Richard Raysman and Peter Brown ()
At the most basic level, a strategic partnership (often used interchangeably with the term strategic alliance) is a relationship between two or more commercial enterprises to pursue a set of shared goals, while at the same time remaining independent entities A strategic alliance is generally less time-consuming and involved than a joint venture, although The Economist once described them as “often said to be like marriages.” In a quintessential strategic partnership, the larger entity provides capital, product development and marketing, with the smaller entity providing specialized technical or creative expertise. Unsurprisingly, strategic partnerships take seemingly innumerable forms, from established businesses with startups, the United States and foreign governments, one of America’s largest retailers and one of the largest Chinese e-commerce sites, and content creators and distributors.
In some cases, strategic partnerships go wrong and invariably litigation ensues. For instance, in March 2017, a complaint was filed alleging that the controlling shareholder negotiated an $800 million loan and strategic alliance behind the backs of the minority shareholders. In another, discussed in this column, an existing strategic partnership between investment advisors dissolved after one partner, at the direction of its shareholders, revoked prior consent to investment of its funds in a prospective strategic alliance with the successor entity of the other partner. Litigation ensued and one claim survived a motion to dismiss in part on the rationale that a strategic partnership sufficiently creates a “special relationship” between the partners that requires a greater degree of candor and fair dealing when contemplating the prospective strategic alliance with an unrelated third party. See Kortright Capital Partners LP v. Investcorp Invest. Advisers, — F. Supp. 3d —-, 2017 WL 2790547 (S.D.N.Y. June 27, 2017).
Facts, Procedural Background
Kortright Capital Partners was an SEC-registered investment adviser and capital manager. In November 2013, Kortright entered into a project agreement with Investcorp Investment Advisers Limited, another SEC-registered investment adviser. The project agreement required Investcorp to invest in Kortright: (1) $50 million of its proprietary capital; and (2) $40 million of its clients’ capital in the Kortright funds (the funds). In return for this seed capital, Kortright granted Investcorp a portion of its operating revenue, influence over its corporate governance and access to Kortright’s confidential information.
In January 2015, Kortright and Man Group plc, an investment manager and competitor of Investcorp, began to negotiate a transaction whereby Kortright would either bring the funds into Man Group or wind down the funds. Prior to the absorption of Kortright by Man Group, Investcorp was to redeem its proprietary capital, while leaving its clients’ capital with Kortright. Kortright and Man Group structured any future transaction to transfer based in part on Investcorp’s agreement to withdraw its proprietary capital, which it did in May 2016.
In June 2016, Kortright and the Man Group entered an agreement which entailed Man Group investing $300 million in the funds (the transaction agreement). The transaction agreement mandated that Kortright bring a minimum level of Investcorp’s client capital to Man Group. Simultaneously, Kortright and Investcorp entered into two new agreements: a “termination agreement” and a “revenue sharing agreement.” The termination agreement obviated the project agreement, while the revenue sharing agreement permitted Investcorp to continue to share revenue with Kortright, and now the Man Group, while also including a termination clause in the event Investcorp redeemed clients’ capital in excess of a threshold amount. Notably, the revenue sharing agreement did not require Investcorp to maintain its investment in the funds for a minimum fixed term.
One day after the execution of the transaction agreement, Kortright informed, and sought consent from, its investors to transfer their investments to the Man Group (collectively, the election form). The election form also indicated that the partnership between Kortright and Investcorp would continue. Finally, the election form provided, among other things, that the investor was making an independent decision to prolong its investment in the funds, and that the investor had the requisite power and right to make such investment. Investcorp, still a client of Kortright, returned its election form within a week, prompting Kortright to commence winding down the funds.
However, two business days later, Investcorp revoked that consent because it was required to secure its own clients’ consent to the transfer of investments. These clients declined to consent, triggering the mandatory redemption of their capital invested in the funds. This withdrawal meant that a condition precedent of the transaction agreement could not be satisfied. Man Group, free from the obligation sign the transaction agreement, withdrew.
Kortright (and its co-founders) sued Investcorp alleging, inter alia, negligent misrepresentation, breach of contract and breach of the implied covenant of good faith and fair dealing. This article focuses only on the negligent misrepresentation claims, as all others were dismissed.
Grounds for Kortright’s negligent misrepresentation claim included averments that: (1) Investcorp initially delivered false election forms; (2) led Kortright to believe it could represent in its client consent letters that Investcorp would remain invested in the funds; (3) caused Kortright to begin winding down the funds; (4) signed the termination agreement and revenue sharing agreement; and (5) it could participate in the transaction agreement, while failing to disclose that any transfer of Investcorp’s client capital was subject to their consent. Investcorp moved to dismiss.
Legal Analysis, Conclusions
Investcorp’s motion was granted in part and denied in part. The motion was evaluated under the Ashcroft v. Iqbal standard, where Kortright’s complaint “must contain sufficient factual matter, accepted as true, to ‘state a claim for relief that is plausible on its face.’” 556 U.S. 662, 678 (2013).
Kortright claimed that Investcorp made five negligent misrepresentations. With respect to the first four alleged misrepresentations, the court disagreed.
Under New York law, Kortright’s reliance on the misrepresentations must be reasonable and foreseeable. See Anschutz v. Merrill Lynch & Co., 690 F.3d 98, 114 (2d Cir. 2012). Since Investcorp’s alleged misrepresentations concerning Kortright’s statement in its client consent letters and the supposedly “false” election forms occurred after Kortright executed the transaction agreement, the claim of reliance on such statements was precluded. In the same vein, Kortright’s decision to start to wind down the funds, purportedly as a response to Investcorp’s signed election forms, also did not demonstrate actionable reliance since Kortright did not show how it was harmed in the two business days between receiving the election forms and Investcorp’s consent revocation and funds’ redemption. In any event, Kortright had already began winding down it’s the funds prior to the execution of the transaction agreement. Finally, Kortright could not claim reliance on Investcorp’s representations in the Termination and revenue sharing agreements with respect to Investcorp’s continued investment of client capital since neither document committed Investcorp to maintaining an investment with Kortright after its absorption by the Man Group.
Generally, courts are disinclined to frame future statements into misrepresentations of present fact, as future statements are often conjectural and per se pertain to events that may not occur. However, the court held that Investcorp’s representation that it was willing to participate in the future transaction agreement without concomitantly revealing that client consent was required to do so, could be sufficient to state a claim for negligent misrepresentation. Investcorp’s stated willingness to participate was a representation made with a “degree of definitiveness” that prompted action by both parties. To wit, Investcorp withdrew the proprietary capital, while Kortright and Man Group structured the transaction to conform with the misrepresentation. “Construed in the light most favorable to Kortright,” Investcorp’s representation that it would participate in the prospective transaction agreement reflected a then-present intention.
The court also concluded that Kortright and Investcorp possessed a “special relationship” to give correct information sufficient to survive a motion to dismiss. First, the special relationship arose from circumstances extraneous to the project agreement insofar as Investcorp’s alleged misrepresentations referenced a contemplated new relationship and termination of the project agreement. Second, Investcorp held “unique or special expertise” that Kortright could not have learned through generally available information, since only Investcorp could have known of the client consent requirement. Third, and perhaps most important, as “self-proclaimed” strategic partners, Kortright and Investcorp owed each other a “closer degree of trust,” particularly because the project agreement granted Investcorp certain veto power over proposed corporate actions by Kortright, as well as access to “virtually any and all information regarding the Kortright funds.” The court therefore denied Investcorp’s motion with respect to this portion of Kortright’s negligent misrepresentation claim.