increased future distributions was discussed, defendants indicated a belief that the cash reserves would be maintained, presumably leaving distributions unaffected. Soon after the Offer closed in June 1996, however, distributions increased so that Unitholders received over $33,000 in that year alone. In light of the timing of defendants' change of policy, plaintiffs are entitled to an inference, at this stage of the proceedings, that defendants did not believe the projections when they made them. As such, aspects of defendants' motion to dismiss that relate to distributions must be denied.

Defendants warn the court of the post hoc ergo propter hoc fallacy. The issue presented, however, is not one of causation. Instead, it is that distributions rose so dramatically and so soon after defendants' disclosure indicated the contrary expectation that, at this preliminary stage, a predicate exists for inferring that the disclosures were false when made.

Defendants present two arguments against such an inference. First, they cite my opinion in Sanders v. Devine and Vice Chancellor Jacobs's opinion in Noerr v. Greenwood as support for its position that the "fact that an issuer has immediate access to information about the company's financial status does not support an inference that it knows the future."

In the circumstances, neither case is helpful to defendants. Noerr can be distinguished because, while numerous factors beyond a board's control may contribute to stock price fluctuations, the Partnership's distribution policy was unilaterally controlled by the General Partner. Sanders is inapplicable because in that case, (a) no "secret plan" was alleged in the complaint, (b) a "secret plan" theory was fundamentally inconsistent with the overall theory of the complaint, and, critically, (c) plaintiff sought to allege a conspiracy concocted over five years before it was executed.

The present complaint, on the other hand, alleges that the General Partner disclosed facts about its distribution policy and within months, unilaterally made a dramatic change in course. There may well be a good explanation for this change. Because the current record provides none, however, further inquiry is warranted.

Defendants also argue that the Offer to Purchase disclosed that the refinancing would soon be accomplished and that the reserves were created to provide cash needed to consummate the refinancing. As such, defendants claim that "the `foreseeable future' did not necessarily include endless reserves."

I agree, as did Chancellor Allen, that some limited partners must have recognized that Host, once it stood to benefit from doing so, might cause the General Partner to change its distribution policy. Those perceptive investors refused to tender and profited handsomely. However, by (a) making projections that did not contemplate any significant increase in distributions based on terminating the lender reserves and (b) affirmatively suggesting that a "significant portion" of the reserves would be needed to accomplish the proposed refinancing, defendants provided the basis for an inference by limited partners that the reserves would stay in place and distributions would remain constricted. In the circumstances, plaintiff must be given further opportunity to explore when and why the distribution policy changed.

Several of plaintiffs disclosure claims may turn on the resolution of this issue, and are therefore not subject to dismissal. As discussed, the projected distributions may prove to be false and misleading. Second, if defendants planned, in April 1996, to increase distributions after the refinancing, they were obliged to disclose that plan as part of the expected benefit to Host upon completing the Offer. Third, it is unclear, based on the present record, whether plaintiffs claim that defendants failed to disclose the possibility of an excess refinancing distribution is linked to the disclosure regarding projected distributions. In other words, it may be that the increase in distributions was based, in part, on excess refinancing proceeds. Along those lines, if such increase was expected, it should have been disclosed.

Finally, a finding that the projections were false may also impact the validity of the valuation performed by American. Specifically, one of the valuation methods employed by American was a "Unitholder Cash Distribution Analysis." If Host withheld from American a plan to change the distribution policy, Host may have breached its fiduciary duties.

2. The Summary Judgment Issue: Was the Tender Offer Tainted by the General Partner's Disloyal Manipulation of Unit Value?

Defendants have moved for summary judgment on plaintiff's allegation that defendants failed to make distributions to which the limited partners were entitled, arguing that "the undisputed facts show that creation of the reserves was within the General Partner's reasonable discretion." In support of their argument, defendants present an affidavit filed by Gregory Larson, a manager for Host, in connection with the preliminary injunction hearing in 1996. At that time, Larson stated that "[t]he Partnership has not been `stockpiling cash in anticipation of the tender offer' as alleged by plaintiffs in this action. Rather, over the last four years, the Partnership has established and funded reserve accounts in anticipation of its mortgage debt refinancing."

Although this affidavit gives a plausible explanation for the policy, defendants ignore the nature of plaintiff's claim.

Plaintiff is not, as defendants characterize it, alleging simply that he was entitled to distributions. Indeed, in light of this affidavit, such argument would fail.

Rather, plaintiff argues that even if the General Partner's authority over distributions was broad, its power was not unfettered. Specifically, the fortuitous timing of the General Partner's change in distribution policy calls into question the good faith of the General Partner's management decisions in the time period preceding the Offer. This aspect of plaintiff's position is connected to the surviving disclosure issues, as follows: if defendants anticipated that distributions would increase shortly (the core of the disclosure claim), they may have created and/or maintained the cash reserve at an artificially high level in order to lower the limited partners' perception of Unit value (the core of the loyalty claim).

Plaintiff argues that "[g]iven Defendants' refusal to increase distributions notwithstanding their ability to do so, Unitholders perceived that, unless they tendered, they would be faced with a return limited to $15,000 per Unit for the foreseeable future." Further, plaintiff argues that the six month delay of the refinancing and the increase in distributions shortly after the Offer closed "allows a reasonable inference that the creation and maintenance of cash reserves were improperly designed for the benefit of Host, not the limited partners. . . ."

Plaintiffs claim is analogous to that made in Litle v. Waters, where the plaintiff alleged that the defendant had frozen dividends in order to effectuate an oppressive squeeze-out. Under the authority of Litle, if plaintiff can prove that the General Partner limited distributions in anticipation of the Offer, that decision could be viewed as an interested transaction subject to heightened judicial scrutiny. I must note that the facts alleged in Litle evidenced a more obvious form of inequitable conduct than the situation presented here. Nevertheless, because neither of defendants' affidavits nor any other evidence elucidates the circumstances surrounding the significant shift in distribution policy, further proceedings are needed to determine the law's application to the facts.

I note that the burden of proof at trial will remain, at the outset, on plaintiff. "Nevertheless, on the motion for summary judgment, the movant, to prevail, must still demonstrate that there are no material issues of fact in dispute." Further discovery is needed to develop facts regarding the timing, motivation and effect of the General Partner's decisions.

E. The Remaining Claims in the Complaint Will be Dismissed

Keeping in mind the issues remaining to be litigated, I think it useful to discuss the aspects of the complaint that will be dismissed for failure to state a claim.

1. The Entire Fairness Standard Does Not Necessarily Apply to Transactions Between the General Partner or its Affiliates and the Limited Partners

The parties agree that Host Marriott controlled the General Partner. Host Marriott was the offeror. Plaintiff therefore states that because Host Marriott stood on both sides of the transaction, the entire fairness standard should apply.

Plaintiff recognizes the distinction between a tender offer and a merger. However, plaintiff argues that the combination of the Offer and the Consent Solicitation amounted to a reorganization akin to a merger. If that were true, a duty of entire fairness would theoretically apply. However, there is a fundamental difference between a merger, in which the General Partner (or, in the corporation context, the board of directors) plays an integral role, and a tender offer, in which the offeror deals directly with the limited partners (or the stockholders). The facts of this case do not blur the line to such an extent that I can treat the transaction as a merger.

If one party stands on both sides of a transaction, it might effectuate changes to the detriment of fellow investors. In such situations, the entire fairness test properly applies to protect minority stockholders from the tyranny of the controlling entity. In the present case, however, Host Marriott stood on one side of the transaction and the limited partners on the other. It would be exceedingly paternalistic and intrusive to hold that the entire fairness test is required to protect the limited partners from themselves.

That the Amendments were presented to the limited partners in connection with the Offer does not alter the voluntary nature of either the Consent Solicitation or the Offer. As I discuss in section III.E.5, infra, by presenting the Amendments and the Offer together, limited partners had more, not less, freedom of choice. In the circumstances, I see no reason to depart from the rule that tender offers are not subject to an entire fairness standard.

2. Revlon Duties Do Not Apply

Plaintiff initially asserted that defendants breached their fiduciary duties to consider or pursue alternatives to the refinancing and tender offer, consistent with the Supreme Court's holding in Revlon, Inc. v. MacAndrews Forbes Holdings, Inc. These contentions were considered rejected in the Dismissal Opinion, when I stated:

In denying preliminary injunctive relief Chancellor Allen held, on a preliminary basis, that the structural elements of the partnership giving [the General Partner] effective control over the management and disposition of the assets of the partnership precluded a finding that the limited partners were entitled to any premium for the passage of "control." . . . Thus, he rejected plaintiff's contention that defendants breached their fiduciary duties by failing to solicit possible alternative transaction. . . . This conclusion would seem to be consistent with, and, indeed, compelled by applicable Delaware precedent.

Plaintiff apparently concedes the lack of merit in his argument, as he does not address this aspect of defendants' motion. However, even if he does not make such a concession, my previous ruling is dispositive on this allegation. This aspect of the complaint is hereby dismissed as a matter of law.

3. Plaintiff's Contract Claims Must be Dismissed

Plaintiff's breach of contract claims involve provisions of the partnership agreement intended to provide the limited partners with a procedure to ensure the fairness of transactions between the Partnership and the General Partner or its affiliates. Section 5.02(B)(ii), in particular, governs the sale of Partnership assets (the hotels) to the General Partner or its affiliates, and prescribes a fixed procedure, including independent appraisals and a vote of the limited partners. These provisions are plainly inapplicable to the Offer. Plaintiffs contract argument is three-fold.

a. Section 5.02(B)(ii)

Plaintiff firsts contends that the Offer constituted a "sale of the hotels" and triggered the appraisal process required by section 5.02(B)(ii). I disagree. Section 5.02(B)(ii) was clearly intended to apply to a sale of the partnership's assets, i.e., the hotels, not to a tender offer for the Units. The two cannot be equated. Section 17-701 of the Delaware Revised Uniform Limited Partnership Act, states: "A partner has no interest in specific limited partnership property," and has been interpreted to preclude the attempt to equate ownership interests in a partnership with ownership of partnership property. Thus, plaintiff's first argument must fail, as there was no "sale of the hotels" sufficient to invoke the protections of section 5.02(B)(ii).

b. Implied Covenant of Good Faith and Fair Dealing

Plaintiff next contends that defendants breached the implied covenant of good faith and fair dealing. Assuming that the Offer did not trigger the protections of section 5.02(B)(ii), plaintiff argues that the intention of the Offer was to circumvent that section, in that "[t]he tender offer transferred the economic benefits of the operation of the Hotels from a majority of the limited partners to an affiliate of the General Partner in a manner that avoided the protections of the independent appraisal process."

This argument also fails. Nothing in the agreement precludes the General Partner or its affiliates from making a tender offer for the Units. I will neither assume nor infer, based on this allegation, that defendants chose to structure the transaction as a tender offer, as opposed to a sale of assets, merely to circumvent the agreement s appraisal provisions.

Moreover, there is a critical distinction between a sale of the hotels, which (if approved by the requisite number of limited partners) would affect supporters and dissenters alike and a tender offer, in which the assets underlying the Units would remain unchanged. Thus, the rationale for contractually limiting the General Partner's participation in a sale of the hotels does not apply in the tender offer context, and the Offer cannot be viewed as a way to circumvent the contract's intent.

c. Implied Obligation to Establish a Fair Price

Plaintiff's last argument is that defendants breached an obligation they imply from the terms of the partnership agreement to ensure fairness in any transaction involving the General Partner. This obligation is said to arise from the parties' expectation, because "[t]he framework of the Partnership Agreement . . . — including the "blue sky" process designed to protect the investors — compels the conclusion that had the issue been addressed, the price of a tender offer by the General Partner or its affiliates would have been determined by an independent valuation process akin to the appraisal process set forth in Section 5.02(B)(ii)." In support of this argument, plaintiff quotes from Schwartzberg v. Critef Assocs., L.P., as follows:

It is of course generally recognized that implicit obligations consistent with the text of written obligations may, indeed under correct conditions should be inferred under both statutes and contracts. . . . [A]n [implied contractual] obligation may be inferred when, given the terms of the express contract made and the circumstances of the contracting process, it is more likely than not . . . that if the parties had thought to address the subject, they would have agreed to create the obligation that is under consideration by the court ex post facto.

Essentially, plaintiff asks me to rewrite the partnership agreement to include an independent valuation process for a non-interested transaction between an affiliate of the General Partner and the limited partners. I will not do so. I recognize that there are unusual factual situations where it is appropriate for the court, based on the surrounding circumstances, to draw from and enforce implied obligations in contracts. However, where such a situation is not present, the law is well-established that "it is not the proper role of a court to rewrite or supply omitted provisions to a written agreement."

I see no basis to draw the inference plaintiff seeks. The drafters of the partnership agreement crafted a protective provision designed to ensure that in a self-interested transaction, specifically a sale of the hotels to the General Partner or one of its affiliates, the Partnership would receive a fair price for its property. A similar provision, providing for an independent valuation process in the event of a tender offer by the General Partner or its affiliates, could have been made a part of the agreement but was not. Due o the essentially voluntary nature of tender offers, I will not imply an intention to subject them to some independent appraisal process.

For the above reasons, plaintiff's contract claims must be dismissed.

4. The General Partner Was Under No Duty to Protect the Limited Partners From the Threat of an Unfairly Priced Offer

Plaintiff claims that the General Partner's "failure to take steps to protect the limited partners in response to its affiliate's unfair and misleading proposal," amounted to breach of the General Partner's duty of due care and good faith. Such a breach is alleged to be shown by the General Partner's failure: (a) to retain an outside advisor to opine as to the fairness of the offer, (b) to form a committee of Unitholders to independently evaluate the offer and (c) to resolve or at least minimize conflicts of interests in favor of the Unitholders. Plaintiff cites Unocal Corp. v. Mesa Petroleum Co., where the Supreme Court stated, "in the broad context of corporate governance, including issues of fundamental corporate change, a board of directors is not a passive instrumentality."

Plaintiff also relies on a comment I made during oral argument on an earlier motion to dismiss in this case, in which I referred to Vice Chancellor Jacobs' decision in the Sealy Mattress case and suggested some criticism of the General Partner's passivity in response to the Offer.

Plaintiff's argument is premised on an analogy to principles of corporate fiduciary duty law that, after full consideration, I cannot accept. It is simply unreasonable and inappropriate to impose on the General Partner or its directors (all of whom were controlled by Host) an obligation to have acted independently of Host in relation to the Offer, which was, after all, structured as a voluntary transaction between Host and the limited partners.

In denying the preliminary injunction, Chancellor Allen noted "the significance of operating within the context of rather highly specified rights of this limited partnership." Important among those "highly specified rights" are two express contractual provisions limiting the freedom of Host and the General Partner to act in certain conflict of interest situations. These "rights" are the appraisal process in the case of a sale of hotel properties, previously discussed, and a restriction on the General Partner's power to change the terms of the management agreements to increase "the compensation payable to the General Partner or any of its Affiliates, or which adversely affects the rights of the Limited Partners." Both of these conflict situations involve transactions in which individual limited partners would not have an exercisable choice of whether or not to participate. Thus, they would be bound by the action of the General Partner or by a vote of the majority. The fact that the Partnership Agreement eliminated the General Partner's involvement in these conflict situations makes clear that the limited partners anticipated and understood that they could not rely on the General Partner to act on their behalf when Host's interests were directly adverse.

The situation at issue here — a tender offer by the General Partner or one of its affiliates — was not addressed in the partnership agreement. No contractual provision was needed, however, because the law provides a framework that is well-suited to the individual and essentially voluntary nature of such a transaction. Unlike a third party tender offerer, who is subject to no fiduciary duties to the target-company stockholders, Host was unquestionably subject to the requirement of Delaware law that its Offer be made with complete disclosure and be non-coercive. In my judgment, this is an adequate framework to protect the interests of the limited partners without imposing an awkward and overly formalistic version of Unocal duties on persons controlled by Host.

I also note that, except for allowing the Amendments to be voted upon, no act of "corporate governance" was required to complete the transaction. This distinguishes the matter from the freeze-out merger contested in Sealy, in which the defendant board, albeit controlled, was nevertheless obliged by statute and established law, "to make an informed, deliberate judgment, in good faith, that the merger terms, including the price, were fair and that the merger would not become a vehicle for economic oppression." This aspect of plaintiff's claim is dismissed.

5. The Offer Was Not Coercive

Delaware law is well-settled that "the adequacy of the price in a tender offer does not raise a triable issue unless price is connected to valid claims of breach of fiduciary duty, such as disclosure problems or actionable coercion." Chancellor Allen relied on this principle of law in denying the preliminary injunction and it applies in the context of this motion to dismiss. The premise underlying the law's treatment of a tender offer is "the understanding that tender offers are voluntary transactions; that is, that [Unitholders] each have a free choice to . . . tender or not at a given price." Unless the complaint can be read to adequately plead a claim of coercion or a disclosure violation, plaintiffs fair price claim is subject to dismissal.

It is hard to take seriously a claim that plaintiff and others were "coerced" into tendering when the Offer failed to attract a large majority of the limited partnership Units by its initial closing date. Only after Host raised its price by 20% to $150,000 per Unit and extended the term of the Offer did it succeed in attracting tenders of more than 50% of the Units and, even then, only barely so. Can it be that a non-frivolous tender offer that fails to attract tenders is, nonetheless, actionably "coercive?" If not, can that offer become actionably coercive simply by a 20% increase in its price term?

Whatever the answer to those questions may be in the abstract, it is clear in this case that no coercion is alleged. That is, there was no threatened bad consequence resulting from the conduct of Host or the General Partner that compelled a decision to tender. I am mindful that the decision of each limited partner whether or not to tender entailed a weighing of the price offered against the perceived risks and rewards of continuing to hold the investment. Just because Salter and others ultimately decided that it was in their best interest to sell, rather than continue to hold their limited partnership interest, however, does not mean that they were "coerced" into doing so in any legally meaningful sense.

Plaintiff attempts to characterize as "coercion" the fact that, if the tender offer was successful (and the Amendments approved), nontendering Unitholders, as a group, would lose the capacity to control the vote independently of the General Partner. Chancellor Allen was unable to identify in that fact "an actual threat to the investment interests of the limited partners from the general partner's acquiring a majority" of the limited partnership voting power. There is nothing in the present complaint that suggests a different conclusion. Tender offers for majority control regularly occur and have never been found coercive for that reason alone.

Plaintiff also claims that the Offer was actionably coercive because there were, potentially, adverse tax implications to nontendering Unitholders, as described in the Offer to Purchase. Chancellor Allen concluded that this claim failed as a matter of law because "[t]o hold that the collective action effect of the tax constitutes a reason why a fiduciary cannot extend an any and all offer would sharply reduce the availability" of potentially valuable transactions. I concur.

Next, plaintiff claims that the tendering Unitholders "were forced to vote for the amendments as a condition of the sale of their Units even though these amendments would be irrelevant to the tendering Unitholders." This is an exercise in illogic. In fact, the concurrent but independent existence of the Consent Solicitation and the Offer gave Unitholders more freedom of choice rather than less. Specifically, Unitholders who wanted the Offer to fail but wanted to be bought out if it succeeded had an effective strategy. They could simultaneously tender and withhold consent. Similarly, those who wished to see the Offer succeed but did not want to sell could refuse to tender but consent to the Amendments. In theory, at least, the only group that both tendered and gave a consent were those who both wanted the Offer to succeed and wanted to participate in it. To them, the Consent Solicitation was an obstacle to the desired end, not a goad to agree to changes not otherwise in their interest.

Finally, plaintiff contends that the Unitholders were "coerced" into tendering because the General Partner told the Unitholders that the refinancing of the mortgage debt could be seriously detrimental to them, i.e., by restricting any sale of the hotels for a ten-year term, prohibiting pre-payment of the debt, and increasing future debt service. Although complaining of their coercive effect, plaintiff does not dispute the accuracy of these statements as they relate to the successful completion of the Offer. Accurate descriptions of the consequences of a successful tender offer do not amount to coercion. As the Supreme Court observed in Williams v. Geier:

The simple answer . . . is that the Proxy was merely stating facts which were required to be disclosed. These disclosures were neutrally stated and were not threatening in any respect. . . . The board could not couch these disclosures in vague or euphemistic language or in terms that would deprive the stockholders of their right to choose. The disclosures must be forthright and clear, and they were in this case.

The same reasoning applies here. The Offer to Purchase and the General Partner's Schedule 14D-9 merely disclosed neutral, non-threatening factual possibilities that could be considered important by a Unitholder in determining whether or not to tender his or her Units. This claim also fails and is dismissed.

6. Disclosure Violations

The complaint also alleges that defendants "purposefully failed to provide full, truthful and adequate information to the limited partners," and that such disclosure violations warrant a duty to pay a fair price in the Offer. The legal standard for a disclosure claim in the context of a tender offer by a fiduciary is discussed in section III.D.1, supra. I have already discussed plaintiffs' allegations of non-disclosure or misrepresentation that are connected to distributions. I turn now to plaintiffs remaining allegations.

a. Cash Not Disclosed in the Unit Valuation

I agree with defendants that plaintiffs claim merely presents a "quarrel over methodology." It may be that plaintiffs expert's approach is more easily understood than defendants' approach. However, this is not adequate reason for finding a disclosure violation.

b. Substantial Undervaluation of Hotels

Plaintiff contends that the appraisal results were manipulated in order to reduce the valuations of the hotels and thus, the Units. As evidence of this change, plaintiff notes that as of 1996, the value of the hotels had more than doubled since the original offering, and that the conversion price of the Unit in the REIT merger was $237,334 per Units. Plaintiff argues that contrary to defendants' assertion that the increase was the result of a drop in prevailing capitalization rates of more than 20% (200 + basis points), his expert, relying on "the most commonly relied upon industry publication" opined that the decrease in rates was significantly lower, thus resulting in a valuation increase of only 5% (52 basis points). Plaintiff also finds value suppression in the alleged use of "inflated capitalization rates" by American Appraisal, noting that American's 12.2% base case cap rate yielded a lower valuation than the average cap rate at the time, which was only 10.4%.

Again, the distinction drawn by plaintiff is merely a quarrel over methodology. Defendants' affidavit, relying on the same industry publication as plaintiff, shows that the base case cap rate used by American Appraisal was within the range used by the hotel industry at the time, and also that the cap rates dropped between 200 and 300 points. Further, that plaintiffs expert disagrees with the use of a base case cap rate as compared to an average cap rate or with the specific amount that the basis points dropped is not relevant to the motion before me. This dispute would have significantly more importance were I attempting to value the hotels. I am not. Plaintiff was not misled by this methodology and he has not alleged how other Unitholders would be. Therefore, this claim fails and is dismissed.

c. Advantage of the Transaction to Host Marriott

Plaintiff alleges that while Host Marriott's purported business motivations were discussed in the Offer to Purchase, defendants did not disclose the financial benefits to be gained by Host Marriott as a result of the Offer, such as increased cash distributions and the addition of the hotels as assets on Host Marriott's balance sheet.

The advantage of increased distributions is a corollary to the surviving disclosure claim and, therefore, will not be dismissed. As to the accounting benefit, plaintiff has not alleged sufficient facts for me to find that defendants' alleged failure to inform the Unitholders of the financial benefits that Host Marriott would receive from the addition of the hotels as assets on its financial statements is a material nondisclosure. Also, common sense dictates that an acquirer of majority ownership in a partnership will reflect such ownership on its financial statements. This claim is dismissed.

F. Issues of Standing or Acquiescence

Salter, the only remaining plaintiff, tendered in the Offer. Generally speaking, of course, a person who voluntarily accepts the benefits of a transaction with knowledge or means of knowledge of all the material circumstances thereof is precluded from thereafter attacking the same transaction. The crux of the issue is whether the party was informed when accepting the benefits.⁸⁴

I requested briefs by the parties discussing whether by tendering, Salter acquiesced in defendants' alleged conduct or otherwise waived rights that may have been available to him. After further consideration, I conclude that there are valid jurisprudential reasons to permit Salter to continue acting as class plaintiff notwithstanding the fact that he was admittedly aware of all or nearly all of the nondisclosures or misrepresentations about which he now complains. To rule otherwise would discourage plaintiffs and their counsel from acting promptly to litigate disclosure claims in advance of the conclusion of a transaction. This is directly at odds with the interests of the class who are best served when full and complete disclosures are made in a timely fashion. Moreover, it is also true that even Salter did not know that distributions would increase dramatically after the Offer closed, a fact that he now relies on in challenging the completeness and accuracy of the disclosures made in the Offer to Purchase. Thus, I cannot conclude that even Salter was fully informed when tendering.

IV. CONCLUSION

For the foregoing reasons, defendants' motion to dismiss is GRANTED IN PART and DENIED IN PART. Specifically, plaintiffs contract claims, Revlon and Unocal claims, coercion claims, and disclosure claims not relating to distributions are hereby DISMISSED. Defendants' motion for summary judgment is DENIED.

_________________________ Vice Chancellor