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Eames v. Quantlab Group GP, LLC

Court of Chancery of Delaware

May 1, 2018

Eames
v.
Quantlab Group GP, LLC

          Submitted: February 1, 2018

          Thad J. Bracegirdle, Esquire Scott B. Czerwonka, Esquire Wilks, Lukoff & Bracegirdle, LLC

          John L. Reed, Esquire Derrick B. Farrell, Esquire DLA Piper LLP (US)

          William D. Johnston, Esquire Tammy L. Mercer, Esquire Young Conaway Stargatt & Taylor, LLP

          Dear Counsel:

         This case concerns the de jure management of Quantlab Group, LP ("Quantlab LP"), a Delaware limited partnership. Prior to November 6, 2017, Quantlab LP's sole general partner was Quantlab Group GP, LLC ("Quantlab GP"). On November 6, 2017, a voting trustee, acting by written consent on behalf of approximately 96% of Quantlab LP's voting limited partnership interests, purported to add Quantlab Group GP II, LLC ("Quantlab GP II") as a general partner of Quantlab LP and then remove Quantlab GP from its position as general partner.

         Under Quantlab LP's limited partnership agreement (the "LPA"), [1]Quantlab LP's general partner may be removed without cause only if at least one other general partner remains, and the addition of a new general partner requires the consent of the then-acting general partner. With these requirements in mind, simultaneous with the voting trustee's actions, Plaintiff, Bruce Eames, acting as a manager of Quantlab GP, purported to consent to Quantlab GP II's addition as a general partner of Quantlab LP so that a general partner would remain upon Quantlab GP's subsequent removal. Plaintiffs claim that, by virtue of these actions, Quantlab GP II is now Quantlab LP's sole general partner.

         The same day these written consents were executed, Plaintiffs filed this action under 6 Del. C. § 17-110 to confirm that (1) Quantlab GP was removed as general partner of Quantlab LP and (2) Quantlab GP II was admitted as general partner of Quantlab LP and rightfully serves in that capacity. On December 14, 2017, Defendant moved for partial summary judgment on the ground that Quantlab GP II's addition as general partner was invalid under the clear and unambiguous terms of the LPA, such that Quantlab GP remains Quantlab LP's sole general partner.[2]

         Defendant's motion must be granted. Under the unambiguous terms of the LPA, it was necessary to admit a second general partner before Quantlab GP could be removed, and admitting a new general partner required Quantlab GP's consent. No such consent was obtained; Quantlab GP did not agree in advance to the voting trustee's actions by virtue of signing the voting trust agreement giving the trustee his authority and Eames, in his capacity as a Quantlab GP manager, lacked unilateral authority to consent to Quantlab GP II's addition as general partner of Quantlab LP. Because Quantlab GP II was not properly admitted as general partner of Quantlab LP, Quantlab GP could not be removed as general partner. Accordingly, Quantlab GP remains the sole general partner of Quantlab LP.

          I. BACKGROUND

         In accordance with Court of Chancery Rule 56(c), I have drawn the facts from the pleadings, uncontested facts in the parties' submissions, and materials presented in connection with the motion. Unless otherwise indicated, I have determined that the following facts are undisputed.

         A. Parties and Relevant Non-Parties

         Plaintiffs, Bruce P. Eames and Andrey Omeltchenko, are limited partners of Nominal Defendant, Quantlab LP, a Delaware limited partnership headquartered in Houston, Texas.[3] Plaintiffs hold Quantlab LP Class A limited partnership interests, which are Quantlab LP's only limited partnership interests entitled to vote on the admission and removal of general partners.[4] Eames also serves as a manager of Quantlab GP.[5]

          Defendant, Quantlab GP, is a Delaware limited liability company.[6] It was established in 2008 for the sole purpose of serving as Quantlab LP's general partner.[7]Prior to November 6, 2017, Quantlab GP had served as Quantlab LP's sole general partner for approximately ten years.[8] It also holds a 1% Class A limited partnership interest in Quantlab LP.[9] Quantlab GP has two members, Marco, LP ("Marco")[10]and AVG Holdings, LP ("AVG").[11]

          Non-party, Bosarge, founded Quantlab LP in 1995 "for the purpose of becoming a world leader in high frequency trading."[12] Bosarge, and Bosarge family entities, collectively hold 71.96% of Quantlab LP's Class A limited partnership interests.[13] Bosarge is also a manager of Quantlab GP.[14]

         B. The Relevant Agreements

         The parties' dispute over the rightful management of Quantlab LP implicates three contracts: Quantlab LP's limited partnership agreement (the "LPA"), a voting trust agreement among certain of Quantlab LP's limited partners (the "VTA") and Quantlab GP's LLC agreement. [15] I discuss each in turn below.

         1. The Limited Partnership Agreement

         Quantlab LP is governed by the LPA. Pursuant to the LPA, Quantlab LP's general partner "shall be responsible for the exclusive management, operation and control of the business and affairs of the Partnership."[16] When more than one general partner is admitted, management authority is "joint and several."[17] The LPA makes clear that Quantlab LP's limited partners may "not take part in the management and control of the business" and may not "interfere[] in the management of the Partnership affairs."[18]

         Pursuant to LPA § 5.3, "additional General Partners may be admitted only with the consent of all General Partners and the consent of a Super Majority in Interest of the Limited Partners . . . ."[19] And pursuant to LPA § 5.4, "a General Partner may not be removed unless there is at least one remaining General Partner."[20] "[I]f a General Partner is in material breach of any of its obligations" or commits "any act or omission of gross negligence, fraud or malfeasance to the injury of the Partnership, " however, it may be removed by a "Majority in Interest" even if it is the sole general partner at the time.[21]

         2. The Voting Trust Agreement

         Several of Quantlab LP's Class A limited partners entered into the VTA in November 2010 (effective September 2010). The signatories were Marco, AVG, Eames, Veloce LP, Omeltchenko, Aster Securities (US) LP, Quantlab GP and David J. Houston.[22] The VTA defines Marco, AVG, Eames, Veloce LP, Omeltchenko and Aster Securities (US) LP as "Limited Partners"[23] who combined their Quantlab LP Voting Interests[24] by irrevocably assigning and transferring them to a Voting Trustee.[25] Quantlab GP is not included in the definition of "Limited Partners."[26] Pursuant to the VTA, the Voting Trustee is empowered to vote the Limited Partner Interests "as directed by the [majority vote of the] Voting Trust Committee, " which comprises Bosarge, Eames and Omeltchenko.[27]

         By virtue of the combination of interests reflected in the VTA, the Voting Trustee holds (and controls) at least 96% of Quantlab LP's Class A limited partnership interests, which constitutes a supermajority of Quantlab LP's voting limited partnership interests.[28] While the VTA expressly contemplates that the parties will amend the LPA to acknowledge that the LPA is "restricted by and subject to the terms of [the VTA], " it does not appear that the amendment to incorporate the VTA carried over to the current version of the LPA.[29]

         3. The LLC Agreement

         Also relevant to this dispute is the Operating Agreement for the Quantlab Group GP, LLC (the "LLC Agreement"). The LLC Agreement provides that Quantlab GP was "formed for the sole purpose of acting as the general Partner of [] Quantlab [] LP, " and "cannot carry on any business other than acting as the General Partner of [Quantlab] LP without the unanimous consent of all the Members."[30]

          Quantlab GP is a manager-managed LLC.[31] Per Section 5.1 of the LLC Agreement, Quantlab GP's managers can "act[] alone without approval or consent of the other Manager[s] . . . to transact business on behalf of and for the benefit of [Quantlab GP], " subject to the limitations of Section 5.4. Section 5.4, in turn, provides that a "Manager shall not take . . . [a]ny act that would make it impossible to carry on the ordinary business of [Quantlab GP] or [Quantlab LP]" or that would cause "[a] change in the nature of the principal business of [Quantlab GP] or [Quantlab LP] . . . unless a Majority [] of Members has consented to the taking of such action."[32]

         C. Plaintiffs Purport to Admit Quantlab GP II as General Partner of Quantlab LP and Remove Quantlab GP as General Partner

         On November 6, 2017, Plaintiffs-acting as a majority of the Voting Trust Committee-executed a written consent instructing the Voting Trustee to vote the Voting Trust Interests to admit and appoint Quantlab GP II as general partner of

          Quantlab LP and remove Quantlab GP as general partner.[33] The Voting Trustee did as instructed.[34] At or around the same time, Eames, as manager of Quantlab GP, purportedly consented on behalf of Quantlab GP to add Quantlab GP II as a second general partner of Quantlab LP.[35]

         D. Procedural Posture

         Later that day, Plaintiffs filed a Verified Complaint (the "Complaint") pursuant to 6 Del. C. § 17-110 seeking a declaration that Quantlab GP II is the sole general partner of Quantlab LP. The parties cross-moved for a status quo order. The Court entered a status quo order on November 30, 2017, keeping Quantlab GP in place as general partner of Quantlab LP pending the final resolution of this matter.[36] Quantlab GP answered Plaintiffs' Complaint on December 11, 2017 and then, on December 14, 2017, moved for partial summary judgment (the "Motion").

         II. ANALYSIS

         Under Court of Chancery Rule 56(c), summary judgment will be granted "if the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law."[37]The movant initially bears the burden to demonstrate that no genuine issue of material fact exists.[38] In determining whether the movant has met that burden, the court must view the evidence in the light most favorable to the non-moving party.[39]

         "When the issue before the Court involves the interpretation of a contract, summary judgment is appropriate only if the contract in question is unambiguous."[40] Ambiguity exists if the court "may reasonably ascribe multiple and different interpretations to [the] contract."[41]

         A. The LPA Does Not Permit The Simultaneous Removal and Replacement of the General Partner

         Plaintiffs contend that Quantlab GP's consent was not required for the addition of a second general partner (Quantlab GP II) because "the limited partners simultaneously [voted] their interests to remove and replace the incumbent General Partner" as permitted by the VTA.[42] According to Plaintiffs, it would be nonsensical to create a regime whereby a sole general partner, in essence, would have to facilitate its own removal by consenting to the addition of a new general partner before any removal could be effected.[43] That interpretation of the agreements "would effectively negate the entire purpose of the [VTA], "[44] which Plaintiffs contend must be interpreted along with the LPA.[45]

          Under Plaintiffs' reading of the agreements, the requirement that more than one general partner be in place prior to removal of a general partner (Section 5.4 of the LPA) was intended solely to prevent Quantlab LP's dissolution for want of any general partner.[46] Since the simultaneous removal and replacement of the sole general partner assuages that concern, Section 5.4 of the LPA is inapplicable in this setting. Thus, Quantlab GP could be removed without the prior addition of a new general partner. At the very least, Plaintiffs contend that the operative contractual provisions are susceptible to their proffered construction and, therefore, summary judgment is inappropriate.[47]

         Defendant, on the other hand, argues that the VTA is no longer incorporated within the LPA. But even if it were, the LPA's terms clearly provide that Quantlab GP could not be removed as sole general partner without first adding a new general partner, and that admitting a new general partner required Quantlab GP's consent.[48]

          After carefully reviewing the agreements, I am satisfied that the LPA's express terms support only Defendant's construction, even if the VTA were intended to be incorporated into the current LPA. Section 5.4 of the LPA provides that, absent "for cause" removal, "a General Partner may not be removed unless there is at least one remaining General Partner."[49] And Section 5.3 provides that the addition of a new general partner requires the consent of the existing general partner(s) and the consent of a Super Majority in Interest of the Limited Partners. Thus, the LPA clearly establishes that (1) Quantlab GP could not be removed as Quantlab LP's sole general partner prior to the addition of a new general partner; and (2) Quantlab GP's consent was required to admit Quantlab GP II as general partner.[50] Had the parties intended to limit these requirements to allow for simultaneous removal and replacement of the lone general partner without consent, they easily could have done so.[51] Thus, the dispositive question here is whether Quantlab GP consented to add Quantlab GP II as general partner of Quantlab LP.

         B. Quantlab GP Did Not Consent to Add Quantlab GP II as a ...


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