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Fitzgerald v. Cantor

Court of Chancery of Delaware, New Castle County
Nov 5, 2001
C.A. No. 18101 (Del. Ch. Nov. 5, 2001)

Opinion

C.A. No. 18101

Submitted: April 17, 2001

Decided: November 5, 2001

Rodman Ward, Jr., Karen Valihura and Jennifer C. Kelleher of Skadden, Arps, Slate, Meagher Flom, LLP Wilmington, Delaware. OF COUNSEL: Thomas J. Schwarz and Joseph M. Asher of Skadden, Arps, Slate, Meagher Flom LLP, New York, New York. Attorneys for Plaintiffs/Counterclaim Defendants and Third-Party Defendants.

Stephen E. Jenkins and Richard I. G. Jones, Jr. of Ashby Geddes, Wilmington, Delaware. OF COUNSEL: Saul B. Shapiro, Kieran M. Corcoran and Deborah K. Steinberger of Patterson, Belknap, Webb Tyler LLP, New York, New York. Attorneys for Rodney Fisher.

Stephen E. Jenkins and Richard I.G. Jones, Jr. of Ashby Geddes, Wilmington, Delaware. OF COUNSEL: Barry I. Slotnick, Michael Shapiro, J. Lawrence Crocker and Joshua T. Rabinowitz of Slotnick, Shapiro Crocker, LLP, New York, New York. Attorneys for Defendants and Counterclaim Plaintiffs Cantor Fitzgerald Incorporated and Iris Cantor.


MEMORANDUM OPINION INTRODUCTION

Cantor Fitzgerald, L.P. and CF Group Management, Inc. (collectively "plaintiffs") filed an action in this Court seeking a declaration that certain actions taken with respect to an offer to exchange partnership units and amendments to the Partnership Agreement are valid. The defendants, Iris Cantor (individually and as trustee for certain family trusts), Cantor Fitzgerald, Inc. and Rod Fisher (collectively "defendants") answered and filed several counterclaims. Presently before the Court are the plaintiffs' motion to dismiss [the counterclaims] under Court of Chancery Rule 12(b)(6) and their motion for judgment on the pleadings under Court of Chancery Rule 12(c). This is my decision on these motions.

STATEMENT OF FACTS A. The Parties

Plaintiff and Counterclaim Defendant CFLP is a limited partnership organized and existing under the laws of the State of Delaware. CFLP is engaged in the inter-dealer and institutional brokerage of financial instruments and other assets primarily through Cantor Fitzgerald Securities, a general partnership organized and existing under the laws of the State of New York, in which CFLP owns a 99.5% partnership interest. CFLP also owns a majority of the outstanding stock of eSpeed, a Delaware corporation publicly traded since December 1999. CFLP also controls nearly 98% of the voting power of eSpeed's common stock. Third-party Defendant eSpeed was established as a separate Delaware corporation in June 1999. Prior to its incorporation, eSpeed existed as a division of CFS.

CFI and Iris Cantor have not counter-claimed against eSpeed. Only Fisher has filed a third-party complaint against eSpeed.

Plaintiff and Counterclaim defendant CFGM, a corporation organized and existing under the laws of the State of New York, is the sole and managing general partner of CFLP.

Third-party Defendant Howard W. Lutnick is a resident of New York and is the sole shareholder of CFGM. He currently also serves as Chairman and Chief Executive Officer of eSpeed.

Defendant CFI, a corporation organized and existing under the laws of the State of Nevada, has offices in California, and is currently a Limited Partner of CFLP. CFI became a Limited Partner in May 1996. Prior to that, from 1992 to 1996, CFI was the Managing General Partner of CFLP.

Defendant Iris Cantor, a resident of California, is a Limited Partner of CFLP. Iris Cantor was married to B. Gerald Cantor, CFI's founder, until his death in 1996. Iris Cantor is a member of the Board of Directors of Market Data Corporation ("MDC") and is the controlling shareholder of MDC.

Defendant Fisher, a resident of New York, is a Limited Partner of CFLP and is Chairman and Chief Executive Officer of MDC.

B. History of the Parties' Relationships

CFLP was formed as a Delaware Limited Partnership in 1992. From 1992 to 1996, CFLP had two general partners: CFI and CFGM. CFI, then controlled by B. Gerald Cantor, was the Managing General Partner. In January 1996, Mr. Cantor was declared incapacitated pursuant to the Partnership Agreement. This declaration spawned a suit in this Court ("First Delaware Action") in March 1996 seeking a determination of the validity of the declaration and confirmation that CFGM was now the Managing General Partner. This action was settled on the first day of trial and resulted in the Settlement Agreement that figures prominently throughout the litigation between these parties. In its simplest terms, the Settlement Agreement resulted in CFI becoming a limited partner in CFLP with certain non-redeemable partnership units and left CFGM as the sole managing general partner.

Specific provisions of this Settlement Agreement will be discussed where germane to the Court's analysis of these motions.

In April 1998, the parties resumed litigation. CFLP filed suit in the Delaware Court of Chancery against CFI, Iris Cantor, Fisher, and MDC arguing that the defendant limited partners had violated their fiduciary duties as limited partners by conducting a directly competitive business through MDC. This action resulted in hotly contested and lengthy proceedings that culminated in the Court ultimately finding that the limited partner defendants had acted in bad faith and had breached a contractual fiduciary duty of loyalty to the partnership and their other partners. The Court further concluded that MDC had aided and abetted the limited partners' breach of their fiduciary duty of loyalty. The aftermath resulting from the Second Delaware Action set the stage for the current litigation.

See Cantor Fitzgerald, L.P. v. Cantor, Del. Ch., C.A. No. 16297, Steele, V.C. (March 13, 2000) Mem. Op. ("Second Delaware Action").

C. eSpeed and the Exchange Offer.

Since the early 1990's, CFLP engaged in developing systems to promote fully electronic trading and, by January 1996, had developed a fully operational electronic trading system for internal use. This technology was still limited in that CFLP's customers could not by-pass live CFLP brokers to enter their buy or sell orders. By December 1999, however, CFLP had further developed the technology so that CFLP clients could bypass CFLP brokers and enter their buy sell orders directly into CFLP's electronic trading system. This technology is known as the eSpeed system.

In March 1999, the eSpeed technology was transferred to a separate division of CFS. Shortly thereafter, in June 1999, eSpeed, Inc. was incorporated in Delaware. In December 1999, eSpeed made an initial public offering of approximately 20 percent of its Class A common stock. At the time of the IPO, CFLP transferred the assets comprising the eSpeed system to eSpeed, Inc. The consideration CFLP received for these assets consisted of 44 million shares of eSpeed Class B common stock. The Class B stock has the same rights as the Class A except the Class B shares are entitled to ten votes per share and can be converted into Class A shares.

CFLP elected to convert approximately 3.65 million shares of its Class B shares into Class A stock for sale in the IPO. CFLP realized approximately $69 million from this sale. Immediately following the IPO, CFLP owned approximately 80 percent of eSpeed and controlled approximately 98 percent of the voting power of eSpeed's outstanding voting stock. Lutnick is the Chairman and CEO of eSpeed, and certain other CFLP senior executives also hold senior executive positions with eSpeed. These persons receive compensation for holding these positions consisting of a salary and options for shares of eSpeed stock.

In May 2000, CFLP decided to distribute a portion of the eSpeed shares it held to the limited partners who owned Equity Units in CFLP. The terms of this offer were presented to the limited partners on May 8, 2000, and, in general, would allow limited partners to exchange their Units for a new class of Partnership Units called "eSpeed Units," which would give the holder a right to a distribution of eSpeed shares. This offer will be referred to as the "Exchange Offer."

Under the terms of the Exchange Offer, eSpeed Unitholders may receive, subject to certain conditions, eSpeed shares in a three-step process, receiving 50 percent of the shares to which they are entitled within 30 days after January 8, 2001, 25 percent of the shares within 30 days after July 8, 2001, and the final 25 percent of the shares within 30 days after January 8, 2002.

Participation in the Exchange Offer was conditioned on a Limited Partner's consent to 33 new amendments to the 1996 Partnership Agreement. In general, these 33 amendments had several effects on the rights of CFLP Limited Partners. Moreover, the amendments and the Exchange Offer, as originally presented, had different terms for, and effects on, regular Limited Partners and the defendant-party Limited Partners.

These amendments play a central role in this litigation and will be discussed with specificity as they affect the legal analysis below.

Non-defendant Limited Partners electing to accept the Exchange Offer gave up certain rights previously held under the 1996 Partnership Agreement. For instance, upon a breach of the Partnership Agreement, the Limited Partner now gives up substantial rights to distributions that differ depending on whether the breach was before or after the first distribution date. If the breach is after the first distribution, the non-defendant Limited Partner's Units may be redeemed by the partnership for "zero dollars." On the other hand, the defendants' eSpeed Units would be redeemable, but they would receive value, as set forth in the amendments, for their Units.

The defendants' participation in the Exchange Offer was originally conditioned on accepting the 33 amendments and also agreeing to additional conditions found in Side Letters attached to their Exchange Offer materials. The Side Letters included the following conditions:

On October 19, 2000, CFLP removed the Side Letter requirements as a barrier to the defendants' participation in the Exchange Offer.

1. CFI, Fisher, Iris Cantor, and MDC must accept the ruling and final judgments of the Court of Chancery in the Second Delaware Action regarding the form or declaratory judgment order;
2. They must agree not to pursue any appeals to the Supreme Court of Delaware; and
3. They must agree to dismiss with prejudice litigation being pursued in the U.S. District Court for the Southern District of New York.

The defendants objected to these additional conditions to their participation in the Exchange Offer and argued that they should be permitted to participate under the same terms as non-defendant Limited Partners. Ultimately, on June 5, 2000, CFLP advised the defendants that the Limited Partners overwhelmingly participated in the Exchange Offer and consented to the amendments to the partnership agreement.

CFLP, fully aware of the defendants' objections to the conditions of the Exchange Offer and the amendments enacted contemporaneously with it, filed a Complaint in this Court on June 12, 2000, seeking a declaratory judgment that there has been no breach of fiduciary duty, contractual breach, nor violation of Delaware law in connection with the Exchange Offer or Amendments. On July 18, 2000, the defendants filed their answer containing affirmative defenses, counterclaims, and third-party claims. Finally, on September 15, 2000, CFLP filed a motion to dismiss the counterclaims under Court of Chancery Rule 12(b)(6) and a motion for judgment on the pleadings under Court of Chancery Rule 12(c). The parties fully briefed the motions and orally argued their positions on March 15, 2001. This is the Court's decision on both motions.

In mid-August 2000, the plaintiffs submitted a package to the Limited Partners that contained, among other things, copies of the counterclaims filed against them by the defendants. The purpose of this package was to seek ratification of their actions relating to the Exchange Offer pursuant to certain provisions of the Partnership Agreement. Ratification could provide a global defense to these counterclaims. The Court, deciding these motions on other independent grounds, does not render an opinion as to the effectiveness of ratification here. The defendants challenged the ratification vote as a matter of fact, so this issue could not properly be decided at this stage of the proceedings, in any event.

STANDARD OF REVIEW

The standards this Court uses to evaluate motions under Court of Chancery Rules 12(b)(6) and 12(c) are quite similar. The significant difference lies in the ultimate effect of a successful motion.

The Court will grant a motion to dismiss a claim under Rule 12(b)(6) if "it appears with reasonable certainty that, under any set of facts which could be proven to support the claim, plaintiffs [here, counterclaimants] would not be entitled to relief." Moreover, the Court will accept as true all well-plead facts in the Complaint [counterclaim] and will draw all inferences in favor of the non-moving party. Finally, claims can not be simply conclusory statements, but must be supported by specific allegations of fact.

In re Tn-Star Pictures, Inc. Litig., Del. Supr., 634 A.2d 319, 326 (1993).

Id.

Id.

Similarly, this Court, in evaluating a motion for judgment on the pleadings under Rule 12(c), "is required to view the facts pleaded and the inferences to be drawn from such facts in a light most favorable to the non-moving party." In fact, the Court must accept well-pleaded facts in the Complaint as admitted. Finally, a motion for judgment on the pleadings may be granted only where the movant is entitled to judgment as a matter of law and there are no disputed material facts.

Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund II, L.P., Del. Supr., 624 A.2d 1199, 1205 (1993).

Id.

Id.

Plaintiffs have filed motions under Rule 12(c) seeking a judgment on the pleadings that the Exchange Offer and the resulting amendments to the Partnership Agreement are valid. The defendants oppose the motion and, at oral argument, noted that they, too, sought a declaration of the invalidity of the Exchange Offer and amendments. Moreover, all argument, both in briefing and orally, has been directed at the merits for supporting or denying the validity of the Exchange Offer and amendments. Because I find that no factual issue exists to prevent rendering a judgment on the pleadings, the standards for motions under both Rule 12(b)(6) and Rule 12(c) are almost identical, and that this issue warrants a decision on the merits, plaintiffs' motions to dismiss the counterclaims under Rule 12(b)(6) are denied and the remainder of this Opinion will focus on the motions under Rule 12(c).

ANALYSIS

The plaintiffs, CFGM and CFLP, ask this Court to provide a declaratory judgment that (1) CFGM has not breached its fiduciary duty with respect to the Exchange Offer or the amendments; (2) neither CFGM nor CFLP have violated Delaware law with respect to the Exchange Offer or the amendments; and (3) the amendments to the Partnership Agreement are valid. The defendants, however, seek a declaration that the Exchange Offer and amendments constitute breaches of fiduciary duty and are contrary to Delaware law, the Partnership Agreement, and the Settlement Agreement. For the reasons discussed below, the Court grants the motion for judgment on the pleadings and finds that the parties are entitled to a declaratory judgment: (1) that the Exchange Offer and amendments to the Partnership Agreement are facially valid as to their terms and method of enactment; and (2) that recognizes that the Limited Partner defendants have a special relationship with the plaintiffs because of their prior litigation and the Settlement Agreement, and declares their respective rights and responsibilities under the Settlement Agreement, the Court's March 13, 2000, opinion, and the Partnership Agreement as amended.

Where appropriate, the parties' specific arguments, in support of or against, certain issues will be set forth and analyzed with that specific discussion. The parties have vigorously argued their respective positions on these motions and the Court notes that the CFI and Iris Cantor defendants' brief makes fifteen separate arguments. The Court has carefully considered all positions advanced by the parties but will only discuss those arguments it believes are necessary to its decision. Arguments not discussed were found neither necessary to, nor preclusive of, the Court's decision.

1. The Exchange Offer is Valid.

The defendants argue that the Exchange Offer violates both the Partnership Agreement and the fiduciary duties owed to the Limited Partners by CFGM. The Exchange Offer, however, structured as a distribution of partnership property (eSpeed shares), does not violate the provisions of the Partnership Agreement and does not implicate a violation of CFGM's fiduciary duty of loyalty as Managing General Partner of CFLP.

As this Court has noted in the past:

A court should assume that parties involved in commerce who elect to join together in a business organization to pursue an enterprise have substantial knowledge of a wide range of business operational frameworks. One can further assume these parties make a thoughtful election with full knowledge of the significance of the operational framework they chose.

In re Marriott hotel Properties II L.P. Unitholders Litig., Del. Ch., C.A. No. 14961, Allen, C. (June 12, 1996) Mem. Op. at 11-11 (quoting In re Cencom Cable Income partners, L.P. Litig., Del. Ch., C.A. No. 14634, Steele, V.C. (Feb. 15, 1996).

In the present case, the parties are all sophisticated individuals and entities and possess a demonstrable measure of business acumen. This, combined with advice from their qualified legal counsel, allowed these parties to evaluate fully, both from a business and legal standpoint, the limited partnership form as a commercial vehicle. A limited partnership is a creature of both statute and contract. The operative document is the limited partnership agreement and the statute merely provides the "fall-back" or default provisions where the partnership agreement is silent. Thus, the provisions of the partnership agreement define the rights and responsibilities of those who are parties to the agreement and are afforded significant deference by the Courts. In fact, "where the parties have a more or less elaborated statement of their respective rights and duties, absent fraud, those rights and duties, where they apply by their terms, and not the vague language of a default fiduciary duty, will form the metric for determining breach of duty." Following this directive, the Court will judge the conduct of the plaintiffs in structuring and presenting the Exchange Offer (and later, the amendments) by comparing that conduct to what is required and permitted by the Partnership Agreement.

See Cantor Fitzgerald, L.P. v. Cantor, Del. Ch., C.A. No. 16297, Steele, V.C. (March 13, 2000) Mem. Op. at 51-52.

See id.

In re Marriott Hotel Properties II, L.P. Unitholders Litig., supra. at 11. See also Gotham Partners, L.P. v. Hallwood Realty Partners, L.P., Del. Ch., C.A. No. 15754, Strine, V.C. (Sept. 27, 2000) Mem. Op. at 24 ("[W]here the Partnership Agreement provides the standard that will govern the duty owed by a General Partner to is partners in self-dealing transactions, it is the contractual standard and not the default fiduciary duty of loyalty's fairness standard the exclusively controls."); Wilmington Leasing, Inc. v. Parrish Leasing Co., L.P., Del. Ch., C.A. No. 15202, Jacobs, V.C. (Dec. 23, 1996) Mem. Op. at 30 ("Where, as here, a Partnership Agreement specifically addresses the rights and duties of the partners, any fiduciary duty that might be owed by the Limited Partners is satisfied by compliance with the applicable provisions of the partnership agreement.").

Article III of the 1996 Partnership Agreement provides the general powers of the Managing General Partner for managing the business of CFLP. Specifically, the Partnership Agreement provides that:

(b) Except as otherwise expressly provided herein, the Managing General partner is hereby authorized and empowered . . . to carry out and implement . . . such actions and execute such documents as the Managing General Partner may deem necessary or advisable, or as may be incidental to or necessary for the conduct of the business of the Partnership. All determinations and judgments made by the Managing General Partner in good faith and in accordance with the terms of the Agreement shall be conclusive and binding on all Partners.

Agreement of Limited Partnership of Cantor Fitzgerald, L.P., Amended and Restated as of August 28, 1996, Section 3.01(b) ("1996 Partnership Agreement"). The Court's consideration of certain provisions of this document does not constitute the consideration of matters outside of the pleadings. The 1996 Partnership Agreement, like the Settlement Agreement and the Amendments are operative documents and are integral to the claims asserted in the pleadings. Thus, consideration of these documents is proper in ruling on this motion. See In re Lukens, Inc. Shareholders Litig., Del. Ch., 757 A.2d 720, 727 (1999).

Article VII of the 1996 Partnership Agreement specifically defines the Managing General Partner's power to distribute partnership property to the partners. The defendants argue that Article VII requires a pro rata distribution to all classes of partners on equal or similar terms. The plaintiffs, however, argue that this portion of the 1996 Partnership Agreement gives CFGM latitude and discretion to determine whether to distribute partnership property at all, and if it does, to whom and on what terms.

Neither party has put forth credible reasons why the distribution of eSpeed shares or eSpeed Units should be viewed as anything other than a distribution of Partnership property as opposed to an allocation of net profits, income, etc.

The plaintiffs' position is supported by the 1996 Partnership Agreement. Section 7.01 governs distributions of partnership property and states that "[n]o partner shall be entitled to receive any distribution from the Partnership except as expressly provided in this Agreement." Moreover, Section 7.01(b) provides that:

1996 Partnership Agreement, Section 7.01(a).

[T]he Managing General Partner shall have the right to determine whether to distribute cash or property of the Partnership to the Partners or to retain such cash or property for use in conducting the business of the Partnership. The Managing General Partner is expressly authorized to make distributions to Partners holding one class of Units without making corresponding distributions to any other class, or to otherwise make non-pro rata distributions among the classes of Units. Any distributions made to Partners holding any particular class of Units shall be distributed pro rata in accordance with the number of Units of such class held by each Partner, except as otherwise provided in this Agreement or in an election made available to all Partners of such class.

1996 Partnership Agreement, Section 7.01(b).

These provisions of the Partnership Agreement specifically authorize the Managing General Partner to provide non- pro rata distributions among the different classes. It must, however, treat partners within a class on a pro rata basis. Here, CFGM has determined that a distribution of eSpeed shares to CFLP's partners is appropriate. It chose to do so through the Exchange Offer. While the original Exchange Offer subjected the defendants to the additional conditions of the Side Letter, they have now been offered the opportunity to participate on the same terms as the other Limited Partners. Because even disparate treatment between classes is allowed by the Partnership Agreement, comparable treatment is equally permitted. As a result of the elimination of the side letter, defendants/counter-claimants can not argue persuasively that other Limited Partners received priority or preference as to any distribution. For these reasons, I find that the distribution of eSpeed Units through the Exchange Offer does not violate the 1996 Partnership Agreement and, thus, does not involve a breach of fiduciary duty on the part of the plaintiffs. My finding on this issue is limited to the Exchange Offer as a concept, as one aspect of the Exchange Offer that must be evaluated separately is the 33 amendments to the Partnership Agreement that were tied to the Exchange Offer.

2. The Amendments to the 1996 Partnership Agreement are facially valid and were properly enacted.

The amendments to the Partnership Agreement are facially valid. The defendants' ultimate argument with the amendments themselves, putting aside for now how they were enacted, centers around how CFGM may, in the future, interpret the language of these amendments and apply it to specific conduct of the defendants. The specific application of the language of these amendments will necessarily turn on the specific facts of the situation at the time. Those facts will be instrumental in determining whether CFGM has breached some provision of the Partnership Agreement and hence its fiduciary duties, or, with regard to these defendants, whether CFGM has violated the Stipulated Settlement Agreement or some Opinion or Order of this Court setting forth the rights and responsibilities these parties owe each other. Here, the Court is not faced with particularized allegations that these amendments are being applied in an improper manner. For this reason, the Court is not in a position to rule at this time that these amendments as a whole, or particular amendments, are invalid on their face.

Although the defendants make several different arguments on this issue, I feel compelled to address only three specifically. One argument defendants assert is that the amendments improperly extinguish certain fiduciary duties owed by CFGM through the use of "sole and absolute discretion" language. As noted above, partners in a limited partnership are generally given wide latitude in setting the parameters of their relationship in the partnership agreement. Consequently, the parties to a partnership agreement may set, by contract, the duties, or lack of duties, owed by one party to another. Here, however, I find that the language of the Partnership Agreement, as amended, indicates that "sole and absolute" discretion by CFGM means that it does not have to seek the guidance or approval of others before taking some action or making a particular decision pursuant to that provision. Moreover, I find that any "sole and absolute" discretion granted by a particular provision is subject to the global requirement that every partner abide by its duty of loyalty to CFLP and that CFGM exercise "good faith" in making all determinations and judgments.

See 1996 Partnership Agreement, Section 3.03(b).

See 1996 Partnership Agreement, Section 3.01(b).

Another argument advanced by the defendants is that certain amendments, by making eSpeed Units they receive redeemable, are automatically invalid because they violated the protections the defendants bargained for in the Settlement Agreement. One term of the Settlement Agreement between the parties establishes that certain Partnership Units held by the defendants are not redeemable by the Partnership. The amendments provide a new Section 3.05 to the Partnership Agreement that provides that, should the defendants elect to accept the Exchange Offer, their resulting eSpeed Units would be redeemable under certain conditions. This amendment to the Partnership Agreement directly conflicts with the Settlement Agreement. As I noted in the March 2000 Opinion, "[a]lthough CFGM, as Managing General Partner, has the power to amend the Partnership Agreement, it may not use this general power in the 1996 Partnership Agreement or the 1996 Settlement Agreement to avoid express provisions of the 1996 Settlement Agreement. . . . " I was discussing this in a somewhat different context, but the same reasoning applies here.

Cantor Fitzgerald, L.P. v. Cantor, Del. Ch., C.A. No. 16297, Steele, V.C. (March 13, 2000) Mem. Op. at 39. I reiterate this concept several pages later stating that "CFGM's power to amend the Partnership Agreement cannot be used to avoid its separate contractual commitment in the 1996 Settlement Agreement. . . ." Id. at 41.

The 1996 Settlement Agreement was agreed to by both parties after a give and take exchange, and the plaintiffs may not now try to nullify some of what they gave in the negotiation process. Thus, I find that a core concept of the 1996 Settlement Agreement was the defendants' right not to have their units unilaterally redeemed and thus be driven out of the partnership by fiat. Under new Section 3.05, the defendants are arguably subject to having both their original, and their eSpeed (if they accept the Exchange Offer) Units redeemed. The plaintiffs argue that redemption is only possible if the Limited Partner has breached the Partnership Agreement twice and that two such breaches are also breaches of the Settlement Agreement. Again, I find that this type of determination will turn on the particularized facts presented at the time of an attempted redemption. Thus, while I declare that the amendment is facially valid, the declaratory judgment order will include a directive that any attempted future redemption of the defendants' Partnership Units must be subject to the terms to which the parties agreed in the Settlement Agreement. Quite simply, as a result, the defendants' original units, as opposed to their eSpeed units, can not be redeemed except as provided by the Settlement Agreement.

The defendants further argue that the amendments to the Partnership Agreement place impermissibly onerous burdens on the defendants' ability to operate MDC as a separate entity. The defendants argue that Amendment 2, creating new Section 3.05, improperly subjects them to violation of the corporate opportunity doctrine and constitutes an illegal non-compete provision. Like other arguments advanced by the defendants, I find that this one suffers from a similar defect. I do not find that the provision, on its face, to be invalid. Rather, only when CFGM attempts to enforce the provisions in response to specific facts will the Court be in a position to determine whether CFGM has overstepped its authority in construing the defendants actions to constitute a Competing Business or a Competitive Activity. These are defined terms in the Partnership Agreement and should be measured against a real-world situation.

I also note that competition between MDC and CFLP was a significant issue in the Second Delaware action. Thus, the landscape upon which these parties may compete will also be shaped by the final Order in that case.

Ultimately, I do find that the amendments are facially valid. While, by their terms, the amendments may impose a burden or conditions on the defendants that do not accrue to the non-defendant limited partners, those unique consequences result from the special relationship created by the 1996 Settlement Agreement. Thus, any application of these amendments to these Limited Partners must also fall within the bounds set by the Settlement Agreement. Only after the amendments are applied in specific factual settings may the Court judge them, and, as there is no current effort to apply the provisions to the defendants, consideration of the issue is premature.

The defendants' most earnest challenge to the amendments appears to be the process by which they were adopted. The defendants make several arguments in support of their challenge to the amendment process. First, they assert that the process violated the Partnership Agreement in that the 33 amendments were presented as a package for vote rather than voting on each individual amendment. Second, the defendants argue that conditioning a Limited Partner's participation in the Exchange Offer on an affirmative vote for the amendments constitutes illegal vote buying or coercion. For the reasons discussed below, I find that the amendment process was proper under the Partnership Agreement, did not constitute vote buying or coercion, and thus, did not cause plaintiffs to violate the duty of loyalty.

The proper amendment process is established in Article XIV of the 1996 Partnership Agreement. Section 14.01 provides:

Approval of Amendments. This Agreement may not be amended to:
(b) amend any provisions which require the consent of a specified percentage in interest of the Limited Partners without the consent of that specified percentage in interest of the Limited Partners;
(c) amend this Section 14.01 without the consent of two-thirds in interest of the Partners of each class; or
(d) materially adversely affect the economic interest of a Partner in the Partnership or the value of Partnership Units by altering the interest of any Partner in the amount or timing of distributions or the allocation of profits, losses, or credits other than any such alteration caused by the acquisition of additional Units by any Partner pursuant to this Agreement or as otherwise expressly provided herein, without the Agreement or as otherwise expressly provided herein, without the consent of (x) two-thirds in interest of all Partners in the case of an amendment applying in a substantially similar manner to all classes of Units or (y) two-thirds in interest of the affected class or classes of the Partners in the case of any other amendment.

There can be little doubt that conditioning participation in the Exchange Offer on the approval of the 33 amendments would materially affect the value of the Partners' Units because assets of significant value had been transferred from CFLP to eSpeed. The Partners' continued ability to benefit from that value was predicated on participating in the Exchange Offer. Moreover, there is no question that the amendments, both as a part of the Exchange Offer package and certain amendments individually, alter the interest of the Partners in the receipt of distributions of property (eSpeed Units, for example) and allocations of profits, losses or credits (the redemption provisions of new Section 3.05). I also find that the amendments, as a whole package, apply to all Limited Partners in a " substantially similar manner." Thus, a two-thirds vote in favor by all the Partners would be sufficient for enacting these amendments to the Partnership Agreement.

See 1996 Partnership Agreement, Section 14.01(d) (emphasis added). I note that there are certain amendments that will effect the defendant Limited Partners differently from the nondefendant Limited Partners. This, however, results not only from the fact that they hold different classes of Partnership units, but also from their special relationship vis-a-vis the Settlement Agreement. That separate classes are affected in slightly different ways by these amendments is expressly provided for by certain amendments and is the inevitable consequence of having different classes of Units with varying characteristics. Overall, however, the amendments do not single out any one specific class over another. As noted above, most, if not all, of the deleterious effects the defendants fear implicate the rights and responsibilities these parties owe each other under the Settlement Agreement — the terms of which can not be altered by these amendments.

In addition to arguing that the amendment process did not conform to requirements of the Partnership Agreement, defendants also argue that the way in which the Exchange Offer and amendments were presented to the Limited Partners for approval involved vote buying or coercion. Specifically, the defendants assert that "CFGM's use of Partnership property to induce the Limited Partners to vote for amendments whose overriding purpose was to advance CFGM's self interest was improper coercion and a breach of CFGM's Section 3.01(b) duty to act in good faith and its fiduciary duty of loyalty."

Defendants and Counterclaim Plaintiffs CFI's and Iris Cantor's Memorandum of Law in Opposition to Plaintiffs and Counterclaims Defendants CFLP's, CFGM's, and Lutnick's Motions to Dismiss Pursuant to Court of Chancery Rule 12(b)(6) and for Judgment on the Pleadings Pursuant to Court of Chancery Rule 12(c) at 59.

Illegal vote buying and coercion are two distinct but certainly closely related concepts. Illegal vote buying occurs where a "stockholder divorces his discretionary voting power and votes as directed by the offeror." "Wrongful coercion," however, may exist where the board or some other party takes actions which have the effect of causing the stockholders to vote in favor of the proposed transaction for some reason other than the merits of that transaction.

Schreiber v. Carney, Del. Ch., 447 A.2d 17, 23 (1982).

Williams v. Geier, Del. Supr., 671 A.2d 1368, 1382-83 (1996).

I do not find that conditioning participation in the Exchange Offer on the approval of the 33 amendments constitutes actionable vote buying or coercion. Here, while the Limited Partners appear to have compelling economic incentives for participating in the Exchange Offer, all Limited Partners were free at all times to weigh the benefits and the costs of the transaction and vote in favor of the amendments if that result was the best option for that individual Partner. They were at all times free to reject the Exchange Offer. Moreover, by weighing the costs and benefits of the transaction, the Partners considered the merits of the transaction. For these reasons, the defendants' claims that the amendment process was tainted by vote buying and coercion are unpersuasive.

See generally Henley Group, Inc. v. Santa Fe Southern Pacific, Corp., Del. Ch., C.A. No. 9569.

CONCLUSION

These litigious parties have a complex relationship that transcends the normal relationships between partners in a limited partnership. Here, the parties' relationship, while primarily defined in the Partnership Agreement, is constantly cast in the shadow thrown by the results of the earlier litigation. By this, I mean that future actions taken pursuant to the Partnership Agreement must necessarily be considered in the light of earlier judicial decisions and the Settlement Agreement. If the parties can embark from this point forward on a course of conduct where each discharges to the other to its duty of loyalty and acts in good faith, it should be possible to consider the shadow thrown as a guide but not as an impediment to the conduct of profitable business enterprises.

For the reasons discussed in this Opinion, I find that the parties are entitled to a judgment on the pleadings. I cannot, however, say that the judgment is necessarily in favor of one party over the other. The remedy sought in this action is a declaratory judgment. I am prepared to enter a declaratory judgment order in this action that declares the following:

1. The eSpeed Exchange Offer and Partnership Agreement amendments connected therewith are valid and do not result from either a breach of the Partnership Agreement or the fiduciary duties of the plaintiffs/counterdefendants.
2. The defendants, as "Limited Partners for all purposes," are entitled to participate in the Exchange Offer on the same terms as the other Limited Partners. By this, I mean that they are not subject to special treatment that treats them any better or worse than the other Limited Partners.
3. As I noted in the March 2000 Opinion, these parties are bound by the negotiated terms of their 1996 Settlement Agreement. In this action, the defendants have directed the Court's attention to several ways in which the amendments might arguably violate the Settlement Agreement. I have withheld ruling on these arguments because the precise facts of the individual situations where it might be alleged in the future that a party may have violated this order will be determinative and the speculative contentions are not now ripe. The parties are cautioned that their future conduct must not only be proper under the Partnership Agreement, but also must not be contrary to, or inconsistent with, the 1996 Settlement Agreement or the prior decisions of this Court.

It seems most helpful to issue one Declaratory Judgment Order upon which these parties can fashion future conduct. Therefore, I will issue a Joint Declaratory Judgment Order for both this Action and the litigation in this Court denominated Civil Action Number 16297. That Order is attached.


Summaries of

Fitzgerald v. Cantor

Court of Chancery of Delaware, New Castle County
Nov 5, 2001
C.A. No. 18101 (Del. Ch. Nov. 5, 2001)
Case details for

Fitzgerald v. Cantor

Case Details

Full title:CANTOR FITZGERALD, L.P., and CF GROUP MANAGEMENT., INC. Plaintiffs, v…

Court:Court of Chancery of Delaware, New Castle County

Date published: Nov 5, 2001

Citations

C.A. No. 18101 (Del. Ch. Nov. 5, 2001)