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Simon-Mills II, LLC v. Kan Am USA XVI Limited Partnership

Court of Chancery of Delaware

May 30, 2018

Simon-Mills II, LLC, et al.
v.
Kan Am USA XVI Limited Partnership, et al.,

          Date Submitted: February 7, 2018

          Donald J. Wolfe, Jr., Esquire Matthew E. Fischer, Esquire Timothy R. Dudderar, Esquire Berton W. Ashman, Jr., Esquire Matthew F. Davis, Esquire J. Matthew Belger, Esquire Jacqueline A. Rogers, Esquire Elizabeth H. Mellon, Esquire Potter Anderson & Corroon LLP

          Jon E. Abramczyk, Esquire Matthew R. Clark, Esquire Morris, Nichols, Arsht & Tunnell LLP

         Dear Counsel:

         This is, to my optimistic mind at least, the last iteration of this long running litigation over the exercise of a call right. To perhaps oversimplify, the Plaintiffs had the right to call partnership interests, in a series of joint ventures, from the Defendants.[1] They called those interests in 2014. With respect to the majority of the joint ventures, the contractual consideration for the call transactions was required to be units ("Mills Units") in a by-then defunct real estate investment trust. Since they could not tender those units, the Plaintiffs sought to tender their own similar, but not identical, units ("Simon Units"). I determined that the joint venture agreements applicable there (the "JVAs") did not provide for such consideration.

         With respect to one joint venture, however, the parties agreed in the JVA that "Mills, " the entity, was defined for purposes of that joint venture as "Mills or a successor entity."[2] Therefore, I found, the call right could be exercised by tender of Mills Units or units of a successor, provided that the successor's units satisfied certain contractual conditions of similarity to Mills Units. Unquestionably, Simon Units are the units of Simon, a successor to Mills. The only question remaining is whether Simon Units offer "substantially the same" rights in certain contractually defined areas as would Mills Units. If so, they are valid tender.

         The Plaintiffs seek specific performance of the call provision of this joint venture agreement. The matter has been tried (as part of the trial involving all the joint ventures purportedly subject to Simon's call), and this is my post-trial opinion as to that relief. Because I find that the Plaintiffs have prevailed on the merits by clear and convincing evidence, and because the equities support relief, I conclude the Plaintiffs are entitled to specific performance. My reasoning follows.

         I. BACKGROUND

         This matter concerns a dispute over the proper tender required to exercise call rights in a series of joint venture agreements between two sophisticated groups of investors. I have written two Memorandum Opinions and decided other matters along the winding course of this case.[3] I assume familiarity with my previous Memorandum Opinions in the matter and include only those facts necessary for my narrow decision here.[4]

         The Plaintiffs include a number of entities organized under an umbrella real estate investment trust (UPREIT) and referred to as "Simon."[5] The Defendants are a group of Delaware limited partnerships with German investors known as "Kan Am."[6] Non-party "Mills" was a "real estate investment vehicle" that was "acquired and ultimately dissolved by a joint venture of Simon and an unrelated third-party in 2007."[7]

         Simon and Kan.Am both hold interests in the Orange City Mills Mezzanine II Limited Partnership ("Orange City Mills").[8] In previous holdings, I noted that, compared with the other JVAs at issue in this matter, the Orange City Mills joint venture agreement (the "JV Agreement") contained "unique language relating to successor interests and the substitution of successor units as the proper buy/sell consideration."[9] I held that Simon, as a successor to Mills, must be construed as "Mills" under the JV Agreement.[10] As a result, I found, its units, if otherwise contractually compliant, are effective Mills Units, "which are contractual tender for the call for Kan.Am's interest in this [Orange City Mills] JV."[11] This left a single issue to be addressed in this supplemental decision: can Simon tender successor units that are compliant with the JV Agreement?[12]

         Section 11.3(f) of the Orange Mills JV Agreement states in its entirety:

Any Units received by the Kan.Am Partners pursuant to this Section 11.3 shall have substantially the same rights (including redemption, conversion, registration and anti-dilution protection) as attached to units issued in connection with the formation transactions of TMLP and Mills Corp., as more fully described in the Registration Statement for Mills Corp. dated April 14, 1994 and the exhibits thereto and Amendment No. 1 to Form S-3 for Mills Corp. dated May 28, 1996.[13]

         I asked the parties for supplemental briefing, which they provided. I heard oral argument on August 29, 2017. The parties considered settlement, then provided supplemental submissions; they confirmed the matter as fully submitted on February 7, 2018.

         II. ANALYSIS

         Simon seeks to specifically enforce its call right to acquire Kan.Am's interest in Orange City Mills. "[S]pecific performance [i]s an extraordinary remedy, not to be awarded lightly, " granted only to a party who "prove[s] by clear and convincing evidence that she is entitled to specific performance and that she has no adequate remedy at law."[14] To prove entitlement to specific performance, a party must "establish, by clear and convincing evidence, that (1) a valid, enforceable, agreement exists between the parties; (2) the party seeking specific performance [is] ready, willing, and able to perform under the terms of the agreement; and (3) a balancing of the equities favors an order of specific performance."[15] In addition, "[t]he decision as to the availability of specific performance rests within the sound discretion of this Court."[16]

         A. The Simon Units Provide Substantially the Same Rights

         As I stated in the 2017 Memorandum Opinion,

[t]he only question remaining is whether Simon, once read into the agreement per the definition, can offer compliant units pursuant to Section 11.3(f). Section 11.3(f) provides that: "[a]ny Units received by [Kan Am] pursuant" to this Section 11.3 shall have substantially the same rights (including redemption, conversion, registration and anti-dilution protection) as attached to units issued in connection with the formation transactions of [Mills Partnership] and Mills Corp. . . ."[17]

         Kan Am concedes that "there may not be substantial differences with respect to registration and anti-dilution rights" between the Mills and Simon Units.[18] Consequently, my inquiry focuses on whether the redemption and conversion rights in the Simon Units were "substantially similar" to those in the Mills Units.

         I first note, however, that Kan.Am frames the current inquiry, relying on language from the 2017 Memorandum Opinion, as whether Simon Units "possess the requisite characteristics, including liquidity and tax avoidance, required of compliant Mill Units."[19] Accordingly, Kan.Am spends significant effort describing the potential differences in various types of tax risk and other considerations, particularly under German law, posed by the two units to its investors.[20] However, I did not intend by this language to expand the scope of the inquiry outside of the contractual language of the JV Agreement. That Agreement did not make successor units acceptable as tender based on tax consequences to individual investors of Kan.Am, wherever located. The "tax avoidance" issue under the JV Agreement arises in Section 11.3(d), requiring compliance with IRS Code Section 721, which has the result that transactions in the units are tax free under American law. As stated in the 2017 Memorandum Opinion, "[t]he only question remaining [for this Letter Opinion] is whether Simon, once read into the agreement per the def i nit i on, can o ff er compliant units pursuant to Section 11.3(f). Section 11.3(f) provides that '[a]ny Units received by [Kan Am] pursuant to this Section 11.3 shall have substantially the same rights (including redemption, conversion, registration and anti-dilution protection).'"[21] I turn, then, to the redemption and conversion rights.

         I find that the redemption and conversion rights in the Simon Units are substantially similar to those in the Mills Units. As Kan.Am points out, they are not identical.[22] Simon and Mills both desired to provide liquidity to their unit holders. But Simon and Mills also sought to avoid IRS designation as "Publicly Traded Partnerships" ("PTPs"). Under the United States Internal Revenue Code, such a designation would have negative tax consequences. PTP designation risk[23] may increase if an "established securities market" for the partnership's units arises, which may be deemed to exist if too frequent exchanges of units occur.[24] In light of that risk, both Simon and Mills restricted the redemption and conversion of their units, albeit in different ways, while preserving liquidity for unit holders. The difference between these two approaches forms the bulk of the "substantially similar" inquiry before me.

         Section 9.2 of the Simon LP Agreement provides that the "Limited Partners shall not Transfer all or any portion of their . . . Units to any transferee without the consent of the General Partner, which consent may be withheld in its sole and absolute discretion."[25] Section 9.2 does not distinguish between types of transfers, such as conversion and redemption.[26] The Simon LP Agreement states in Section 9.4(a)(x) that, regardless of general partner consent, a transfer of Simon Units is restricted "if such Transfer is effectuated through an 'established securities market' or a 'secondary market (or the substantial equivalent thereof)' within the meaning of Section 7704(b) of the Code."[27] Thus, Simon grants discretion for unit redemption and conversion to its general partner but prohibits transfers that would trigger PTP designation.

         The Mills LP Agreement separated transfer and redemption rights into two separate provisions.[28] The Mills Units, subject to restrictions not relevant here, could be redeemed

during the four thirty-day periods immediately following the filing with the Securities and Exchange Commission by the REIT of its annual report on Form 10-K or quarterly reports on Form 10-Q or during such periods as the Partnership may otherwise determine . . . ...

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