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Partners Healthcare Solutions Holdings, L.P. v. Universal American Corp.

Court of Chancery of Delaware

June 17, 2015

PARTNERS HEALTHCARE SOLUTIONS HOLDINGS, L.P. and GTCR FUND IX/A, L.P, Plaintiffs,
v.
UNIVERSAL AMERICAN CORP., Defendant.

Date Submitted: March 4, 2015

Jon E. Abramczyk and Ryan D. Stottmann, of MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; OF COUNSEL: Reed S. Oslan, P.C., Scott A. McMillin, P.C., and Richard U.S. Howell, of KIRKLAND & ELLIS LLP, Chicago, Illinois, Attorneys for Plaintiffs.

Blake Rohrbacher and Andrew J. Peach, of RICHARDS, LAYTON & FINGER, P.A, Wilmington, Delaware; OF COUNSEL: Andrew J. Levander, Linda C. Goldstein, Paul C. Kingsbery, and Amanda N. Tuminelli, of DECHERT LLP, New York, New York, Attorneys for Defendant.

MEMORANDUM OPINION

GLASSCOCK, Vice Chancellor.

As a result of a merger, one entity, Plaintiff Partners Healthcare Solutions Holdings, L.P. ("Partners"), became a large stockholder of a second entity, Universal American Corp. ("UAM"), and, pursuant to an agreement between these entities, Partners became entitled to designate a director to the board of UAM (the "Board"). The two entities then became adversaries in litigation. After its initial designee resigned, Partners sought to have a successor designee seated. UAM was willing to seat the designee, but only if he signed a confidentiality agreement and forwent representation as a director by the same law firms representing Partners, which had nominated him, in the litigation against UAM. In other words, the board of UAM insisted that its director not be assisted in that fiduciary role by counsel with an interest adversary to UAM. The designee refused to accede to this request, and Partners sued UAM, arguing that UAM was in breach of certain of the parties' agreements for refusing to seat the designee. Partners sought specific performance-seating of the designee without conditions-and damages.

George Orwell pointed out that "[t]o see what is in front of one's nose needs a constant struggle."[1] During the pendency of the litigation, the parties underwent that struggle, and settled the specific performance portion of the action by seating the designee subject to litigation counsel erecting an ethical wall separating that litigation from those members of the law firm representing the designee in his fiduciary capacity. Partners has continued this litigation, however, in a quixotic attempt to secure damages (and contractual attorney fees) allegedly arising during the months between the designation and the parties' epiphany regarding the ethical wall, that is, during the time when Partners had no designee on UAM's board. UAM has moved for summary judgment, to which I find, for the reasons below, it is entitled.

I. BACKGROUND FACTS

A. The Merger and the Board Seat Agreement

On March 2, 2012, Partners, a limited partnership created by private equity firm GTCR, LLC ("GTCR"), entered into a merger agreement (the "Merger Agreement") with UAM. Pursuant to the Merger Agreement, UAM purchased Partners Healthcare Solutions, Inc. ("Sub"), Partners' subsidiary, and Partners became one of UAM's largest stockholders.

By way of a letter agreement (the "Board Seat Agreement"), Partners also received a seat for its designee (the "Designee") on UAM's Board. In the Board Seat Agreement, the parties agreed that the Designee must be "independent" under stock exchange rules and that Partners and co-Plaintiff GTCR Fund IX/A, L.P. ("Fund IX/A")[2] would have the right to designate a successor should their initial Designee resign.[3] The Board Seat Agreement also included "Management and Information Rights" for Fund IX/A and non-party GTCR Fund IX/B, L.P. ("Fund IX/B")[4] "for so long as [the Plaintiffs, among others] continue to hold at least 5% of the outstanding shares of [UAM] Common Stock."[5]

As indicated in the Board Seat Agreement, Partners named David Katz, a Managing Director of GTCR and former board member of Partners, [6] as its initial Designee on the Board.

According to UAM, "Practically from the moment the merger closed, [Sub's] performance was abysmal."[7] UAM contends that, although two days before closing Sub's management confirmed that it was on track for its 2012 budget of approximately $45 million EBITDA, within six weeks of closing, Sub's forecast was revised downwards by 40%; within four months, the forecast was down 90%.[8] On March 1, 2013, UAM sent a demand for indemnification to Partners, addressed to Katz and a third party.[9] In settlement negotiations that began shortly thereafter, Katz, while still a director of UAM, acted on behalf of GTCR.[10] GTCR was also assisted by legal counsel, attorneys from the firm of Kirkland & Ellis ("K&E").[11]

Katz remained on the Board during the ongoing negotiations between GTCR-the entity with which he was affiliated, and for which he was negotiating-on the one side, and UAM-the company for which he was a fiduciary-on the other. His name was included on the slate of nominees recommended to UAM stockholders at the May 2013 annual meeting, at which he was reelected.[12]

By October 2013, settlement talks ended and UAM filed a complaint in the United States District Court for the District of Delaware asserting, among other things, fraud claims arising out of the sale of Sub to UAM (the "Fraud Litigation").[13] The defendants named in the Fraud Litigation include, among others, Partners, Fund IX/A, former officers of Sub, and Katz. The defendants were represented in the litigation by K&E and Morris, Nicholas, Arsht & Tunnell ("MNAT").

The Board created a special committee, which did not include Katz, to address the Fraud Litigation. In January 2014, [14] the day before a Board meeting at which UAM's "2014 plan and other items" would be discussed, UAM requested that Katz sign a confidentiality agreement.[15] That agreement provided, among other things, (1) that information learned as a UAM director would be used only in connection with that role, and explicitly that such information would not be used in the Fraud Litigation; (2) that Katz would not share non-public information concerning UAM with any third parties, explicitly including K&E; and (3) that he would only share non-public information with GTCR employees on a need-to-know basis.[16]

Katz proposed a revised version of the confidentiality agreement in which he would agree not to use anything he learned as a UAM director in the Fraud Litigation and to keep UAM's non-public information confidential.17 He did not, however, agree to the more explicit restriction on sharing information with GTCR employees or the restriction on sharing information with counsel at K&E.[18] Ultimately, the morning of the Board meeting, Katz executed his proposed version and attended the meeting.

A few weeks later, on February 11, 2014, UAM again requested Katz execute its version of a confidentiality agreement, and noted this would supersede Katz's earlier version. UAM's proposed version provided that Katz would not use K&E or MNAT-counsel to Partners and GTCR as counterparties to UAM in the Fraud Litigation-"in connection with fulfilling [his] duties as a director" of UAM.[19] Katz refused to execute that agreement, and continued to serve on the Board until March 20, 2014, when he resigned as a director of UAM.[20]

B. The Second Board Designee

That same day, Fund IX/A designated George Sperzel to fill Katz's vacancy.[21] He confirmed his independence under the New York Stock Exchange Rules[22] and counsel at K&E, on his behalf, requested information in connection with the upcoming board meeting scheduled for March 24, 2014.[23] UAM did not provide the requested information and met without Sperzel. The Board meeting minutes indicate that "[t]he Board discussed Mr. Sperzel's background and would consider the merits of his appointment to the Board at an upcoming meeting after Mr. Sperzel had consented to and ...


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