In Simon-Mills II, LLC v. Kan Am USA XVI Ltd. Partnership, No. 8520-VCG (Del. Ch. May 30, 2018), the plaintiffs, a number of entities organized under an umbrella real estate investment trust and referred to as “Simon,” sought specific performance of a call right applicable to partnership interests under a joint venture agreement (the “JVA”) with the defendant Kan Am, a group of Delaware limited partnerships.  In exchange for the called units, Simon proposed to issue to Kan Am units (the “Successor Units”) that it argued had “substantially the same” rights as the originally contemplated consideration units (the “Original Units”).  The Court of Chancery concluded that the Successor Units did indeed have “substantially the same” rights as the Original Units, within the meaning of the JVA, and that Simon proved by clear and convincing evidence that it was entitled to specific performance of the call right.

In 2014, Simon exercised a call right with respect to partnership interests held by Kan Am pursuant to the JVA. The contractual consideration for the call transaction was required to be Original Units in a by-then defunct real estate investment trust referred to as “Mills.”  Because Mills no longer existed, Simon sought to tender its own similar, but not identical, Successor Units.  The JVA defined the entity Mills as “Mills or a successor entity”; as a result, the Court, in a prior memorandum opinion, previously found the call right could be exercised by a tender of Original Units or successor units so long as the successor units satisfied certain contractual conditions of similarity to the Original Units.  The remaining question then for the Court to decide was whether the Successor Units proffered as consideration were compliant with the similarity requirements under the JVA.

The JVA provided that any successor units received by Kan Am pursuant to the call right “shall have substantially the same rights (including redemption, conversion, registration and anti-dilution protection)” as the Original Units.  Kan Am conceded that there were not substantial differences with respect to registration and anti-dilution protections, so the Court then turned to evaluate the redemption and conversion features of the Original Units and Successor Units.

The Court noted that both sets of units issued by the real estate investment trusts sought to provide liquidity to their holders while avoiding an Internal Revenue Service (“IRS”) designation as a publicly traded partnership (a “PTP”), which could result in negative tax consequences to holders. Relevant here, the primary risk factor for a PTP determination is whether the units would be viewed by the IRS as being transacted under the substantial equivalent of a secondary market and such a risk may increase if an established securities market for the partnership’s units arises due to frequent exchanges of units.  As a result of this regulatory and tax regime, both Simon and Mills restricted the redemption and conversion of their units, while attempting to preserve liquidity for their holders in different ways.  Kan Am argued that these differences resulted in the Successor Units having rights that were not substantially the same as the Original Units.

With respect to the Successor Units, Simon generally granted absolute discretion for unit redemptions and conversions (as well as other types of “transfers” under the Simon limited partnership agreement) to its general partner but had a blanket restriction over any transfers that would trigger PTP designation. The Original Units issued by Mills, however, could be redeemed by the holder during the four 30-day periods immediately following the filing of a Form 10-K or 10-Q with the Securities and Exchange Commission for cash or parent company publicly traded stock; transfers other than these redemptions required the consent of the general partner, which consent would not be given if the transfer would trigger PTP designation.  Kan Am argued that these 30-day windows in particular provided additional redemption or conversion rights under the Original Units that the Successor Units did not have.

The Court, however, concluded that there was clear and convincing evidence that the two sets of units were substantially similar under the JVA, noting that:

• at trial, several of Kan Am’s own witnesses admitted the conversion and redemption rights of both sets of units were substantially similar; and

• while it was true that the Original Units had four 30-day redemption windows unlike the Successor Units, the two sets of units need not be identical and, here, the intent and effect of the restrictions were the same – to preserve liquidity while avoiding PTP status, with neither set of units containing restrictions substantially more onerous than the other.The Court dispensed of the first two elements in short order: the first was not in dispute and, as discussed above, the Court found by clear and convincing evidence that Simon could perform under the JVA Agreement by delivering Successor Units to Kan Am (in lieu of Original Units) in connection with the exercise of the call right under the JVA. Finally, the Court concluded that the equities also favored specific enforcement, as Simon joined the joint venture in reliance on the terms of the JVA, including express terms providing for (a) the ability of a successor to Mills, like Simon, to exercise the call right and issue successor units in connection therewith and (b) specific performance of the call right.

Simon also stipulated, and the Court relied upon, a covenant of Simon not to block Kan Am from redeeming any Successor Units during the applicable quarterly windows that had applied to the Original Units. The Court noted that, as a result of this stipulation, “even unsubstantial differences between the units [would] cease to be an equitable factor against specific performance.” The Court therefore concluded that Simon had proved by clear and convincing evidence that it was entitled to order of specific performance with respect to exercise of the call right and directed the parties to submit a draft order to effect the same.

Having concluded the Successor Units and the Originals Units were substantially similar, the Court then proceeded to determine whether specific performance, as requested by the plaintiffs, was an appropriate remedy, turning to each of the three elements thereof to be proved by clear and convincing evidence: (1) whether a valid, enforceable agreement exists between the parties, (2) whether Simon is ready, willing and able to perform “under the terms of the [JVA]” and (3) whether the equities are in favor of specific performance.

The Court dispensed of the first two elements in short order: the first was not in dispute and, as discussed above, the Court found by clear and convincing evidence that Simon could perform under the JVA Agreement by delivering Successor Units to Kan Am (in lieu of Original Units) in connection with the exercise of the call right under the JVA.  Finally, the Court concluded that the equities also favored specific enforcement, as Simon joined the joint venture in reliance on the terms of the JVA, including express terms providing for (a) the ability of a successor to Mills, like Simon, to exercise the call right and issue successor units in connection therewith and (b) specific performance of the call right.

Simon also stipulated, and the Court relied upon, a covenant of Simon not to block Kan Am from redeeming any Successor Units during the applicable quarterly windows that had applied to the Original Units. The Court noted that, as a result of this stipulation, “even unsubstantial differences between the units [would] cease to be an equitable factor against specific performance.”  The Court therefore concluded that Simon had proved by clear and convincing evidence that it was entitled to order of specific performance with respect to exercise of the call right and directed the parties to submit a draft order to effect the same.

Simon Mills II, LLC v. Kan AM USA SVI Ltd. P’ship (Del. Ch. May 30, 2018)