## Facts

- Hallwood Realty Partners, L.P. was a Delaware public limited partnership investing in real estate.
- Hallwood Realty Corporation served as the Partnership’s sole general partner and was controlled by The Hallwood Group Inc. (HGI), which also owned a significant block of limited partnership units.
- The limited partnership agreement permitted transactions between the Partnership and the general partner or its affiliates only if the terms were “substantially equivalent” to those obtainable from an independent third party.
- The general partner implemented a series of related transactions (including a reverse unit split, an option plan, and an odd-lot tender offer) that increased HGI’s ownership from roughly 5% to nearly 30% of outstanding units, giving HGI effective control.
- Gotham Partners, L.P., a limited partner, challenged the transactions as conflicted self-dealing that failed to meet the agreement’s third-party equivalence requirement.
- The Court of Chancery found the defendants failed to ensure substantially equivalent terms, treated the agreement as imposing an entire-fairness-type contractual standard, found breach, and awarded money damages rather than rescission; it did not sterilize voting rights for units obtained through the transactions.

## Issues

1. Whether a limited partnership agreement may create fiduciary-type duties that mirror corporate-law fiduciary duties, including an “entire fairness” standard for conflicted transactions.
2. Whether the challenged control-shifting transactions breached the agreement’s contractual standard and, if so, whether defendants were jointly and severally liable.
3. Whether equity required rescission, and if rescission was denied, whether the damages remedy had to account for the value of control (control premium) wrongfully obtained.

## Decision

- The Delaware Supreme Court affirmed the determination that the limited partnership agreement created contractual duties substantially mirroring traditional fiduciary duties, including an entire-fairness requirement for affiliate transactions.
- The Court affirmed the finding that the challenged transaction(s) breached the agreement’s entire-fairness standard and that defendants were jointly and severally liable.
- The Court affirmed that rescission was not mandatory and that the choice to grant or deny rescission lies within the Court of Chancery’s equitable discretion.
- The Court reversed the damages award because it was not an adequate substitute for rescission and did not properly account for the control value obtained through wrongdoing.
- The Court remanded for the Court of Chancery to (i) determine how the transaction would have been consummated had defendants complied with the agreement’s entire-fairness standards and procedures, and (ii) consider equitable relief including rescission, rescissory damages, sterilization of voting rights, or other methods to account for control value.

## Legal Principles

- Delaware limited partnership agreements may impose contractually created duties that substantially mirror corporate fiduciary duties.
- Contract language requiring affiliate transactions to be on terms substantially equivalent to those available from an independent third party can be construed to incorporate an entire-fairness framework (fair dealing and fair price) as a contractual standard.
- Rescission is an equitable remedy committed to the Court of Chancery’s discretion; it is not automatically required even when a conflicted transaction breaches contractual duties.
- If rescission is denied, the substitute remedy must adequately compensate for benefits wrongfully obtained, including the economic value of acquiring control; failure to account for a control premium can render damages inadequate.
- Equity may employ flexible remedial tools in control-shifting cases, including rescissory damages or voting-rights sterilization, to prevent retention of wrongdoing-based control benefits.

## Conclusion

The Delaware Supreme Court held that a limited partnership agreement can contractually impose an entire-fairness-type obligation on a general partner and its controller, affirmed liability for breaching that standard in a control-shifting self-dealing transaction, and required on remand a remedy that captures the value of wrongfully obtained control when rescission is not ordered.


Gotham Partners, L.P. v. Hallwood Realty Partners, L.P., 817 A.2d 160 (Del. 2002)