Selling Your Limited Partnership Units?
by Candice L. H. Hegedus
If you contemplate selling your limited partnership units, be certain that you understand what it is you are selling and what rights or interests, if any, you may be retaining in those units after the sale.1
Public limited partnerships, while often registered with the Securities and Exchange Commission, are highly illiquid investments for which there is no established public market. As a result, a unitholder can sell his units only through the secondary market (an informal system in which an intermediary matches a purchaser with a seller), often at a discounted price, or a unitholder may accept a mini-tender offer from one of the many entities which purchase limited partnership units, again typically at a deep discount.2
The Language of Sales Agreements Varies
Written agreements for the sale of limited partnership units vary widely, some contain very explicit language while others only minimally describe the terms of sale. Some contain provisions assigning specific rights in the transferred units while others remain silent as to rights assigned or contain only general language. The scope of the language used to create transfers or assignments may become an issue in the event that the units are subject to a class action settlement.
An example of a solicitation where the class member and the owner of the partnership unit may be different, and a dispute about entitlement to settlement proceeds may arise involves the following:
- A class action is brought on behalf of all persons entitled to vote on a merger or other corporate transaction. The class is defined as all persons who held units on a particular date, e.g. October 1, 2004.
- A class member sells her units to a purchaser. The class action is later settled. Who is entitled to settlement proceeds attributable to the units sold to the purchaser?
While the terms of a settlement normally define a class member and, thus, who is eligible to receive settlement proceeds, eligibility may be profoundly affected by the terms of the agreement by which the units were transferred or rights in the units were assigned to a purchaser. Contrary to popular belief, the mere sale of units may not effectuate an assignment of any right to receive payment of settlement proceeds. The law regarding the assignment of an interest in a securities action does not provide clear guidance in determining which party to an assignment is entitled to the settlement proceeds in a securities action. Rather, this determination must be based on the language of a particular assignment.
The Sale of Your Units Does Not Automatically Assign Your Right to Settlement Proceeds
Under federal law, applicable to federal securities claims, the right to settlement proceeds is not automatically transferred to the purchaser when a unit or security is sold or assigned. Instead, the courts have required that any assignment of such a right must be valid, knowing and explicit. Thus, a sweeping assignment of all rights associated with limited partnership units, without further clarification, may be inadequate to transfer a right to settlement proceeds to the purchaser of units.3
Likewise, state claims for breaches of fiduciary duty, often filed in conjunction with federal securities claims, are treated similarly. While state laws vary in this area, the majority hold that claims for breaches of fiduciary duty, and other tort claims that are personal, e.g., those claims involving misrepresentations rather than some ongoing misconduct, are not automatically assigned with the transfer of units and may not even be assignable.4
If the language of the agreement whereby units are transferred or assigned does not clearly indicate whether the right to receive settlement proceeds was assigned and the units are subject to a class action settlement, class counsel (or its claims administrator) may be unable to determine whether the seller or the purchaser of the units is entitled to receipt of the settlement proceeds. In order to avoid potential liability to multiple parties as a result of their conflicting claims to the same share of settlement proceeds, class counsel may opt to initiate an interpleader action.
An Interpleader Action May Be Initiated to Determine Which Party is Entitled to Settlement Proceeds
“Interpleader” is a procedure, permitted by federal law, which provides that where two or more parties have competing claims to a particular fund, that money can be paid into the court and the court will then determine which of the disputing parties is entitled to receive payment.5 By using this procedure, class counsel can avoid the litigation of multiple claims and potentially inconsistent judgments from courts in other jurisdictions regarding entitlement to the same portion of settlement proceeds. Class counsel are merely neutral stakeholders as to the disputed settlement proceeds: they claim no interest in the settlement proceeds or which party is entitled to them. The institution of an interpleader action enables class counsel to place the disputed settlement proceeds into the hands of the court to be paid to the parties ultimately determined by the court to be entitled to receive them. Further, it enables the court to impose a restraining order on all competing actions, thereby ensuring that there are no conflicting adjudications to protract the process.6
How to Avoid Problems Arising from Sales Documents Which Do Not Clearly Define What Interests Have Been Sold or Assigned
To avoid the problems that may arise from the execution of ambiguous sales or assignment documents, whenever you are contemplating the sale or purchase of limited partnership units, please consider the following:
- Have your attorney or financial advisor, knowledgeable about such transfers, review the documentation received from your potential purchaser and determine what, if any, changes should be incorporated into the sales documents before you agree to sign them.
- Do not assume that the transfer or assignment language provided by the potential purchaser of your units adequately defines what is to be transferred or assigned or that the terms of the proposed transaction are in your best interest.
- Determine what rights relating to the units you are transferring or assigning to the purchaser. If these rights are not clearly spelled out, you may be facing litigation in the future to resolve that issue, particularly if you find yourself competing with the person on the other side of the sale transaction to recover settlement proceeds from a class action.
- Remember that while the terms of a settlement may indicate that you are the class member and are entitled to receive the settlement proceeds relating to your units, the terms of the transaction whereby you sold or assigned those units may alter your entitlement to settlement proceeds or result in a legal dispute over entitlement.
To Obtain Further Information
Chimicles & Tikellis LLP prosecutes many cases on behalf of investors in limited partnership units. If you would like to discuss an investment you have made in a limited partnership or other illiquid investment (e.g., non-listed REITs), e-mail us at Chimicles.com. Please include a contact telephone number or an e-mail address so that we may respond to you promptly.
_______________________________
1 While this article focuses primarily upon the perspective of a seller of limited partnership units, many of the same issues may affect and should be considered by a purchaser.
2 For additional information, see “To Sell or Not to Sell – Mini-Tenders are the Question,” also posted on this website under the heading “Articles”.
3 Courts are in near universal accord that, with limited exceptions, federal securities claims do not automatically pass to the new purchaser on the sale or assignment of the underlying security. Smith v. Ayres, 977 F.2d 946, 949-50 (5th Cir. 1992); In re Nucorp Energy Sec. Litigation, 772 F.2d at 1489-90; Soderberg v. Gens, 652 F. Supp. 560, 564 (N.D. Ill. 1987); In re Saxon Sec. Litigation, 644 F. Supp. 465, 470-72 (S.D.N.Y. 1985).
4 For example, Florida does not recognize the assignability of tort claims. Carpenter v. Bachman Enters., 657 So. 2d 42 (Fla. Dist. Ct. App. 3d Dist. 1995). Under New Jersey law, a tort claim may not be assigned prior to judgment. Falow v. Cucci, 2003 U.S. Dist. LEXIS 23019 (S.D.N.Y. Dec. 17, 2003). Under New York law, a cause of action is automatically transferred with the sale of an underlying bond, but only by a statute specifically providing for such a transfer for bond sales. Bluebird Partners, L.P. v. First Fidelity Bank, N.A., 97 N.Y. 2d 456 (2002) (Court of Appeals noting that this result is contrary to majority rule).
5 See 28 U.S.C. § 1335.
6 See 28 U.S.C. § 2361.