City of Pittsburgh Comprehensive Municipal Pension Trust Fund v. William E. Conway, Jr.

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

CITY OF PITTSBURGH )
COMPREHENSIVE MUNICIPAL )
PENSION TRUST FUND, directly on )
behalf of itself and all other similarly )
situated stockholders of THE )
CARLYLE GROUP INC. and )
derivatively on behalf of THE )
CARLYLE GROUP INC., )
)
Plaintiff, )
v. ) C.A. No. 2022-0664-MTZ
)
WILLIAM E. CONWAY, JR., )
DANIEL A. D’ANIELLO, DAVID M. )
RUBENSTEIN, PETER CLARE, )
JAMES H. HANCE JR., KEWSONG )
LEE, GLENN YOUNGKIN, )
ANTHONY WELTERS, LAWTON )
FITT, HELEN DOOLEY AS )
EXECUTOR FOR THE ESTATE OF )
JANET HILL, WILLIAM J. SHAW, )
DR. THOMAS S. ROBERTSON, )
CURTIS BUSER, JEFFREY )
FERGUSON, CHRISTOPHER FINN, )
THE CARLYLE GROUP )
MANAGEMENT L.L.C., THE )
CARLYLE GROUP INC., CARLYLE )
HOLDINGS I GP INC., CARLYLE )
HOLDINGS I GP SUB L.L.C., and )
CARLYLE HOLDINGS II GP L.L.C., )
)
Defendants, )
)
and )
)
THE CARLYLE GROUP INC., )
)
Nominal Defendant. )
MEMORANDUM OPINION
Date Submitted: September 13, 2023
Date Decided: April 24, 2024

Joel Friedlander, Jeffrey M. Gorris, Christopher M. Foulds, FRIEDLANDER &
GORRIS, P.A., Wilmington, Delaware; Christopher H. Lyons, Tayler D. Bolton,
ROBBINS GELLER RUDMAN & DOWD LLP, Wilmington, Delaware; Randall
J. Baron, Benny C. Goodman III, Andrew W. Hutton, ROBBINS GELLER
RUDMAN & DOWD LLP, San Diego, California; Gladriel Shobe, Jarrod Shobe,
SHOBE & SHOBE, LLP, Provo, Utah, Attorneys for Plaintiff City of Pittsburgh
Comprehensive Municipal Pension Trust Fund.

Blake Rohrbacher, Matthew D. Perri, Nicole M. Henry, Morgan R. Harrison,
RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Robert A. Van
Kirk, John Williams, Tyler Infinger, Bryan Czako, William Donnelly, WILLIAMS
& CONNOLLY LLP, Washington, DC, Attorneys for Defendants William E.
Conway, Jr., Daniel A. D’Aniello, David M. Rubenstein, Peter Clare, James H.
Hance Jr., Kewsong Lee, Glenn Youngkin, Lawton Fitt, Helen Dooley as executor
for the estate of Janet Hill, William J. Shaw, Anthony Welters, Dr. Thomas S.
Robertson, Curtis Buser, Jeffrey Ferguson, Christopher Finn, Carlyle Group
Management L.L.C., Carlyle Holdings I GP Inc., Carlyle Holdings I GP Sub
L.L.C., and Carlyle Holdings II GP L.L.C., and Defendant and Nominal Defendant
The Carlyle Group Inc.

ZURN, Vice Chancellor.
The Carlyle Group LP (“Carlyle LP”) was indirectly controlled by its three

founders. After Carlyle LP went public as a publicly traded partnership in 2012, the

founders and other pre-IPO investors (together, the “Private Unitholders”) held

equity in three subsidiary holding companies that they could exchange for publicly

traded Carlyle LP units. Those exchanges were treated as sales for tax purposes,

meaning the Private Unitholders paid taxes at the time of exchange. But the

exchanges could also generate future tax benefits for Carlyle LP. Carlyle LP and

the Private Unitholders entered into a tax receivable agreement (the “TRA”), which

allowed the Private Unitholders to share in those potential benefits via payments that

could amount to hundreds of millions of dollars. But there was no guarantee the

exchanges would generate any payments under the TRA or the amount of those

future payments. And if such payments were made, they could be spread out over

fifteen years or longer. As it turned out, Carlyle LP had little to no taxable income

as was necessary to generate TRA payments, and consequently made few payments.

In 2019, Carlyle LP began considering converting to a corporation. The

conversion was expected to greatly benefit both the public unitholders and the

Private Unitholders. The new corporate structure would effectively preclude TRA

payments for any future exchanges. And the company had no legal obligation to

compensate the Private Unitholders for a conversion’s effective elimination of their

TRA rights. In other words, converting to a corporation would effectively render

1
the TRA rights worthless. But because the founders and some of the other Private

Unitholders could block the conversion, Carlyle LP reached an agreement to pay the

Private Unitholders $344 million for the loss of their TRA rights. The conversion

was completed in 2020.

Plaintiff City of Pittsburgh Comprehensive Municipal Pension Trust Fund

(“Plaintiff”) asserts claims arising out of the negotiation and approval of the TRA

rights payment, among other things. Plaintiff reasons that because the TRA rights

were worthless to the holders and the conversion was the best path forward for the

Private Unitholders and public unitholders alike, the founders and other Private

Unitholders lacked the leverage to demand such a payment. In short, Carlyle LP

paid $344 million for the TRA rights despite there being no economic case for doing

so.

Plaintiff presents its theory primarily as a breach of obligations to proceed in

good faith set forth in Carlyle LP’s partnership agreement. For Plaintiff to bring that

claim, neither of two safe harbors in the partnership agreement can apply.

One of the safe harbors establishes a conclusive good faith presumption where

Carlyle LP’s conflicts committee approves the transaction at issue. But there is a

common law exception: that safe harbor does not bar claims where the defendant

undermined the safe harbor’s protections for unaffiliated investors. Plaintiff satisfies

this exception by pleading Carlyle LP’s general partner, acting through various

2
defendants in this action, concealed or obfuscated material information from the

conflicts committee to ensure it did not learn the Private Unitholders lacked the

leverage to extract a payment for their TRA rights. At the pleading stage, Plaintiff

has established that the good faith safe harbor is unavailable. Plaintiff has also pled

the same conduct gives rise to a breach of the limited partnership agreement’s

implied covenant.

The other safe harbor affords a conclusive good faith presumption where the

decisionmaker relied on advice from advisors it selected. At this stage, the pleadings

demonstrate Carlyle LP’s general partner did not rely on any such advice. That safe

harbor is not available either.

Plaintiff also brings a series of claims focusing on an apparent overissuance

of corporate stock in connection with the conversion. Before the conversion, the

Private Unitholders held about 229 million subsidiary holding company units.

Despite the understanding that the $344 million compensated for the effective loss

of the Private Unitholders’ TRA rights, the transaction documents required the

Private Unitholders to relinquish units worth $344 million to receive those payments.

That figure was later determined to be 26.3 million units. After that initial transfer,

the Private Unitholders would exchange the balance of their units for publicly traded

corporate stock on a one-to-one basis. Based on the planned transfer of 26.3 million

units, the Private Unitholders should have received about 201.7 million shares of

3
corporate stock. But when the transactions were completed, they received over 228

million shares. Plaintiff adequately pled the initial transfer never happened, which

supports claims under several legal theories.

I. BACKGROUND1

Carlyle LP was a Delaware limited partnership and a “global investment

firm.”2 Defendants William E. Conway, Jr., Daniel A. D’Aniello, and David M.

Rubenstein (collectively, the “Founders”) founded Carlyle LP’s predecessor entity

in 1987. The Founders controlled a majority of the voting rights of Carlyle LP’s

general partner, Carlyle Group Management LLC (“Carlyle Management”).3

Carlyle Management was responsible for Carlyle LP’s day-to-day operations4 and

1
Citations in the form “Am. Compl.” refer to Plaintiff’s amended complaint in this action,
available at docket item (“D.I.”) 15. Citations in the form “Henry Aff.” refer to the affidavit
of Nicole M. Henry, available at D.I. 24. Citations in the form “Foulds Aff.” refer to the
affidavit of Christopher M. Foulds, available at D.I. 29.
The facts are drawn from the operative complaint, the documents integral to it, and
those incorporated by reference. See Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 860 A.2d
312, 320 (Del. 2004). Plaintiff demanded and received books and records before filing its
complaint in this action. That production was made pursuant to an agreement providing
that documents Carlyle LP produced “will be deemed incorporated by reference in the
Complaint.” Henry Aff., Ex. 2 ¶ 6. Those books and records are incorporated by reference.
See Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752, 796–99 (Del. Ch. 2016), abrogated
on other grounds by Tiger v. Boast Apparel, Inc., 214 A.3d 933 (Del. 2019). Further, “[t]he
court may take judicial notice of facts publicly available in filings with the SEC.”
Omnicare, Inc. v. NCS Healthcare, Inc., 809 A.2d 1163, 1167 n.3 (Del. Ch. 2002).
2
Am. Compl. ¶ 47.
3
Id. ¶ 45.
4
Henry Aff., Ex. 4 § 7.1(a) [hereinafter “LPA”].
4
had no “business activities other than managing and operating” Carlyle LP.5 Carlyle

Management’s board of directors served as Carlyle LP’s board of directors (the

“Board”).6

Rubenstein and Conway served as Carlyle Management directors and Carlyle

Management’s co-CEOs.7 D’Aniello served as chairman of the Board. The Board

included three other directors at the time, including defendants Glenn Youngkin and

Jeffrey Ferguson, who also served as Carlyle Management’s COO and general

counsel, respectively.8 Other defendants in this action were also affiliated with both

Carlyle LP and Carlyle Management, including defendant Curtis Buser, who served

as both entities’ CFO.9

A. Carlyle LP’s IPO

In 2012, Carlyle LP went public through an initial public offering, or IPO, and

public investors acquired units in the publicly traded partnership. The Founders and

other Private Unitholders held equity in Carlyle LP subsidiaries rather than the

public entity. This was, at bottom, for tax reasons.

5
The Carlyle Group LP, Form 10-K (Annual Report), at 15 (Feb. 13, 2019) [hereinafter
“Carlyle LP 2019 Form 10-K”].
6
LPA at 2 (defining “Board of Directors” as “the Board of Directors of [Carlyle
Management]”).
7
Am. Compl. ¶¶ 16, 18; Henry Aff., Ex. 1 at 202.
8
Am. Compl. ¶ 3; Henry Aff., Ex. 1 at 202.
9
Carlyle LP 2019 Form 10-K at 249.
5
1. Up-C IPOs Generally

An LLC or partnership can go public through several structures. Under a more

traditional method, “a new corporation . . . is formed to be the vehicle taken

public[, and] . . . the legacy owners of the LLC would contribute their LLC interests

to the [new corporation] in exchange for stock of [the new corporation].”10 The new

corporation then “sell[s] shares to the public for cash.”11 The legacy owners pay no

tax on the exchange, and the corporation does not receive a stepped up basis in the

LLC’s or partnership’s assets.12

An alternative structure known as an up-C allows the enterprise to reduce its

future tax liability at no cost to the public investors. Under that structure, a new

corporation is formed and the LLC or partnership continues as the operating entity.13

The corporation sells shares to the public through an IPO and the corporation may

then use the IPO cash to purchase equity in the LLC or partnership, a portion of

which can come directly from the legacy owners.14 As a result, the corporation

becomes a holding company that conducts its operations through the original LLC

10
Gregg D. Polsky & Adam H. Rosenzweig, The Up-C Revolution, 71 Tax L. Rev. 415,
427 (2018) [hereinafter “Polsky & Rosenzweig”].
11
Id.
12
Id.
13
Id. at 435.
14
Id.
6
or partnership.15 The legacy owners continue to own the operating company equity

they did not sell to the corporation.16

The operating company units are generally illiquid, but the legacy owners can

exchange them for the publicly traded corporate stock.17 Those exchanges are

taxable, which has three relevant implications: (1) the corporation receives a

stepped-up basis in the allocable portion of the LLC or partnership assets;18 (2) the

allocable portion of the LLC’s or partnership’s self-developed goodwill becomes

depreciable;19 and (3) the legacy owners pay taxes in connection with the exchange.20

The stepped-up basis and depreciable goodwill allow the corporation to reduce its

future taxable income, which benefits the public stockholders.21 Often, the legacy

owners will share in any tax savings by entering into a tax receivable agreement, or

15
See id.; Gladriel Shobe, Private Benefits in Public Offerings: Tax Receivable Agreements
in IPOs, 71 Vand. L. Rev. 889, 926 (2018) [hereinafter “Shobe, Private Benefits”]
(explaining that an up-C IPO creates “a structure where the public company is essentially
a holding corporation for the operating partnership”).
16
Polsky & Rosenzweig at 435–36.
17
Id. at 435–36, 438–39.
18
Id. at 416; see also Shobe, Private Benefits at 926 (“Part of the ‘magic’ of [the up-C]
structure is that when the public company purchases interests in the partnership (with the
money it receives in the IPO), the corporation gets a stepped-up basis in the partnership’s
assets, thus creating valuable tax assets.”).
19
Gladriel Shobe, Supercharged IPOs and the Up-C, 88 U. Colo. L. Rev. 913, 929 (2017).
20
Polsky & Rosenzweig at 436, 440.
21
Id. at 440.
7
TRA.22 Those agreements typically entitle the legacy owners to payments

representing 85% of the realized tax savings while the corporation enjoys the

remaining 15%.23

2. Carlyle LP’s Pre-IPO Structure

Carlyle LP was formed in July of 2011.24 Before its IPO, Carlyle LP was

generally structured like an up-C, except its public investors held equity in a publicly

traded partnership rather than a corporation. At all relevant times, Carlyle LP had

“no material business operations of its own.”25 Instead, it held interests in three

intermediate holding companies: defendant Carlyle Holdings I GP Inc.

(“Intermediate Holdco I”), defendant Carlyle Holdings II GP LLC (“Intermediate

Holdco II”), and Carlyle Holdings III GP LP (“Intermediate Holdco III”).26

Intermediate Holdco I held an interest in Carlyle Holdings I LP (“Holdco Sub I”);

Intermediate Holdco II held an interest in Carlyle Holdings II LP (“Holdco Sub II”);

and Intermediate Holdco III held an interest in Carlyle Holdings III LP (together

with Holdco Sub I and Holdco Sub II, the “Subsidiary Holdcos” and each an

22
Id. at 448; see also Victor Fleischer & Nancy Staudt, The Supercharged IPO, 67 Vand.
L. Rev. 307, 320–21 (2014).
23
Polsky & Rosenzweig at 437.
24
The Carlyle Group LP, Form 10-Q (Quarterly Report), at 8 (May 22, 2012).
25
Am. Compl. ¶ 48.
26
Henry Aff., Ex 1 at 12.
8
“Subsidiary Holdco”).27 Carlyle LP’s material business operations were carried out

through entities indirectly owned by the Subsidiary Holdcos.

3. Carlyle LP’s IPO

In 2012, Carlyle LP conducted an IPO using a publicly traded partnership

structure. After the IPO, public unitholders held Carlyle LP partnership units. But

the three Subsidiary Holdcos remained private companies, and the Private

Unitholders held Subsidiary Holdco units. Carlyle LP’s 2012 post-IPO ownership

structure appears below:28

27
Id.
28
Id. A FAQ distributed by Carlyle LP described its partnership structure as “byzantine.”
Foulds Aff., Ex. 3 at -1653.
9
To sell their equity, the Private Unitholders first had to exchange their units

in the Subsidiary Holdcos for publicly traded Carlyle LP units pursuant to an

exchange agreement.29 The exchange agreement provided the Private Unitholders

would receive one publicly traded unit in exchange for one unit of each of the three

29
Henry Aff., Ex. 1 at 12.
10
Subsidiary Holdcos.30 This opinion refers to one unit of each of the three Subsidiary

Holdcos together as a “Subsidiary Holdco Unit.” The agreement required that these

exchanges be taxable to the Private Unitholders.31

Because the exchanges were taxable, the Private Unitholders would incur a

tax liability in connection with any exchange. These taxes could be significant as

the Private Unitholders generally had a near-$0 basis in the Subsidiary Holdco

Units.32 The exchanges afforded a Carlyle LP subsidiary a stepped-up basis and

turned the allocable portion of the partnership’s non-depreciable, self-developed

goodwill into depreciable goodwill, which could reduce the Carlyle enterprise’s

future taxable income.

Carlyle LP, the Founders, and others entered into the TRA to allow the Private

Unitholders to share in Carlyle LP’s tax savings.33 The TRA provided that the

Private Unitholders would be paid an amount equivalent to 85% of Carlyle LP’s tax

30
The Carlyle Group LP, Form 8-K (Current Report) (May 8, 2012), Ex. 10.1 § 2.1.
31
Id. § 3.11; Am. Compl. ¶ 51.
32
Foulds Aff., Ex. 3 at -1654 to -1655.
33
Henry Aff., Ex. 34 [hereinafter “TRA”]. This opinion proceeds on the understanding
that all the Private Unitholders held TRA rights and eventually received payments in
connection with the challenged transactions, even though the record before the Court does
not speak to that understanding, and indeed does not indicate whether all the Private
Unitholders entered into the TRA.
11
savings generated from the exchange of their Subsidiary Holdco Units.34 The Private

Unitholders would not receive any payments unless and until Carlyle LP realized

those tax savings.35 Whether and to what extent Carlyle LP would realize any tax

savings was uncertain and dependent on multiple factors, including the applicable

tax rate and whether Carlyle LP realized taxable income in a given year.36 The

payments would be made over a minimum of fifteen years,37 but it could take twenty

“years or perhaps even longer” for all payments to be made.38 Defendants Buser,

Peter Clare, Conway, D’Aniello, Ferguson, Christopher Finn, James Hance, Jr.,

Rubenstein, and Youngkin (the “Private Unitholder Defendants”) all held Subsidiary

Holdco Units subject to the TRA.

Carlyle LP made no TRA payments before 2016, and a total of $6.5 million

in TRA payments from 2016 through 2020.39 Two facts contributed to the minimal

34
Id. §§ 3.01(a)–(b). The TRA provided that the tax savings and payments could be
calculated based on the savings of different Carlyle LP subsidiaries that are “treated as a
domestic corporation for United States federal income tax purposes,” and that the payments
could come from any of those entities. Id. § 3.01(a); id. at 3. For purposes of clarity, this
decision references only Carlyle LP when discussing the tax savings as relevant to the TRA
or any payments made pursuant to the TRA.
35
Id. §§ 3.01(a)–(b); see Am. Compl. ¶ 65.
36
See Foulds Aff., Ex. 1 at -3032; Foulds Aff., Ex. 3 at -1655 to -1656; Carlyle LP 2019
Form 10-K at 79.
37
Foulds Aff., Ex. 2 at -2648; Foulds Aff., Ex. 3 at -1655 (“[T]he normal TRA payments
are made over 15+ years.”).
38
Foulds Aff., Ex. 3 at -1656.
39
Am. Compl. ¶¶ 68–69.
12
nature of these payments. First, the Private Unitholder Defendants, who owned a

significant portion of the units subject to the TRA, undertook few exchanges.

Rubenstein never exchanged any Subsidiary Holdco Units. D’Aniello and Conway

each exchanged only 2.5 million of their 47 million units, “meaning that they had

retained 95% of their original” Subsidiary Holdco Units.40 The rest of the Private

Unitholder Defendants undertook “almost no taxable exchanges since [Carlyle LP’s]

IPO in 2012.”41 Together, the Private Unitholder Defendants accounted for only

about $1.6 million of the TRA payments. Second, these exchanges yielded little

value because during those years Carlyle LP “suffered significant investment losses

and operating losses for tax purposes and therefore [did] not ha[ve] sufficient taxable

income.”42

Plaintiff offers further explanations for the Private Unitholder Defendants’

lack of exchanges. It alleges they were “billionaires with no need to engage in

taxable exchanges” because “they could donate to charity tax free or simply hold

their units until death, at which point they would avoid ever having to pay taxes on

their gain because their future heirs would get a stepped-up basis in those units under

the tax code.”43 Rubenstein, who was “almost 73” when the operative complaint

40
Id. ¶ 68.
41
Id. ¶ 67.
42
Foulds Aff., Ex. 3 at -1656.
43
Am. Compl. ¶ 71.
13
was filed, signed the “‘Giving Pledge’ in 2010 and stated that he had ‘already made

arrangements to ensure that a good deal more than half of [his] resources would have

gone to philanthropic purposes.’”44 D’Aniello similarly “committed to donate over

half of [his] wealth, which largely consists of Carlyle stock.”45

Carlyle LP could terminate the TRA at any time.46 If it did so, the Private

Unitholders would be entitled to an early termination payment.47 The payment

amount was not fixed, but it was substantial: a Carlyle LP advisor estimated it to be

$551 million in 2019.48 The termination payment did not necessarily represent the

fair value of the TRA rights.49 As a company presentation described, “Early

termination is meant to be an anti-takeover equivalent to eliminating [the] TRA, not

necessarily determinative of fair market value.”50

In short, two events relevant here would trigger payments to the Private

Unitholders under the TRA: (1) if the Private Unitholders exchange their Subsidiary

44
Id. ¶ 83 n.29 (citation omitted).
45
Id. ¶ 83 (footnote omitted).
46
TRA § 4.01(a).
47
Id.
48
Henry Aff., Ex. 5 at -0105.
49
Foulds Aff., Ex. 1 at -3032 (“[T]he fair value of future exchanges is likely meaningfully
lower than the early termination clause suggests . . . .”).
50
Foulds Aff., Ex. 2 at -2653; see also Am. Compl. ¶ 85.
14
Holdco Units for publicly traded units, and Carlyle LP generates resulting tax

savings; or (2) if Carlyle LP terminates the TRA.

B. The Limited Partnership Agreement

Carlyle LP was governed by a limited partnership agreement (the “LPA”).

The LPA eliminated all fiduciary duties.51 It permitted Carlyle LP to “transfer assets

to . . . business entities in which it is or thereby becomes a participant on terms to

which [Carlyle Management] agree[d] in good faith.”52 Similarly, it permitted

Carlyle Management and its affiliates to “sell, transfer or convey any property to, or

purchase any property from, [Carlyle LP], directly or indirectly, on terms to which

[Carlyle Management] agree[d] in good faith.”53

Under the LPA, Carlyle Management was entitled to a conclusive

presumption that it acted or chose not to act in good faith so long as Carlyle

Management did not subjectively believe its “determination, action or failure to act

was opposed to the best interests of [Carlyle LP],” or if its act or failure to act

received “Special Approval.”54 The agreement defines Special Approval as approval

by either Carlyle LP’s conflicts committee (the “Conflicts Committee”) or a majority

51
LPA § 7.9(a).
52
Id. § 7.6(d).
53
Id. § 7.6(e).
54
Id. § 7.9(a). The presumption also applied to decisions made by the Board or any Board
committee.
15
of Carlyle LP’s outstanding voting units, excluding units held by Carlyle

Management and its affiliates.55 Carlyle Management was also entitled to a

conclusive good faith presumption if it consulted with an advisor, so long as it

selected the advisor, relied on the advisor’s advice, and believed the matter in

question was within the advisor’s expertise.56

C. Project Phoenix

Carlyle LP’s stock price was not performing as hoped and the company began

considering acting to address the underlying causes and other related issues.57 That

endeavor was known as “Project Phoenix.” As part of Project Phoenix, the Board

met in July of 2018 and discussed the possibility of converting Carlyle LP to a

publicly traded corporation (the “Conversion”).58 Carlyle LP retained Centerview

Partners LLC as a financial advisor to assist with the Conversion and other

initiatives.59 An entity by the name of Carlyle Investment Management LLC

retained Ernst & Young LLP (“E&Y”) to advise on the tax implications of Carlyle

55
Id. at 8 (defining “Special Approval”).
56
Id. § 7.10(b).
57
Henry Aff., Ex. 13 at -0018.
58
Henry Aff., Ex. 7 at -1476.
59
Henry Aff., Ex. 8 at -0011 to -0012 (engagement letter defining the scope of work as,
among other things, to “[a]dvise and assist [Carlyle LP] in evaluating its capital structure
and shareholder return alternatives,” and to “[a]dvise and assist [Carlyle LP] in evaluating
shareholder value and ownership consequences related to changing its corporate
structure”).
16
LP “converting its parent entity to a C-corporation and possible similar

alternatives.”60 A group comprising Youngkin, Buser, Ferguson, Finn, Carlyle LP

co-CEO Kewsong Lee, and three other Carlyle LP employees (the “Conversion

Working Group”) was tasked with evaluating the Project Phoenix initiatives,

including the Conversion.61 Youngkin, Buser, Ferguson, and Finn were all Private

Unitholders with TRA rights.

The Conversion would foreclose future TRA payments for unexchanged

Subsidiary Holdco Units but would not terminate the TRA or otherwise trigger an

early termination payment.62 The Conversion Working Group nevertheless

considered a payment to the Private Unitholders alongside the Conversion (the

“TRA Buyout”), and such a payment became part of Project Phoenix. It is unclear

what prompted the Conversion Working Group to consider such a payment, but the

60
Henry Aff., Ex. 9 at -0031.
61
Am. Compl. ¶ 74.
62
Foulds Aff., Ex. 3 at -1654 (“The TRA cannot be maintained in a tax-free conversion to
a Full-C structure because of the absence of a taxable exchange.”); id. at -1657 (“The
Full-C conversion transaction . . . does not breach the TRA, nor would the conversion
technically terminate the TRA. Instead, the conversion is a series of tax-free mergers that
simply makes the TRA irrelevant. As consideration to the Carlyle Partners, we voluntarily
are modifying the TRA to provide for a payment in lieu of the normal TRA payments.”).
A conversion would not affect existing TRA liabilities relating to past exchanges. Id.
at -1652 to -1653; Henry Aff., Ex. 5 at -0155.
17
defendants assert it followed “a ‘lengthy assessment and negotiation process’ with

the Founders, who had voting control over the partnership.”63

1. The September 28 Conversion Working Group Meeting
The Conversion Working Group first met to discuss Project Phoenix on

September 28.64 Centerview presented a slide deck comparing three structures: (1)

remaining a publicly traded partnership; (2) an up-C structure, in which Carlyle LP

would convert to a publicly traded corporation that would conduct its operations

through the Subsidiary Holdcos, with the Private Unitholders continuing to hold

equity directly in the Subsidiary Holdcos; and (3) the Conversion, which entailed

converting to a publicly traded “Full-C corporation” that would wholly own the three

Subsidiary Holdcos, with all investors holding equity only in the public

corporation.65 The Conversion scored the most favorably across several categories,

followed by the up-C, and then the publicly traded partnership structure.66

Centerview recommended the Conversion as the best option for both public

investors and the Private Unitholders.67 One slide included three positive

63
D.I. 23 at 9 (citation omitted).
64
Foulds Aff., Ex. 1. To be sure, the presentation shown at the September 28 meeting is
titled “Board Discussion Materials.” Id. at -0317. The operative complaint alleges this
presentation was instead presented to the Conversion Working Group, and the defendants
have offered nothing to dislodge those well-pled allegations. Am. Compl. ¶¶ 74–75.
65
Foulds Aff., Ex. 1 at -3038; see also id. at -3040 (comparing governance structures).
66
Id. at -3038.
67
Id. at -3019, -3029.
18
consequences of a Conversion specifically for the Private Unitholders, which were

listed as “Current Cash Income,” “Valuation uplift,” and “Increased liquidity.”68

The Conversion carried only two disadvantages: relatively less governance

flexibility and the practical elimination of the TRA rights.69 Centerview noted the

latter was a concern for only the Private Unitholders,70 and observed that “[i]n [a]

conversion to a Full-C corporation, the TRA . . . may be extinguished without

triggering [an] early termination payment.”71

Centerview also discussed potential payments to the Private Unitholders if

Carlyle LP terminated the TRA outside of the Conversion.72 It explained that “[i]f

[the] TRA is terminated early, provisions under [the] existing TRA call for payments

of ~$600mm based on the present value of all tax benefit payments,” and that

“[g]iven significant uncertainties on the value of the TRA . . . the fair value of future

exchanges is likely meaningfully lower than the early termination clause suggests.”73

Centerview estimated the present value of the TRA rights “to be <$150mm ($0.70 /

eligible private unitholder).”74 The relevant slide was marked “DRAFT

68
Id. at -3038.
69
Id.; see also id. at -3040 (discussing governance across structures).
70
Id. at -3038.
71
Id. at -3032.
72
Id.
73
Id.
74
Id.
19
PRELIMINARY ANALYSIS.”75 Centerview did not conduct a subsequent

valuation.

2. The March 2019 Working Group Meeting
In March 2019, the Conversion Working Group received a presentation

focused on the TRA.76 It noted there were 234 million units subject to the TRA and

generally discussed the TRA’s terms.77 It explained that the minimum TRA payment

period is “roughly 15 years from the time of each exchange,” but that the actual

payout period “[w]ill likely be significantly longer based on corporate usage.”78

The presentation analyzed the TRA rights under the current partnership

structure, an up-C structure, and the Conversion.79 It explained that remaining a

publicly traded partnership would not affect the TRA rights and that an up-C

transaction would leave the TRA in place but increase its value to the Private

Unitholders.80 As to the Conversion, the presentation explained: “A tax free

conversion to a full C effectively terminates the TRA as there is no taxable exchange

to trigger the basis step up,” but that “[a] taxable conversion would trigger the TRA,

75
Id.
76
Foulds Aff., Ex. 2. Plaintiff is silent as to who presented the March 2019 slide deck.
77
Id. at -2648.
78
Id.
79
Id. at -2649.
80
Id.
20
but [a] huge tax liability would be due.”81 The presentation conveyed that the TRA

would not be terminated in connection the Conversion.82

The presentation also analyzed the TRA rights’ value in sixty different

scenarios with values ranging from $0.14 to $4.02 per unit.83 The vast majority of

those valuations assumed exchanges of between 6.5 million units and 15 million

units each year.84 Three of the valuation slides discussed early termination

payments, all of which noted that the Conversion would not require a termination

payment.85 The Conversion Working Group also received information on the

volume of exchanges from the second quarter of 2017 through the first quarter of

2019, which showed the Private Unitholders exchanged an annualized average of

5.2 million Subsidiary Holdco Units during that time.86 The slide did not disclose

the TRA payments made pursuant to those exchanges.

81
Id.; see also id. at -2654 (explaining “Value to the TRA would be zero in the following
circumstances . . . [t]ax free conversion of units to C corporation”).
82
Id. at -2658 (“No termination payment required in Full-C conversion or potentially
certain changes of control.”); id. at -2659 (same); id. at -2660 (same); see also id. at -2649
(“A tax free conversion to a full C effectively terminates the TRA as there is no taxable
exchange to trigger the basis step up.” (emphasis added)).
83
Id. at -2653 to -2672.
84
Id. at -2655. Nine valuations assume the exchange of 78 million units over three years.
Id.
85
Id. at -2658 to -2660.
86
Id. at -2673.
21
Those valuations were prefaced by the comment that the “[v]alue of the TRA

would be zero in the following circumstances,” including a “[t]ax free conversion

of units to [a] C corporation.”87 It noted three other circumstances in which the TRA

rights would be worthless: (1) if the Private Unitholders “[n]ever exchanged private

units and died with units in [their] estate”; (2) if the Private Unitholders “[g]ifted

private units to charity”; and (3) if Carlyle LP never realized a benefit from the

stepped up basis following an exchange, including due to a change in tax rules or if

it “had losses in perpetuity.”88

3. The April 2019 Board Meeting

The Board first met to discuss Project Phoenix in April 2019.89 Ferguson and

Buser gave a presentation that reiterated some of the reasons for undertaking Project

Phoenix, including that Carlyle LP’s “stock ha[d] not performed,” was “trading

below the IPO price[,] . . . and trade[d] at the lowest valuation multiple in [its] peer

set.”90 It noted the benefits of the Conversion as compared to remaining a publicly

traded partnership and pursuing an up-C structure, concluding that the Conversion

“tends to provide the highest after tax return to shareholders.”91

87
Id. at -2654 (emphasis in original).
88
Id.
89
Am. Compl. ¶ 87; Henry Aff., Ex. 13.
90
Henry Aff., Ex. 13 at -0018 (emphasis omitted).
91
Id. at -0024 (emphasis omitted).
22
The presentation also discussed the Private Unitholders’ TRA rights. It listed

a series of factors affecting the TRA rights’ value, including applicable corporate

tax rates.92 The presentation explained that the TRA rights generate income only if

Carlyle LP has “positive taxable income,” that “historically, Carlyle [LP’s] [net

operating loss] position has reduced TRA payments because the additional

deductions have not offset taxable income,” and that a “[r]eduction of [the] corporate

tax rate reduced the value of the TRA.”93 The presentation noted that the TRA rights

would be unchanged if Carlyle LP remains a publicly traded partnership, that

converting to an up-C would leave the TRA in place but increase its value, and that

the Conversion would “effectively terminate[] the TRA as there is no taxable

exchange to trigger the basis step up.”94 The presentation included a valuation of

the TRA rights based on “roughly 60 different alternatives” and concluded

“[e]valuating various sensitivities” showed the TRA rights had a net present value

“from zero to $4.00 per unit.”95 Those valuations appear identical to those presented

to the Conversion Working Group at its March 2019 meeting, and assumed the same

volume of exchanges.96

92
Id. at -0039.
93
Id. at -0037.
94
Id. at -0038.
95
Id. at -0041 (emphasis omitted).
96
Compare Foulds Aff., Ex. 2 at -2655 to -2657, with Henry Aff., Ex. 13 at -0043 to -0045.
23
The Board also received two other facts that had been presented to the

Conversion Working Group. First, the Board learned that the TRA “[p]ayout period

is roughly a minimum of 15 years from the time of each exchange,” and that it “[w]ill

likely be significantly longer based on corporate taxable income and usage of related

deduction[s].”97 Second, the presentation stated the TRA rights would be worth

nothing if the Conversion were tax free or if the company did not receive a tax

benefit on a stepped-up exchange.98

Unlike the Conversion Working Group, the Board was not presented with the

volume of past exchanges. In fact, a slide comparing precedent TRA transactions to

Carlyle LP’s TRA included no information on Carlyle LP’s payments for historical

exchanges despite giving that information for the three precedent transactions.99 The

presentation also omitted any reference to the value of the TRA rights if the

rightholders died before exchanging units or donated the units to charity.

D. The Conflicts Committee Evaluates The Conversion And
TRA Buyout.

Carlyle LP continued to move forward with the Conversion and TRA Buyout.

The transactions were evaluated by Carlyle LP’s standing Conflicts Committee,

which comprised Carlyle LP directors Lawton Fitt, Janet Hill, Dr. Thomas

97
Henry Aff., Ex. 13 at -0037.
98
Id. at -0042.
99
Id. at -0046.
24
Robertson, William Shaw, and Anthony Welters. Before the Conflicts Committee’s

first meeting, Fitt retained Perella Weinberg Partners LP to serve as the committee’s

financial advisor. The Conflicts Committee retained the law firm Gibson, Dunn &

Crutcher LLP to serve as its legal counsel.

1. July 15 Conflicts Committee Meeting

The Conflicts Committee met to discuss Project Phoenix for the first time on

July 15, 2019.100 Buser attended in his capacity as Carlyle LP’s CFO, as did

representatives from Perella Weinberg, Gibson Dunn, and Carlyle LP advisors

Centerview and Simpson, Thacher & Bartlett LLP.101 Buser explained that “[Carlyle

LP’s] proposal was the product of extended negotiations between [Carlyle LP] and

its founders, and [Carlyle LP] viewed the proposal as offering the best prospects for

future value creation for [Carlyle LP’s] public unitholders.”102 The parties offered

nothing as to what prompted the negotiations, when they took place, or who

negotiated with the Founders.103

100
Henry Aff., Ex. 14.
101
Id. at -0008.
102
Id.; see also Henry Aff., Ex. 5 at -0089 (noting that the Conversion and TRA Buyout
“follow[ed] extensive discussions [between Carlyle LP] and its Founders”).
103
The operative complaint advances the theory that the Private Unitholder Defendants
demanded a payment in exchange for the loss of their TRA rights. See, e.g., Am. Compl.
¶ 6 (“The [Private Unitholder Defendants] nevertheless proposed that [Carlyle LP] pay
them $344 million for their worthless TRA rights.”). I understand the complaint to allege
that the Founders negotiated and obtained payments on behalf of the Private Unitholder
Defendants.
25
Buser presented to the committee.104 The presentation explained Carlyle LP

was proposing to convert to a corporation, and that the Conversion would create

more value for all unitholders than remaining a partnership or pursuing an up-C

conversion.105 The presentation noted the Conversion would be tax free only in the

appendix.106

Unlike the September 2018 and March 2019 presentations given to the

Conversion Working Group, the July 15 Conflicts Committee presentation indicated

the TRA would be terminated. Multiple slides stated Carlyle LP was terminating

the TRA in connection with the Conversion.107 The presentation stated that

“terminat[ing]” the TRA would “improv[e] transparency and further align[] former

private unitholders with public shareholders.”108 The presentation explained that if

104
Henry Aff., Ex. 14 at -0008; Henry Aff., Ex. 5.
105
Henry Aff., Ex. 5 at -0088 (emphasis omitted).
106
Id. at -0128.
107
Id. at -0089 (“As part of our conversion, we intend to terminate the TRA for all
unexchanged private units.”); id. at -0093 (“TRA for all unexchanged private units will be
terminated . . . .”); id. at -0104 (“As part of the proposed conversion transaction, Carlyle
will terminate the TRA in respect to all unexchanged private units.”); id. (“By terminating
the TRA we will further align shareholder economics and simplify administrative and
reporting complexity and associated costs.”); see also id. at -0159 (explaining that
eliminating the TRA obligation as to future exchanges “[r]equires payment of upfront
consideration to TRA holders”).
108
Id. at -0093.
26
the TRA was “directly terminated by Carlyle [LP], Carlyle [LP] would be obligated

to pay an early termination payment of $551 [million].”109

The presentation presented the termination payment as a “[l]ens” through

which to assess the TRA Buyout payment.110 The presentation explained that the

“[h]olders of TRA [rights] on unexchanged private units [would] receive

compensation of $1.50 / private unit paid over 5 years,”111 or a total payment of about

$338 million.112 That valuation was supported by a sensitivity analysis that assumed

the exchange of between 3 million and 12 million Subsidiary Holdco Units

annually.113 The presentation also stated that the proposed TRA Buyout payment

was lower than what “would be realized by the TRA-recipients in a [publicly traded

partnership] or Up-C through the TRA payments,”114 and that the “TRA payment

[was] set within [the] range of TRA scenarios analyzed by Carlyle [LP].”115 The

presentation omitted that the TRA rights were worthless if the rightholders died

without exchanging Subsidiary Holdco Units or if they donated the units to charity.

109
Id. at -0105.
110
Id.
111
Id. at -0089.
112
Id. at -0104.
113
Id. at -0106.
114
Id. at -0104.
115
Id. at -0093.
27
It did not discuss past exchanges undertaken by the Private Unitholder Defendants

or all Private Unitholders.

The Conflicts Committee then met in an executive session “and the

representatives of [Carlyle LP], Centerview and Simpson Thacher left the

meeting.”116 Perella Weinberg presented to the committee during that executive

session.117 It showed slides setting the TRA rights’ present value between $0.39 and

$3.95 if Carlyle LP remained a publicly traded partnership and between $0.71 and

$6.85 if Carlyle LP undertook an up-C conversion.118 Those valuations assumed the

Private Unitholders would exchange 6.5 million Subsidiary Holdco Units each

year.119 The valuations were based on “Project Phoenix Company projections.”120

2. July 17 Conflicts Committee Meeting

The Conflicts Committee met again on July 17 and received more detailed

versions of Perella Weinberg’s July 15 materials.121 Perella Weinberg explained that

Carlyle LP would pay $1.50 per unit subject to the TRA, or a total of $338 million

“for [the] value of TRA payments attributable to remaining future exchanges.”122 It

116
Henry Aff., Ex. 14 at -0008.
117
Henry Aff., Ex. 5 at -0151 to -0165.
118
Id. at -0162.
119
Id.
120
Id.
121
Henry Aff., Ex. 15 at -0010 to -0011; Henry Aff., Ex. 16.
122
Henry Aff., Ex. 16 at -0171.
28
noted that the TRA Buyout “crystalizes long-term, uncertain payments as [a]

near-term, known liability.”123 It also stated the Conversion benefitted the company

by “eliminat[ing]” the TRA obligation, but that doing so “[r]equire[d] payment of

upfront consideration to TRA holders.”124 Perella Weinberg further explained that

the TRA Buyout payment “compare[d] favorably to [the] latest disclosed

termination liability of $458M,” which was the estimated termination payment as of

December 31, 2018.125 The same slide compared the TRA payment to the more

recent $551 million termination payment estimate.126 The presentation included

valuations of the TRA rights similar to those presented on July 15, which again

assumed the exchange of 6.5 million units annually.127

The presentation omitted that the Private Unitholders would not be entitled to

future TRA payments following the Conversion, did not give information on past

exchanges, and did not explain why Carlyle LP was making any payment at all to

the TRA rightholders in connection with the Conversion.

The Board met to discuss the Conversion on July 24. It received the same

presentation the Conflicts Committee received on July 15.

123
Id. at -0173.
124
Id. at -0176.
125
Id. at -0177.
126
Id.
127
Id. at -0185.
29
3. July 29 Conflicts Committee Meeting

The Conflicts Committee met again on July 29.128 Its members discussed the

Conversion and several related matters, including that certain unitholders would

grant an irrevocable proxy to Carlyle Management in connection with the

Conversion that would give Carlyle Management control over a majority of

post-Conversion entity’s voting power.129 The proxy would expire upon the earlier

of Carlyle Management owning less than 20% of the post-Conversion entity’s voting

power or January 1, 2025.130 “The [Conflicts] Committee discussed that, under the

proposed structure, there would be a clear path to the founders and management no

longer controlling the [post-Conversion entity].”131

E. The Conflicts Committee, Board, And Transaction
Committee Approve The Conversion And TRA Buyout.

The Conflicts Committee met a fourth and final time on July 30. Perella

Weinberg presented substantially the same slides it showed the committee on July

17.132 The Conflicts Committee resolved to approve the Conversion and related

transactions and recommend that the Board approve the same.133 The

128
Henry Aff., Ex. 27.
129
Id. at -2645; Henry Aff., Ex. 26 at -0189.
130
Carlyle Group LP, Form 8-K (Current Report), at 3 (Jan. 2, 2020).
131
Henry Aff., Ex. 27 at -2645.
132
Henry Aff., Ex. 17.
133
Henry Aff., Ex. 18 at -0243.
30
post-Conversion entity would be known as The Carlyle Group Inc. (“Carlyle

Inc.”).134

The Conflicts Committee approved certain TRA arrangements that introduced

a new wrinkle. An exhibit to the resolutions explained that as part of the Conversion,

the Private Unitholders would “exchange [Subsidiary Holdco Units] for an

equivalent number of shares of common stock in [the future corporation] and the

entitlement to” payments totaling $1.50 per “[Subsidiary Holdco Unit] exchanged[,]

. . . payable in five equal annual installments.”135 The exhibit hedged that “the

specific transactions . . . may be more complicated and/or take a different specific

legal form.”136 The resolution was silent as why the TRA Buyout called for a unit

transfer if the payments were intended to compensate for the Conversion’s effective

elimination of the Private Unitholders’ TRA rights.

The Board met the same day and resolved that the Conversion and related

transactions were “advisable and in the best interests of [Carlyle LP].”137 The Board

also resolved to create a transaction committee (the “Transaction Committee”) and

authorized it to “act on behalf of the Board with all of the power and authority of the

full Board” and to “determine in its sole discretion to be necessary, advisable or

134
Henry Aff., Ex. 26 at Ex. A at preamble [hereinafter “Plan of Conver.”].
135
Id. at Ex. B (footnote omitted).
136
Id. at n.1.
137
Henry Aff., Ex. 20 at -2634.
31
appropriate in connection with the [Conversion and related transactions].”138 This

included “the power and authority to make a final determination whether to proceed

with the [Conversion and related transactions] and to approve the [Conversion and

related transactions].”139 The Transaction Committee comprised D’Aniello, Fitt,

Lee, and Youngkin.140 Consistent with previous Board and Conflicts Committee

materials, the relevant Board minutes did not mention the reason for the TRA

Buyout.

The Transaction Committee resolved to approve the Conversion and related

transactions on December 13.141 It passed resolutions authorizing “each officer and

director of” Carlyle Management and Carlyle Inc. to “perform all such agreements,

contracts, subcontracts, obligations, binding understandings, . . . promises,

arrangements, . . . legally binding commitments or undertakings of any nature

(whether written or oral and whether express or implied), in connection with the

[Conversion and related transactions] as any such [person] shall determine

necessary, desirable or appropriate.”142 It also resolved to approve Carlyle Inc.’s

certificate of conversion and certificate of incorporation, as well as a master

138
Id.
139
Id.
140
Id. at -2635.
141
Henry Aff., Ex. 26.
142
Id. at -0199 to -0200.
32
reorganization agreement (the “MRA”) and a plan of conversion (the “Plan of

Conversion”).143 And it passed a resolution authorizing the issuance of Carlyle Inc.

common stock “as provided in the Plan of Conversion, the [MRA], [all ancillary

documents], and the related agreements.”144 Carlyle Inc.’s certificate of

incorporation set the par value of its stock at $0.01.145 The Transaction Committee

further resolved to amend the TRA: the TRA was not terminated in connection with

the Conversion.146 Finally, the resolutions provided that the Transaction

Committee’s resolutions “shall have the effect, . . . after the effectiveness of the

Conversion, of [Carlyle Inc.’s] Board taking them on behalf of [Carlyle Inc.].”147

F. The Transaction Documents

The Plan of Conversion set forth the Conversion’s mechanics. It provided

Carlyle LP would convert to a corporation on January 1, 2020.148 Specified types of

Carlyle LP partnership units outstanding immediately before the Conversion would

be converted into one share of Carlyle Inc. common stock.149 The post-conversion

board would comprise Conway, D’Aniello, Rubenstein, Lee, Youngkin, Clare, Fitt,

143
Id. at -0189 to -0190, -0192.
144
Id. at -0195.
145
Id. at -0215 at art. IV, § 4.01(a)(i).
146
Id. at -0190.
147
Id. at -0199.
148
Plan of Conver. § 1.01; id. § 1.02 (defining “Effective Time”).
149
Id. § 2.01(i); see also Henry Aff., Ex. 26 at -0216 at art. 4, § 4.01(b).
33
Hance, Hill, Robertson, Shaw, and Welters.150 Lee and Youngkin would serve as

co-CEOs of Carlyle Inc., Buser would serve as CFO, Conway would serve as chief

investment officer, Ferguson would serve as general counsel, and Finn would serve

as COO.151

The Plan of Conversion did not affect the Private Unitholders’ equity in the

three Subsidiary Holdcos, which totaled 229 million Subsidiary Holdco Units. The

treatment of those units was instead addressed by the MRA. Twenty-three

individuals and entities were signatories to the MRA, including Clare, Carlyle Group

Management, Intermediate Holdco I, an Intermediate Holdco I affiliate called

Carlyle Holdings I GP Sub LLC (“Holdings I GP Sub”), and Operating Sub II.152

Conway, Rubenstein, D’Aniello, and Youngkin signed the MRA as trustees on

behalf of trusts in their name or their family’s name.153

The MRA contemplated a four-step process.

150
Plan of Conver. § 1.04(a).
151
Id. § 1.04(b).
152
Henry Aff., Ex. 26, Ex. I at -0343 to -0348 [hereinafter “MRA”].
153
Id. at -0343.
34
Step 1: On behalf of the Private Unitholders, Holdings I GP Sub and
Intermediate Holdco II would transfer to Intermediate Holdco I “a
number of [units] [worth $344 million], as reasonably determined by
[Intermediate Holdco I] on the basis of information provided by a
nationally recognized valuation firm and set forth in its books and
records” (the “Initial Transfer Units”).154 It was later determined that
26.3 million Initial Transfer Units were equal to $344 million.155
Step 2: In exchange for the Initial Transfer Units, Intermediate Holdco
I would transfer to the Private Unitholders payments totaling $344
million, to be paid out in five equal installments over five years (the
“Deferred Payments”).156 The first payment would be made on January
31, 2020, and the final payment would be made on January 31, 2024.157
Step 3: Various Carlyle entities would transfer to Carlyle Inc. on behalf
of the Private Unitholders all the Private Unitholders’ Subsidiary
Holdco Units other than the Initial Transfer Units (the “Remaining
Units”).158
Step 4: After steps one and three were completed, Carlyle Inc. would
issue to the Private Unitholders “a number of shares of [Carlyle Inc.
common stock] of equivalent value” to the Remaining Units.159

These transactions were to be effective on January 1, 2020.160

No party has offered any explanation as to why the TRA Buyout payments

increased from $338 million, the number Perella Weinberg suggested to the

Conflicts Committee, to $344 million. And the record is unclear as to why the TRA

154
Id. § 3.1(b).
155
Henry Aff., Ex. 3 at 49–50.
156
MRA § 3.1(a).
157
Id.
158
Id. § 9.1(a).
159
Id. § 9.1(b).
160
Id. at art. III at preamble, art. VIII at preamble.
35
Buyout payments, ostensibly for TRA rights valued at $344 million,161 also required

the Private Unitholders to give up $344 million worth of Subsidiary Holdco Units.162

On January 1, Buser authorized the American Stock Transfer & Trust

Company, LLC “to issue and to deliver, on January 2, 2020, an aggregate of

228,028,388 Common Shares [of Carlyle, Inc. stock] to the brokers indicated on the

Shareholder Schedules.”163 He explained the “228,028,388 Common Shares

represent the aggregate number of Common Shares received by the individuals or

entities listed on the Shareholder Schedules.”164 The attached shareholder schedules

were fully redacted for relevance.165 Buser’s letter specified that all units were to be

exchanged “on a one-for-one basis.”166 If the transfer occurred as Buser directed,

161
See, e.g., Foulds Aff., Ex. 3 at -1655 (“[W]e are electing to terminate the TRA and to
pay IPO partners a termination payment of $1.50 per unit over five years to compensate
for the absence of the normal TRA benefits.”); Henry Aff., Ex. 22 at 17 (“[W]e thought it
was appropriate to remunerate [the TRA] and get rid of it. And we’ve essentially put the
$1.50 and that was an amount to get it to go away.”).
162
The defendants offer no explanation. Plaintiff pled that the Transaction Committee
made the decision to require the unit exchange because it “knew the TRA rights were worth
‘zero,’ and therefore the termination of the TRA could not be consideration for a $344
million payment.” Am. Compl. ¶ 9. It appears that management or the Conversion
Working Group designed the exchange and presented it to the Conflicts Committee. See
Henry Aff., Ex. 18 at Ex. B (“[I]n in connection with its consideration of the foregoing, the
Conflicts Committee and its advisors have been provided with and have reviewed and
evaluated, in addition to other information, the terms and conditions of: . . . the material
terms of which are attached hereto as Exhibit B . . . .” (emphasis added)).
163
Foulds Aff., Ex. 5 at -2578.
164
Id.
165
Id. at -2580 to -2583.
166
Id. at -2578.
36
the Private Unitholders would have received Carlyle Inc. shares on a one-for-one

basis for each of their Subsidiary Holdco Units, without any deduction for the Initial

Transfer Units that were supposed to be transferred as consideration for the Deferred

Payments.167 From this, it is inferable that the Initial Transfer Units were never

transferred: step one under the MRA did not happen.

Nevertheless, the first four Deferred Payments have been made. The nine

Private Unitholder Defendants were to receive Deferred Payments in connection

with the TRA Buyout: after all five Deferred Payments were made, Buser would

receive $391,062; Clare would receive $6,916,545; Conway would receive

$66,749,466; D’Aniello would receive $66,749,466; Ferguson would receive

$941,724; Finn would receive $312,000; Hance would receive $377,070;

Rubenstein would receive $70,499,466; and Youngkin would receive $8,506,632.

The payments to these defendants represent about 64% of the $344 million in

Deferred Payments.

167
The defendants have not argued or even suggested the approximately 1-million-unit
difference between the 229 million units held by the Private Unitholders before the transfer
and the 228 million units transferred represented consideration for the Deferred Payments.
37
G. This Litigation

On May 11, 2021, Plaintiff made a demand to inspect Carlyle Inc.’s books

and records.168 Plaintiff filed its original complaint in this action on July 29, 2022.169

It filed its amended complaint on January 15, 2023 (the “Amended Complaint”).170

At bottom, Plaintiff argues the Private Unitholders received something for

nothing because Carlyle Management ensured the Conflicts Committee did not

receive information that would have revealed the Private Unitholder Defendants

lacked the leverage to demand a payment for their TRA rights. It is undisputed that

the Conversion would not trigger a termination payment and that no Subsidiary

Holdco Units could be exchanged following the Conversion. Of the three structures

the Conflicts Committee considered, the Conversion offered the greatest value to

public unitholders and Private Unitholders. But the Private Unitholders would give

up their perceived present value of their TRA rights in connection with the

Conversion. If past was prologue and the Private Unitholder Defendants expected

to exchange few if any of their Subsidiary Holdco Units, then it is reasonable to infer

the Private Unitholder Defendants would perceive those rights held little value. Had

the Conflicts Committee known this, it would not have approved paying for TRA

168
Henry Aff., Ex. 2 at recitals.
169
D.I. 1.
170
D.I. 15.
38
rights in the Conversion, because the Founders and other Private Unitholder

Defendants would have no reason to block it.

Plaintiff alleges Carlyle Management, acting through other defendants,

ensured the Conflicts Committee did not become aware of the facts necessary to

make this determination. The parties agree that if those defendants stymied the flow

of information to the committee, their actions are attributable to Carlyle

Management. Plaintiff also brings a second series of claims arising out of an alleged

overissuance of shares in connection with the MRA.

Plaintiff asserts nine causes of action against various combinations of

Conway, D’Aniello, Rubenstein, Lee, Youngkin, Clare, Fitt, Hance, Hill’s estate,

Robertson, Shaw, and Welters (together, the “Director Defendants”), Buser,

Ferguson, Finn, Carlyle Inc., Carlyle Management, Intermediate Holdco I,

Intermediate Holdco II, and Holdings I GP Sub (together with the Director

Defendants, “Defendants”). Among those counts are claims for breach of fiduciary

duty, breach of the LPA, breach of the MRA, breach of Carlyle Inc.’s certificate of

incorporation, tortious interference with contract, and unjust enrichment.

Defendants moved to dismiss under Court of Chancery Rules 23.1 and

12(b)(6).171 On January 22, 2024, I denied the Rule 23.1 motion.172 This decision

171
D.I. 22.
172
D.I. 55.
39
addresses Defendants’ motion under Rule 12(b)(6): most of Plaintiff’s claims

survive.

II. ANALYSIS

The standard governing a motion to dismiss under Court of Chancery Rule

12(b)(6) for failure to state a claim for relief is well settled:

(i) [A]ll well-pleaded factual allegations are accepted as true; (ii) even
vague allegations are “well-pleaded” if they give the opposing party
notice of the claim; (iii) the Court must draw all reasonable inferences
in favor of the non-moving party; and [(iv)] dismissal is inappropriate
unless the “plaintiff would not be entitled to recover under any
reasonably conceivable set of circumstances susceptible of proof.”173
The touchstone “to survive a motion to dismiss is reasonable ‘conceivability.’”174

This standard is “minimal”175 and plaintiff-friendly.176 “Indeed, it may, as a factual

matter, ultimately prove impossible for Plaintiff to prove his claims at a later stage

of a proceeding, but that is not the test to survive a motion to dismiss.”177

173
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002) (footnotes omitted)
(quoting Kofron v. Amoco Chems. Corp., 441 A.2d 226, 227 (Del. 1982)).
174
Cent. Mortg. Co. v. Morgan Stanley Mortg. Cap. Hldgs. LLC, 27 A.3d 531, 537 (Del.
2011).
175
Id. at 536.
176
E.g., Clouser v. Doherty, 175 A.3d 86, 2017 WL 3947404, at *9 (Del. 2017) (TABLE);
In re USG Corp. S’holder Litig., 2021 WL 930620, at *3–4 (Del. Ch. Mar. 11, 2021), aff’d
sub nom. Anderson v. Leer, 265 A.3d 995 (Del. 2021); In re Trados Inc. S’holder Litig.,
2009 WL 2225958, at *8 (Del. Ch. July 24, 2009).
177
Cent. Mortg., 27 A.3d at 536.
40
My analysis proceeds in four parts. I first address Plaintiff’s claims for

breaches of express and implied LPA provisions, and tortious interference with the

LPA. I conclude Plaintiff has pled all claims arising out of the LPA against all

named defendants. I next address Plaintiff’s claims for breach of the MRA and

unjust enrichment based on the alleged overissuance of Carlyle Inc. shares. I

conclude Plaintiff has pled both claims against one or more defendants. Third, I

address Plaintiff’s post-Conversion claims for breach of fiduciary duty against

Carlyle Inc.’s directors and officers, as well as a claim against the Founders as a

control group. Plaintiff adequately pled its breach of fiduciary duty claims against

Carlyle Inc.’s directors and officers, but it failed to plead the existence of a control

group. Finally, I conclude Plaintiff has pled a claim for violating Carlyle Inc.’s

charter.

A. The LPA Claims

I first address Plaintiff’s claims concerning the LPA. Count IV alleges that

Carlyle Management breached the LPA by “failing to act in good faith in connection

with the Conversion, [u]nit [e]xchange, and TRA Buyout.”178 Count V alleges

Carlyle Management breached the LPA’s implied covenant of good faith and fair

dealing by withholding information from the Conflicts Committee to ensure its

178
Am. Compl. ¶ 272.
41
approval of the TRA Buyout. Count VIII alleges the Private Unitholder Defendants

interfered with the LPA.179 I conclude Plaintiff has successfully pled all claims

within Counts IV, V, and VIII.

1. Breach Of The LPA For Failing To Act In Good Faith

Plaintiff alleges Carlyle Management failed to act in good faith in the approval

of the TRA Buyout and related transactions such that Carlyle Management violated

the LPA’s requirements that it agree to those transactions in good faith. Section

7.6(d) provides that Carlyle LP “may transfer assets to joint ventures, other

partnerships, corporations, limited liability companies or other business entities in

which it is or thereby becomes a participant on terms to which [Carlyle Management]

agrees in good faith.”180 Section 7.6(e) provides “[Carlyle Management] or any of

its Affiliates may sell, transfer or convey any property to, or purchase any property

from, [Carlyle LP] directly or indirectly, on terms to which the [Carlyle

Management] agrees in good faith.”181 Plaintiff argues Carlyle Management could

not have acted in good faith because it knew the TRA Buyout was not in Carlyle

LP’s best interests, as the TRA rights were nearly worthless to the Private Unitholder

Defendants whether Carlyle LP remained a partnership, underwent an up-C

179
Count VIII also alleges that these same defendants tortiously interfered with the MRA.
I address those allegations separately.
180
LPA § 7.6(d).
181
Id. § 7.6(e).
42
transaction, or completed the Conversion. Plaintiff styles this shortcoming as

Carlyle Management’s breach of obligations under Sections 7.6(d) and (e) to agree

to those transactions only in good faith; Defendants do not take issue with that

formulation.182

Defendants respond by asserting that Carlyle Management enjoys a good faith

presumption under the LPA’s safe harbors because the Conversion and TRA Buyout

were subject to Special Approval, and Carlyle Management relied on advisors in

connection with those transactions. Neither safe harbor applies at the pleading stage.

a. Special Approval

Section 7.9(a) of the LPA provides Carlyle Management with a conclusive

good faith presumption in certain situations. It reads:

182
D.I. 29 at Ans. Br. 59; Am. Compl. ¶¶ 272–73. The Amended Complaint also asserts
that Carlyle Management’s failure to secure the good faith presumption under Section
7.9(a)’s safe harbor breached that provision. Am. Compl. ¶ 274. This opinion explains
Carlyle Management failed to secure that safe harbor. Plaintiff does not appear to pursue
that claim in its answering brief, and I do not today tackle the question of whether failing
to secure a safe harbor breaches that safe harbor.
43
For all purposes of this Agreement and notwithstanding any applicable
provision of law or in equity, a determination or other action or failure
to act by [Carlyle Management], the Board of Directors or any
committee thereof conclusively will be deemed to be made, taken or
omitted to be made or taken in “good faith”, and shall not be a breach
of this Agreement, (i) if such determination, action or failure to act was
approved by Special Approval or (ii) unless [Carlyle Management], the
Board of Directors or committee thereof, as applicable, subjectively
believed such determination, action or failure to act was opposed to the
best interests of [Carlyle LP].183

This provision establishes a conclusive presumption that the relevant decisionmaker

acted or decided not to act in good faith, so long as the decisionmaker did not

subjectively believe its decision was against Carlyle LP’s best interests. But even if

the decisionmaker had such a subjective belief, the decisionmaker receives the

conclusive good faith presumption under romanette (i) if the act or failure to act

received Special Approval. Put differently, Special Approval is dispositive

regardless of Carlyle Management’s subjective belief. Relevant here, Special

Approval means approval by the Conflicts Committee.184 The LPA allocates the

burden of demonstrating both bad faith and the requisite subjective belief under

romanette (ii) to Plaintiff.185

The parties disagree whether Special Approval was effective here. There is

no dispute that the Conflicts Committee unanimously approved the Conversion and

183
LPA § 7.9(a).
184
Id. at 8 (defining “Special Approval”).
185
Id. § 7.9(a).
44
TRA Buyout, making those transactions facially subject to Special Approval. But

Plaintiff has pled the Special Approval was not effective because Carlyle

Management ensured the Conflicts Committee did not receive key information.

i. The Implied Covenant

The conclusive good faith presumption does not apply if Carlyle Management

obtained Special Approval in violation of the LPA’s implied protections for Carlyle

LP unitholders.186 The implied covenant of good faith and fair dealing “attaches to

every contract.”187 It “is ‘best understood as a way of implying terms in the

agreement,’ whether employed to analyze unanticipated developments or to fill gaps

in the contract’s provisions.”188 Our courts “will only imply contract terms when the

party asserting the implied covenant proves that the other party has acted arbitrarily

or unreasonably, thereby frustrating the fruits of the bargain that the asserting party

reasonably expected.”189 “The implied covenant is well-suited to imply contractual

terms that are so obvious . . . that the drafter would not have needed to include the

186
Dieckman v. Regency GP LP, 155 A.3d 358, 367–69 (Del. 2017).
187
Dunlap v. State Farm Fire & Cas. Co., 878 A.2d 434, 441 (Del. 2005).
188
Id. (footnotes omitted) (quoting E.I. DuPont de Nemours & Co. v. Pressman, 679 A.2d
436, 443 (Del. 1996)).
189
Nemec v. Shrader, 991 A.2d 1120, 1126 (Del. 2010).
45
conditions as express terms in the agreement.”190 Put differently, the covenant may

be applied when addressing “understandings or expectations that were so

fundamental that [the parties] did not need to negotiate about those expectations.”191

The implied covenant can imply conditions to invoking a good faith safe

harbor in a limited partnership agreement.192 In that context, our courts have

concluded that undermining investor protections can cause the nonoccurrence of a

condition to invoking that safe harbor.193 In Dieckman v. Regency GP LP, our

Supreme Court reasoned that a good faith safe harbor was not available to a master

limited partnership’s general partner because the general partner undermined the

safe harbor’s investor protections.194 The transaction at issue was approved by a

conflicts committee and a majority of the unaffiliated unitholders; under the relevant

partnership agreement, each was sufficient to preclude the breach of contract claim

at issue.195 But the plaintiff alleged the first safe harbor did not apply because the

190
Cygnus Opportunity Fund, LLC v. Wash. Prime Grp., LLC, 302 A.3d 430, 459 (Del.
Ch. 2023) (alteration in original) (internal quotation marks omitted) (quoting Dieckman,
155 A.3d at 360).
191
Katz v. Oak Indus. Inc., 508 A.2d 873, 880 (Del. Ch. 1986) (internal quotation marks
omitted) (citation omitted).
192
See Dieckman, 155 A.3d at 367–69.
193
Id. at 366–69.
194
155 A.3d 358, 369 (Del. 2017).
195
Id. at 363–65.
46
committee was not independent as required by the partnership agreement.196 He also

alleged the unaffiliated unitholder vote safe harbor did not apply because the proxy

for that vote falsely disclosed that an independent committee approved the

transaction.197 Our Supreme Court agreed. It reasoned that while the partnership

agreement was silent as to whether the general partner “could use false or misleading

statements to enable it to reach the safe harbors,” such a condition was “easily

implied,” as “some aspects of the deal are so obvious to the participants that they

never think, or see no need, to address them.”198 From this, the Supreme Court

reasoned the agreement implied “a requirement that the General Partner not act to

undermine the protections afforded unitholders in the safe harbor process.”199 The

nonoccurrence of this condition precedent meant the general partner could not

invoke the safe harbor.200 Because the safe harbor was unavailable, the plaintiff was

free to pursue claims for breaches of other provisions of the partnership

196
Id. at 360.
197
Id.
198
Id. at 368 (internal quotation marks omitted) (quoting In re El Paso Pipeline P’rs, L.P.
Deriv. Litig., 2014 WL 2768782, at *16 (Del. Ch. June 12, 2014)).
199
Id.
200
See id. at 369.
47
agreement.201 The type of condition our Supreme Court implied is known as a

constructive condition.202

Our courts have also concluded similar conduct can breach the implied

covenant.203 In Gerber v. Enterprise Products Holdings, our Supreme Court

concluded that interference with a safe harbor can constitute a breach of the implied

covenant.204 There, a limited partnership purchased the general partner of an oil and

gas master limited partnership in 2007 for $1.1 billion.205 In 2009, the partnership

sold the same entity for about $100 million.206 In 2010, the limited partnership

entered into a merger designed to eliminate any claims arising out of the 2007 and

2009 transactions.207 A financial advisor opined that the exchange ratio for the

merger was fair but did not value the claims being eliminated.208 A limited partner

201
Id.
202
See generally 13 Richard A. Lord, Williston on Contracts § 38:11 (4th ed. May 2023
update) [hereinafter “Williston on Contracts”] (discussing express, implied, and
constructive conditions).
203
Gerber v. Enter. Prod. Hldgs., LLC, 67 A.3d 400, 422–23 (Del. 2013), overruled on
other grounds by Winshall v. Viacom Int’l, Inc., 76 A.3d 808 (Del. 2013); In re CVR Ref.,
LP Unitholder Litig., 2020 WL 506680, at *13–16 (Del. Ch. Jan. 31, 2020) (reasoning
frustrating minority protections in a call right provision caused nonoccurrence of implied
condition to invoking the call right and resulted in a breach of the implied covenant).
204
Gerber, 67 A.3d at 422–23.
205
Id. at 406.
206
Id.
207
Id. at 407.
208
Id. at 407–08.
48
sued the general partner and others alleging that the merger was unfair.209 The

limited partnership agreement included a safe harbor that precluded judicial review

where the general partner relies on the advice of an advisor.210 The general partner

argued that the safe harbor applied because it relied on the financial advisor’s

fairness opinion in entering the 2010 merger.211

Though the partnership agreement was silent on the issue, the Supreme Court

reasoned the parties would have agreed “that any fairness opinion contemplated by

[the advisor safe harbor] would address the value of derivative claims where (as

here) terminating those claims was a principal purpose of a merger.”212 The Supreme

Court concluded the plaintiff “sufficiently pled that [the general partner] breached

the implied covenant in the course of taking advantage of [the safe harbor’s]

conclusive presumption.”213

Here, Plaintiff invokes the implied covenant both to preclude the application

of the Special Approval safe harbor and as the basis for a claim for breach of an

implied provision. The LPA expressly provides for one condition to invoking the

conclusive good faith presumption: approval by a majority of the Conflicts

209
Id. at 408–09.
210
Id. at 410–11.
211
Id. at 415.
212
Id. at 423.
213
Id.
49
Committee’s members. As in Dieckman, the LPA’s safe harbor includes a

constructive condition that Carlyle Management “not act to undermine the

protections afforded unitholders in the safe harbor process.”214 Consequently, the

conclusive good faith presumption is impliedly conditioned on the safe harbor’s

protections not being undermined by the party seeking to invoke it. And following

Gerber, if Carlyle Management undermined the Special Approval process by

withholding or obfuscating information from the Conflicts Committee, Carlyle

Management would breach the implied covenant. The parties made no distinction

between these frameworks, and so I will evaluate them under the same analysis—if

Carlyle Management materially undermined the safe harbors’ protections by

withholding or obfuscating information, that conduct will both cause the

nonoccurrence of a constructive condition in the LPA and constitute a breach of the

implied covenant.

(a) Carlyle Management Withheld Or Obfuscated
Information From The Conflicts Committee.

Carlyle Management withheld or obfuscated at least four facts from the

Conflicts Committee.215 First, the Conflicts Committee was not told that the TRA

214
Dieckman, 155 A.3d at 368.
215
Defendants do not contest that Carlyle Management knew of these facts or that it
controlled the flow of information to the Conflicts Committee. Defendants concede to the
extent any information was withheld from the Conflicts Committee, that information was
withheld by Carlyle Management’s agents and therefore any such acts or omissions are

50
would not be terminated in connection with the Conversion such that no termination

payment would be required. Rather, the July 15 presentation to the Conflicts

Committee repeatedly stated the TRA would be terminated in connection with the

Conversion.216 The presentation compared the proposed $338 million payment

attributable to Carlyle Management. D.I. 23 at 75 (“[A]s to the alleged breach of the LPA,
the individual defendants’ actions are all attributable to Carlyle Management. A
corporation can only act through its agents.”); D.I. 34 at 35 (“To be sure, Plaintiff is wrong
about that presentation and its theory that Carlyle Management breached the LPA in any
way. But, in all events, that presentation was made by Carlyle Management personnel on
behalf of Carlyle Management in the scope of their agency.” (citation omitted)).
216
Henry Aff., Ex. 5 at -0089 (“As part of our conversion, we intend to terminate the TRA
for all unexchanged private units.”); id. at -0093 (“TRA for all unexchanged private units
will be terminated . . . .”); id. at -0104 (“As part of the proposed conversion transaction,
Carlyle will terminate the TRA in respect to all unexchanged private units.”); id. (“By
terminating the TRA we will further align shareholder economics and simplify
administrative and reporting complexity and associated costs.”); see also id. at -0105
(stating the net present value of the termination payment under the TRA was zero “[i]f”
the termination payment was not required in connection with the Conversion); id. at -0159
(explaining that eliminating the TRA obligation as to future exchanges “[r]equires payment
of upfront consideration to TRA holders”).
At this stage of the proceedings, Plaintiff has pled these statements were false. The
Board was repeatedly told in earlier meetings that the TRA would not be terminated.
Foulds Aff., Ex. 2 at -2658 (“No termination payment required in Full-C conversion or
potentially certain changes of control.”); id. at -2659 (same); id. at -2660 (same); Foulds
Aff., Ex. 1 at -3032 (“In conversion to a Full-C corporation, the TRA on future exchanges
may be extinguished without triggering early termination payment.”); see also Foulds Aff.,
Ex. 3 at -1657 (“The Full-C conversion transaction . . . does not breach the TRA, nor would
the conversion technically terminate the TRA.”). Defendants’ opening brief appears to
acknowledge that the information the Conflicts Committee received was not true at the
time. D.I. 23 at 13 (citing language from the July 15 presentation stating that the TRA
would be terminated in connection with the Conversion, and then stating “[b]ecause the
conversion would effectively eliminate the TRA Holders’ rights, it was considered
appropriate to compensate the TRA Holders (some of whom could also prevent the
conversion from taking place) for the loss of those rights . . . .” (emphasis added)). To be
sure, the Conflicts Committee members received that information at those Board meetings.

51
against the termination payment and stated that if the TRA was “directly terminated

by Carlyle [LP], Carlyle [LP] would be obligated to pay an early termination

payment of $551 [million].”217 The July 17 presentation likewise stated that

“[e]liminat[ing the] TRA obligation “[r]equire[d] payment of upfront consideration

to [the] TRA holders,” and compared the TRA Buyout payment to a contractual

termination payment.218

Second, the Conflicts Committee was not given information on the Private

Unitholder Defendants’ exchange history. The Private Unitholder Defendants

undertook “almost no taxable exchanges since [Carlyle LP’s] IPO in 2012.”219 And

none of the Private Unitholder Defendants undertook a taxable exchange between

February 2016 and February 2019.220 Rubenstein did not exchange any units after

the IPO, and “D’Aniello and Conway each had engaged in taxable exchanges of only

2.5 million of the 47 million units they owned at [the] IPO, meaning that they had

retained 95% of their original [Subsidiary Holdco Units].”221

A plaintiff-friendly reading of the Conflicts Committee slides three months later supports
the inference that Carlyle Management supplanted the directors’ accurate information by
then delivering inaccurate information to the Conflicts Committee.
217
Id. at -0105.
218
Henry Aff., Ex. 16 at -0176 to -0177.
219
Am. Compl. ¶ 67.
220
Id.
221
Id. ¶ 68.
52
Third, the Conflicts Committee was not told that the TRA rights were

worthless to the holder if Subsidiary Holdco Units were donated to charity or held

until death.222 This information was reflected in the March 2019 presentation given

to the Conversion Working Group, which included no members of the Conflicts

Committee.223 That presentation contained a slide titled “Valuation alternatives,”

which was prefaced with a bullet point reading “[v]alue of the TRA would be zero

in the following circumstances.”224 The April 2019 Board presentation included a

similar slide titled “Valuation Considerations (cont.),” which prefaced a bulleted list

with language stating that the “[v]alue to the TRA would be zero in the following

circumstances.”225 That list did not indicate that the TRA rights were worthless if

the Private Unitholders held the Subsidiary Holdco Units until death or donated them

to charity.226

222
Defendants argue the TRA rights are not “worthless” if units are donated to charity
because the TRA rights are assignable with the units. D.I. 34 at 5 (citing TRA § 7.06(a)).
The point is not assignability, but valuation, and what the Conversion Working Group was
told. The defendants have offered no argument, much less a supported one or one I will
consider at the pleading stage, as to why I should disregard the well-pled fact that the
Conversion Working Group was told the TRA rights were valued at zero in the context of
donating units to charity.
223
Foulds Aff., Ex. 2 at -2654.
224
Id. (emphasis in original).
225
Henry Aff., Ex. 13 at -0042 (emphasis in original).
226
Compare Foulds Aff., Ex. 2 at -2654, with Henry Aff., Ex. 13 at -0042.
53
Fourth, the Conflicts Committee was not told that “[t]he value of [the] TRA

rights had declined in recent years due to reduced taxable income at the operative

Carlyle entity and reduced federal corporate tax rates.”227 This information was

presented to the full Board at its April 2019 meeting.228

(b) The Withheld Information Was Material To
The Conflicts Committee’s Decisionmaking
Process.

The condition that Carlyle Management not undermine safe harbors’

protections will not be satisfied if the information it withheld or obfuscated was

material. Where an agreement expressly includes a condition precedent, strict

compliance with that condition is required.229 But where a court reads a condition

into an agreement “to promote justice and prevent injustice”230—i.e., imposes a

constructive condition—only substantial performance or substantial compliance is

required.231 “The doctrine of substantial performance is intended to protect a party’s

227
D.I. 29 at Ans. Br. 62.
228
Henry Aff., Ex. 13 at -0037.
229
2 E. Allen Farnsworth & Zachary Wolfe, Farnsworth on Contracts § 8.03, at 8-18 (4th
ed. 2019) [hereinafter “Farnsworth on Contracts”] (“If the occurrence of a condition is
required by the agreement of the parties . . . a rule of strict compliance traditionally
applies.”); 13 Williston on Contracts § 38:6 (“As a general rule . . . conditions which are
either express or implied in fact must be literally met or exactly fulfilled, or no liability can
arise on the promise qualified by the conditions.” (footnote omitted)).
230
13 Williston on Contracts § 38:11.
231
8 Arthur L. Corbin et al., Corbin on Contracts § 32.1, at 113 (rev. ed. 2022) (“A
hallmark of constructive conditions is that they must only be substantially performed.”);

54
right to be compensated when it has performed in all material and substantive

respects and to avoid the possibility of a forfeiture due to technical, minor,

inadvertent, or unimportant deficiencies.”232 Withholding material information from

a safe harbor’s decisionmaker constitutes a failure to substantially comply with or

substantially perform a constructive condition.233 In determining whether

information is material, our courts apply a standard first articulated in TSC Industries

v. Northway:

see 13 Williston on Contracts § 38:12 (“[C]onstructive conditions, which arise and are
implied by the courts from the language of promise contained in the parties’ contract or the
parties’ conduct, are subject to the precept that substantial compliance with the condition
. . . sufficient.”); Dieckman, 155 A.3d at 369 (concluding a condition precedent to invoking
a safe harbor did not occur where the general partner “materially” misled the unitholders
in securing the requisite approval); see also 2 Farnsworth on Contracts § 8.02, at 8-9
(“[T]he rule of strict compliance is limited to express conditions.”); 17B C.J.S. Contracts
§ 806 (Mar. 2024 update) (“[T]he doctrine of substantial compliance is closely intertwined
with the doctrine of substantial performance.”).
232
15 Williston on Contracts § 44:52 (footnote omitted). The analysis of whether one has
substantially performed is the inverse of the materiality analysis. Restatement (Second) of
Contracts § 237 cmt. d (explaining the considerations as to whether one has substantially
performed are the same as those in considering whether a failure to perform is material);
Clean Harbors, Inc. v. Union Pac. Corp., 2017 WL 5606953, at *4 (Del. Super.
Nov. 15, 2017) (“If a party substantially performs, there is no material breach; if there is a
material breach, the breaching party cannot have substantially performed.”), aff’d, 201
A.3d 1161 (Del. 2019).
233
Dieckman, 155 A.3d at 367–69.
55
An omitted fact is material if there is a substantial likelihood that a
reasonable shareholder would consider it important in deciding how to
vote . . . . It does not require proof of a substantial likelihood that
disclosure of the omitted fact would have caused the reasonable
investor to change his vote. What the standard does contemplate is a
showing of a substantial likelihood that, under all the circumstances,
the omitted fact would have assumed actual significance in the
deliberations of the reasonable shareholder. Put another way, there
must be a substantial likelihood that the disclosure of the omitted fact
would have been viewed by the reasonable investor as having
significantly altered the “total mix” of information made available.234

Here, the withheld or obfuscated information was material. The Private

Unitholders had no contractual right to a payment in connection with the

Conversion. Instead, Plaintiff pled that Carlyle LP was negotiating to pay the lowest

price the Private Unitholder Defendants would accept in exchange for not blocking

the Conversion.235 To aid in assessing whether Carlyle LP should agree to the

proposed TRA Buyout, the Conflicts Committee received valuations of the TRA

234
Kahn v. Tremont Corp., 1996 WL 145452, at *16 (Del. Ch. Mar. 21, 1996) (alteration
in original) (internal quotation marks omitted) (quoting TSC Indus. v. Northway, 426 U.S.
438, 449 (1976)), rev’d on other grounds, 694 A.2d 422 (Del. 1997).
235
See D.I. 48 at 140 (Defendants’ counsel explaining the Conflicts Committee proceeded
“with the understanding that the only way to get [approval for the Conversion] was through
a negotiation with the founders about what the TRA rights were worth”); D.I. 23 at 2
(stating the Board believed a TRA Buyout payment was appropriate because the Founders
“had no obligation to support a transaction that required them to both forgo their
contractual entitlement to payments under the tax receivable agreement and give up their
control rights”).
56
rights based on two methodologies: the value of the termination payment and an

intrinsic value analysis.236

The Conflicts Committee was told that the Conversion would trigger a $551

million termination payment, setting a high starting point in determining whether the

proposed price was fair. That analysis would look very different if no such payment

was required. The repeated assertions in the July 15 Conflicts Committee

presentation that a termination payment was required in connection with the

Conversion were misleading and plainly material. These misrepresentations to the

Conflicts Committee and the failure to inform the committee that no termination

payment was required is sufficient to cause a failure of the condition that Carlyle

Management not undermine the Special Approval process.

Separately, the other withheld facts were material because they demonstrated

that the termination payment was not a useful benchmark. A termination payment

would approximate the value of the TRA rights only if it reasonably reflected the

236
Henry Aff., Ex. 5 at -0105 to -0106. The July 15 presentation also included an analysis
of the tax savings Carlyle LP would realize through the Conversion and compared those
figures to the proposed TRA Buyout payment. Id. at -0107. At this stage, I interpret this
presentation to offer these tax savings as a “partial[] offset” for the “[i]mpact” of the $1.50
TRA payment rather than an alternative valuation. Id. at -0104. Another slide compares
the proposed TRA Buyout payment to TRA buyout payments made by other companies.
Id. at -0121. This slide appears in a section titled “Appendix: Supporting Analysis,” and
it is not clear to me this was presented to the Conflicts Committee or intended to be used
as an alternative valuation.
57
value of future exchanges.237 But the Private Unitholder Defendants would have to

exchange their units to realize any value.

The withheld facts would have shown that the Private Unitholder Defendants

exchanged few to no units and were not likely to exchange significantly more units

in the future if Carlyle LP remained a partnership or undertook an up-C restructuring.

The lack of taxable income and reduction in corporate tax rates reflect that any

payments may have been minimal for the foreseeable future, and it is reasonably

inferable that this could disincentivize exchanges. And in the more likely event of

holding units until death or donating them, the TRA rights would have no value to

the Private Unitholder Defendants. Those facts would have demonstrated that the

termination payment valuation metric presented to the Conflicts Committee was of

little to no use in determining the only question it needed to answer: the value of the

TRA rights to the Private Unitholder Defendants. These facts were material.

In addition to the termination payment benchmark, the Conflicts Committee

received intrinsic value analyses estimating the expected value of the TRA rights to

the Private Unitholders.238 The other omitted facts were material to contextualize

237
Plaintiff has pled that the termination payment was not intended as an estimate of the
TRA rights’ value. As a presentation given to the Conversion Working Group explained,
“[e]arly termination is meant to be an anti-takeover equivalent to eliminating TRA, not
necessarily determinative of fair market value.” Foulds Aff., Ex. 2 at -2653. The Conflicts
Committee was not informed of this fact.
238
Henry Aff., Ex. 5 at -0105 to -0106; Henry Aff., Ex. 16 at -0185 to -0186.
58
that valuation as well.239 The July 15 intrinsic value analysis valued the TRA rights

at $0.06 per unit to $3.93 per unit if Carlyle LP remained a partnership.240 Those

valuation analyses assumed the Private Unitholders would exchange between 3

million and 12 million units each year.241 The valuations presented by Perella

Weinberg at the July 15 and July 17 meetings concluded the TRA rights had an

intrinsic value of between $0.38 or $0.39 and $6.85 if Carlyle did not pursue the

Conversion.242 They assumed the exchange of 6.5 million units each year.243

Notably, those analyses did not separately analyze the value of the TRA rights

to the Private Unitholder Defendants as a distinct subset of the larger group. This is

relevant because the Private Unitholder Defendants’ exchange history looked very

different than those of the Private Unitholders. Between the second quarter of 2017

and the first quarter of 2019, all Private Unitholders exchanged an annualized

average of 5.2 million units.244 On the other hand, the Private Unitholder Defendants

did not exchange any units since before 2016, exchanged few of their units after that,

and did not face conditions favorable to future exchanges if Carlyle LP remained a

239
See In re Mindbody, Inc., 2020 WL 5870084, at *30 (Del. Ch. Oct. 2, 2020) (considering
multiple facts and omissions in determining that disclosure deficiencies were material).
240
Henry Aff., Ex. 5 at -0106.
241
Id.
242
Id. at -0162; Henry Aff., Ex. 16 at -0185.
243
Henry Aff., Ex. 5 at -0162; Henry Aff., Ex. 16 at -0185.
244
Foulds Aff., Ex. 2 at -2673.
59
partnership or engaged in an up-C restructuring.245 The Conflicts Committee was

not informed of these facts. Withholding that information precluded the Conflicts

Committee from realizing that the intrinsic analyses were inapplicable to the Private

Unitholder Defendants—the very individuals who could hold up the Conversion.

From there, the pleading standard carries Plaintiff the rest of the way. It is

reasonably conceivable that Carlyle Management withheld these facts to ensure the

Conflicts Committee would approve the TRA Buyout at $344 million. Withholding

that information materially undermined the Special Approval provision’s

protections for the other investors. The Special Approval safe harbor cannot

establish a presumption of good faith.246

245
Am. Compl. ¶ 67.
246
Plaintiff also contends that Carlyle Management withheld from the Conflicts Committee
other facts, including that the Conversion “was a far superior structure for the Private
Unitholders” and Centerview had valued the Private Unitholders’ TRA rights at less than
$150 million. D.I. 29 at Ans. Br. 62, 67. This opinion concludes that Carlyle Management
withheld or obfuscated other material facts from the Conflicts Committee sufficient to
preclude the Special Approval, and does not reach the question of whether these additional
facts were withheld or whether they were material.
Defendants also argue that the fact the LPA requires the Conflicts Committee “to
consider ‘only such interests and factors as it desires, including its own interests,’”
precludes the implied covenant claim because it “leaves ‘no gap to fill in the agreement’
and eliminates any role for the implied covenant.” D.I. 23 at 67 (quoting LPA § 7.9(a);
and then quoting Glaxo Grp. Ltd. v. DRIT LP, 248 A.3d 911, 920 (Del. 2021)). I
understand this argument to assert that this specific “sole discretion” standard itself
addresses the implied covenant. This argument, that a standard of decisionmaking
displaces the implied covenant inherent in every contract, has been rejected by the
Delaware Supreme Court. Gerber, 67 A.3d at 418–21.
60
ii. Reliance On Advisors

Defendants next argue that Carlyle Management is entitled to a conclusive

good faith presumption because it relied on the advice of its advisors in connection

with the Conversion, TRA Buyout, and related transactions. Section 7.10(b) of the

LPA provides:

[Carlyle Management] . . . may consult with legal counsel, accountants,
appraisers, management consultants, investment bankers and other
consultants and advisers selected by it, and any act taken or omitted to
be taken in reliance upon the advice or opinion (including an Opinion
of Counsel) of such Persons as to matters that [Carlyle Management] .
. . believes to be within such Person’s professional or expert
competence shall be conclusively presumed to have been done or
omitted in good faith and in accordance with such advice or opinion.247

This language creates four requirements to invoke the advisor safe harbor: (1)

Carlyle Management must select the advisor; (2) Carlyle Management must consult

with the advisor; (3) Carlyle Management must rely on the advice it receives; and

(4) Carlyle Management must believe the matter was within the advisor’s

professional or expert competence. Reliance on advisors is a fact-intensive

affirmative defense for which the defendants bear the burden.248 In raising this

defense, Defendants point to the advice of Perella Weinberg, Centerview, and E&Y.

247
LPA § 7.10(b).
248
See Ogus v. SportTechie, Inc., 2020 WL 502996, at *14 (Del. Ch. Jan. 31, 2020).
61
Defendants point to Perella Weinberg’s advice given at the Conflict

Committee’s July 17 meeting.249 During the meeting, a Perella Weinberg

representative conveyed that “the value of the proposed payment in connection with

the proposed termination of the Company’s tax receivable agreement seemed within

the range of potential values currently attributed to the tax receivable agreement.”250

But as explained, Plaintiff has pled that Carlyle Management withheld information

relevant to valuing the Private Unitholder Defendants’ TRA rights from the

Conflicts Committee. The material information Carlyle Management knew, but

withheld from the Conflicts Committee, was not reflected in Perella Weinberg’s

presentation. From there, it is reasonable to infer that Perella Weinberg’s

recommendation did not account for that information. It follows that Carlyle

Management knew Perella Weinberg’s evaluation was either not fully informed or

incorrect. On these facts, it is reasonably conceivable that Carlyle Management did

not rely on Perella Weinberg’s advice in deciding to proceed with the TRA

Buyout.251

249
D.I. 23 at 63–64 (citing Henry Aff., Ex. 15 at -0011; and Henry Aff., Ex. 16 at -0173).
250
Henry Aff., Ex. 15 at -0011.
251
Because Carlyle Management knew the expert advice omitted material information,
Carlyle Management’s reliance on that advice in order to obtain a safe harbor may itself be
a breach of the implied covenant. See Gerber, 67 A.3d at 421–22.
62
Carlyle Management also points to the retention of Centerview. But Carlyle

LP was the counterparty to Centerview’s engagement letter, which makes no

mention of Carlyle Management.252 Nothing in the record reflects that Carlyle

Management, as opposed to Carlyle LP, selected Centerview as an advisor or

consulted with it.253 Further, Carlyle Management has not pointed to any advice of

Centerview it relied on—instead it addresses Plaintiff’s arguments before stating that

“what matters is that Carlyle Management relied on a professional advisor’s advice

in ultimately approving the TRA Buyout—specifically, the advice of Perella

Weinberg.”254

Finally, Defendants argue Carlyle Management relied on E&Y’s advice. An

entity called Carlyle Investment Management LLC retained E&Y.255 The parties

have provided no indication of what Carlyle Investment Management LLC is or its

252
Henry Aff., Ex. 8 at 6. Carlyle Management does not press that it, rather than Carlyle
LP, retained Centerview. See, e.g., D.I. 23 at 9 (describing Centerview’s hiring in the
passive voice); id. at 62 (stating “Carlyle LP engaged financial advisors,” then describing
Centerview’s engagement in the passive voice). To be sure, Carlyle Management was
responsible for Carlyle LP’s day-to-day management, and Carlyle Management’s board of
directors served as the Board. But Defendants have not argued that the separate legal
existence of Carlyle Management and Carlyle LP should be ignored for purposes of Section
7.10(b).
253
See LPA § 7.10(b) (offering a conclusive presumption of good faith where the
decisionmaker consulted with advisors “selected by it”).
254
D.I. 23 at 63.
255
Henry Aff., Ex. 9 at 7. As with Centerview’s retention, Carlyle Management has not
addressed this point. See supra note 252.
63
relationship to Carlyle Management. For purposes of this motion, I conclude Carlyle

Management did not retain E&Y.

Even had Carlyle Management retained E&Y, it has not pointed to any

advice it relied on or could have relied on relating to the TRA Buyout. The record

reflects that E&Y advised on the tax implications of the Conversion generally and

on structuring the Conversion and related transactions, which is insufficient to show

reliance for purposes of the separate issue of the TRA Buyout’s fairness, necessity,

or price.256 At this stage, Carlyle Management has failed to establish that it relied

on advice from any advisor it selected in approving the TRA Buyout.

b. Subjective Bad Faith

Plaintiff has demonstrated that neither safe harbor applies. But the good faith

presumption nevertheless applies unless Plaintiff establishes that Carlyle

Management “subjectively believed” the TRA Buyout was not in Carlyle LP’s best

interests.257 Of course, Carlyle Management is an entity and therefore is incapable

of having any subjective beliefs.258 Instead, the Court must look to the subjective

256
Henry Aff., Ex. 32.
257
LPA § 7.9(a).
258
See N. Assur. Co. v. Rachlin Clothes Shop, 125 A. 184, 188 (Del. 1924) (“A corporation
being a purely metaphysical creature, having no mind with which to think, no will with
which to determine and no voice with which to speak, must depend upon the faculties of
natural persons to determine for it its policies and direct the agencies through which they
are to be effectuated.”); see also 2A C.J.S. Agency § 476 (Mar. 2024 update) (“Knowledge
can always be imputed to a corporation, even when used to determine a subjective mental

64
beliefs of the Board.259 Those individuals’ “personal knowledge and experience will

be relevant to a subjective good faith determination, which must focus on measuring

the directors’ approval of a transaction against their knowledge of the facts and

circumstances surrounding the transaction.”260

Plaintiff’s showings that Carlyle Management withheld or obfuscated facts

tending to show the TRA rights were nearly worthless to the Private Unitholder

Defendants, and told the Conflicts Committee the TRA would be terminated,

supports the pleading-stage inference that Carlyle Management subjectively

believed that paying $344 million for those rights was not in Carlyle LP’s best

interest. It is reasonable to infer Carlyle Management skewed the information

presented to the Conflicts Committee concerning the value of future exchanges to

the Private Unitholder Defendants because those facts would have shown that the

TRA rights were worth far less to the Private Unitholder Defendants than the agreed

state, because a corporation has no belief or intent independent of that of its officers and
agents.”).
259
See Boardwalk Pipeline P’rs, LP v. Bandera Master Fund LP, 288 A.3d 1083, 1118–
20 (Del. 2022); Dieckman v. Regency GP LP, 2021 WL 537325, at *36 (Del. Ch.
Feb. 15, 2021) (“[D]etermining whether the General Partner acted in bad faith or engaged
in fraud or willful misconduct turns on the state of mind of the directors on the Board who
voted to approve or otherwise authorized a challenged action.”), aff’d, 264 A.3d 641 (Del.
2021); see also James L. Burns, Pruning the Judicial Oak: Developing A Coherent
Application of Common Law Agency and Controlling Person Liability in Securities Cases,
93 Colum. L. Rev. 1185, 1196 (1993) (“A corporate entity cannot act in ‘good faith’ or
have a ‘reasonable belief,’ so these attributes must be imputed to the corporation from its
executives.”).
260
Allen v. Encore Energy P’rs, L.P., 72 A.3d 93, 107 (Del. 2013).
65
TRA Buyout price. It is reasonable to infer that Carlyle Management believed

Carlyle LP was overpaying for those rights and therefore that the TRA Buyout was

not in Carlyle LP’s best interests. It follows that the good faith presumption is not

available, and that Plaintiff has pled that Carlyle Management fell short of the good

faith standard required by LPA Sections 7.6(d) and (e).

2. Tortious Interference With The LPA

Count VIII asserts a claim for tortious interference with the LPA against

Clare, Hance, Rubenstein, D’Aniello, Youngkin, Buser, Ferguson, Finn, and

Conway. Defendants first argue this claim fails because Plaintiff failed to plead a

predicate breach. As explained, Plaintiff pled a claim that Carlyle Management

breached the implied covenant of good faith and fair dealing by withholding

information from the Conflicts Committee, and also pled that Carlyle Management

breached the good faith requirements in Sections 7.6(d) and (e).261 Plaintiff satisfied

the predicate breach requirement.

From there, Defendants argue only that there is a presumption that these

defendants were acting within the scope of their agency. “It is well settled that a

party to a contract cannot be held liable for [both] breaching the contract and for

261
A breach of the implied covenant can satisfy the requirement of a predicate breach. See
NAMA Hldgs., LLC v. Related WMC LLC, 2014 WL 6436647, at *25–27 (Del. Ch.
Nov. 17, 2014).
66
tortiously interfering with that contract.”262 Where an entity is a party to an

agreement, that entity’s agent can be liable for tortious interference with the

agreement where she “acted beyond the scope of [her] agency.”263 “Acts carried out

for an employee’s personal motives—rather than for the employer’s benefit—are

outside the scope of employment and can amount to interference with a contract.”264

“Delaware law presumes that a corporate officer’s actions that cause the corporation

to breach a contract were taken for the corporation’s benefit.”265 A plaintiff can rebut

that presumption by pleading “that the officer (1) ‘was not pursuing legitimate

profit-seeking activities of the affiliated enterprise in good faith,’ or (2) ‘was

motivated by some malicious or other bad faith purpose to injure the plaintiff.’”266

I concluded that Plaintiff pled these defendants withheld or obfuscated

information from the Conflicts Committee while acting as Carlyle Management

262
Kuroda v. SPJS Hldgs., L.L.C., 971 A.2d 872, 884 (Del. Ch. 2009).
263
Am. Bottling Co. v. Repole, 2020 WL 7787043, at *6 (Del. Super. Dec. 30, 2020).
264
Id.
265
Id.
266
Id. (quoting Yu v. GSM Nation, LLC, 2018 WL 2272708, at *15–16 (Del. Super.
Apr. 24, 2018)); see also Restatement (Second) of the Law of Torts § 770 (“One who,
charged with responsibility for the welfare of a third person, intentionally causes that
person not to perform a contract or enter into a prospective contractual relation with
another, does not interfere improperly with the other’s relation if the actor (a) does not
employ wrongful means and (b) acts to protect the welfare of the third person.” (formatting
altered)); id. at cmt. b (“The rule stated [in Section 770] is frequently applicable to those
who stand in a fiduciary relation toward another, as in the case of . . . corporate officers
acting for the benefit of the corporation.”).
67
agents.267 And as explained, to plead a claim for tortious interference against them,

Plaintiff must allege they exceeded the scope of their agency. Though Plaintiff has

pled a claim that these defendants acted as Carlyle Management’s agents in

connection with Carlyle Management’s breaches of the LPA, Plaintiff may plead in

the alternative under Court of Chancery Rule 8.268 I conclude Plaintiff has done so

here. Each named defendant personally received payments in connection with the

TRA Buyout. Plaintiff alleged the named defendants intentionally deceived the

Conflicts Committee so they could obtain the TRA Buyout payment at Carlyle LP’s

expense.269 It is not clear from the face of the Amended Complaint how those actions

benefitted Carlyle Management, which did not receive a TRA Buyout payment. It

is reasonable to infer each defendant’s pursuit of the TRA Buyout was in his own

interest, as opposed to Carlyle Management’s. Plaintiff has stated a claim for

tortious interference with the LPA.

267
In addressing the breach of contract claims, the parties did not address which Defendants
ensured information did not reach the Conflicts Committee. I understand Plaintiff to be
asserting this claim against those same individuals.
268
Ct. Ch. R. 8(e)(2); Garfield ex rel. ODP Corp. v. Allen, 277 A.3d 296, 307 (Del. Ch.
2022) (“Court of Chancery Rule 8 expressly permits a plaintiff to plead in the alternative.”).
269
Smith v. Hercules, Inc., 2002 WL 499817, at *3 (Del. Super. Mar. 28, 2002) (“If
Plaintiffs can establish that [the CEO’s] actions were not motivated by, and for, his
corporate responsibilities, but were instead principally executed to further his personal
investments, [the CEO] may be held liable for causing the breach.”).
68
B. The Initial Transfer Unit Claims

Plaintiff alleges the Initial Transfer Units were not transferred to Intermediate

Holdco I but that the Private Unitholder Defendants nevertheless received the

Deferred Payments. On that basis, Plaintiff asserts claims for breach of MRA

Section 3.1, tortious interference with the MRA, and unjust enrichment.

1. Breach Of The MRA

Section 3.1(b) of the MRA required Holdings I GP Sub and Intermediate

Holdco II to “transfer to [Intermediate Holdco I] on behalf of [the Private

Unitholders] a number of [units] of equivalent value to [$344 million].”270 This

decision refers to those units as the Initial Transfer Units. Following that transfer,

Intermediate Holdco I was to make the Deferred Payments to the Private

Unitholders.271

Plaintiff asserts Intermediate Holdco I, Holdings I GP Sub, Intermediate

Holdco II, Clare, Rubenstein as trustee of the David M. Rubenstein Revocable Trust,

D’Aniello as trustee of the D’Aniello Revocable Trust, Youngkin as trustee of the

Glenn A. Youngkin Revocable Trust, and Conway as trustee of the William E.

270
MRA § 3.1(b).
271
Id. § 3.1(a).
69
Conway Jr. 2006 Revocable Trust breached the MRA by failing to transfer the Initial

Transfer Units.272

Defendants contest these breaches on three narrow grounds: (1) the individual

defendants named were not parties to the MRA, and even if they were, they owed

no duties and therefore could not breach the MRA; (2) a November 2020

presentation reflects that Initial Transfer Units were transferred; and (3) Plaintiff

failed to plead damages. Defendants prevail on the first argument, but fall short on

the second and third.

a. Breach Of The MRA Against Clare, Rubenstein,
D’Aniello, Youngkin, and Conway

“The elements of a claim for breach of contract are (i) a contractual obligation,

(ii) a breach of that obligation by the defendant, and (iii) a causally related injury

that warrants a remedy.”273 One cannot breach an agreement under which she owes

no duties.274

272
The Amended Complaint also alleges the MRA was breached because a “nationally
recognized valuation firm” did not determine the number of Initial Transfer Units that
should be transferred in exchange for the Deferred Payments. Am. Compl. ¶ 176.
Defendants did not address these allegations. Plaintiff addressed them quickly in its
answering brief. See D.I. 29 at Ans. Br. 46–47. Defendants did not mention them in reply.
To the extent Plaintiff is pursuing a standalone breach of contract claim on this basis,
Defendants have not moved to dismiss it.
273
AB Stable VIII LLC v. Maps Hotels & Resorts One LLC, 2020 WL 7024929, at *47
(Del. Ch. Nov. 30, 2020), aff’d, 268 A.3d 198 (Del. 2021).
274
See Inter-Mktg. Grp. USA, Inc. ex rel. Plains All Am. Pipeline, L.P. v. Armstrong, 2020
WL 756965, at *8 (Del. Ch. Jan. 31, 2020) (“[O]nly the General Partner owed a

70
Plaintiff has not pled that Clare or Rubenstein, D’Aniello, Youngkin, and

Conway, in their capacity as trustees or otherwise, breached the MRA by failing to

transfer the Initial Transfer Units. Holdings I GP Sub and Intermediate Holdco II

owed a duty to perform under the MRA—not Clare, Rubenstein, D’Aniello,

Youngkin, and Conway. Because they were not obligated to transfer the units, they

could not have breached. Count VI is dismissed as to Clare, Rubenstein, D’Aniello,

Youngkin, and Conway.

b. Breach Of The MRA Against Holdings I GP Sub And
Intermediate Holdco II
Plaintiff has pled a claim for breach of the MRA against Holdings I GP Sub

and Intermediate Holdco II. Immediately before the Conversion, the Private

Unitholders held 229 million Subsidiary Holdco Units.275 Approximately 26 million

of those units, which this decision refers to as the Initial Transfer Units, were to be

transferred to Intermediate Holdco I in exchange for the Deferred Payments.276

Then, the Remaining Units were to be exchanged for Carlyle Inc. common stock on

freestanding contractual duty, and breach of contract claims (Count I) against all
Defendants except the General Partner are dismissed for failure to state a claim under Rule
12(b)(6), as they owed no duties under the LP Agreement.”); see also In re WeWork Litig.,
2020 WL 6375438, at *11 (Del. Ch. Oct. 30, 2020) (“This aspect of Count I . . . fails to
state an independent basis for a breach of contract claim against [the defendant] because it
owed no obligations under Section 1.02.”).
275
Am. Compl. ¶ 169.
276
MRA § 3.1(b).
71
a one-for-one basis.277 On January 1, Buser sent a letter to the American Stock

Transfer & Trust Company directing the transfer of 228,028,388 shares of Carlyle

Inc. common stock to the Private Unitholders.278 It is reasonable to infer that

Holdings I GP Sub and Intermediate Holdco II failed to transfer the Initial Transfer

Units in breach of the MRA.

Defendants argue the Initial Transfer Units were transferred, pointing to a

November 23, 2020, presentation that states 26.3 million of the Private Unitholders’

Subsidiary Holdco Units had been exchanged in connection with the TRA Buyout.279

This document directly conflicts with Buser’s January 1 letter, which directs the

transfer of over 228 million shares of Carlyle Inc. common stock.280 At best, the

November presentation gives rise to a competing inference that the Initial Transfer

Units were exchanged for the Deferred Payments. The Court cannot resolve this

conflict at this stage, and must draw all reasonable inferences in Plaintiff’s favor.281

277
Id.; Plan of Conver. § 2.01.
278
Foulds Aff., Ex. 5 at -2578.
279
Henry Aff., Ex. 3 at -2356 to -2357.
280
Foulds Aff., Ex. 5 at -2578.
281
IBEW Loc. Union 481 Defined Contribution Plan & Tr. ex rel. GoDaddy, Inc. v.
Winborne, 301 A.3d 596, 632 (Del. Ch. 2023) (“At the pleading stage, the court does not
decide between competing inferences. The plaintiff receives the benefit of the inference
that favors its case.”); Lebanon Cnty. Emps.’ Ret. Fund v. Collis, 287 A.3d 1160, 1181
(Del. Ch. 2022) (“If there are factual conflicts in the documents or the circumstances
support competing interpretations, and if the plaintiffs made a well-pled factual allegation,
then the court must credit the allegation.”); Repole, 2020 WL 7787043, at *9 (“[T]he

72
c. Breach Of The MRA Against Intermediate Holdco I

Plaintiff alleges Intermediate Holdco I breached the MRA by making the

Deferred Payments despite the failure to transfer the Initial Transfer Units. Section

3.1(a) of the MRA provides that Intermediate Holdco I “shall agree to make

payments to” the Private Unitholders “whose [Initial Transfer Units] are transferred

to [Intermediate Holdco I] pursuant to Section 3.1(b).”282 Defendants seek dismissal

of this claim solely on the grounds that the Initial Transfer Units were transferred.

As explained, Plaintiff has pled the unit transfer did not occur.

d. Plaintiff Has Pled Carlyle Inc. Was Damaged By The
Breaches.

Finally, Defendants argue Plaintiff’s breach claim should be dismissed

because it failed to plead damages.283 A plaintiff must plead damages for a breach

of contract claim to survive a motion to dismiss.284 Plaintiff has pled damages in the

form of a dilutive overpayment to the Private Unitholders.

Because the Initial Transfer Units were not transferred, the Private

Unitholders received Carlyle Inc. common stock on a one-for-one basis for over 228

competing inferences that can be drawn from the text messages cannot be resolved in a
pleadings-based motion.”).
282
MRA § 3.1(a) (emphasis omitted).
283
Defendants do not appear to contest the existence of damages for the breach of contract
claim against Intermediate Holdco I.
284
In re Mobilactive Media, LLC, 2013 WL 297950, at *11 (Del. Ch. Jan. 25, 2013)
(“[D]amages are a necessary element of a breach of contract claim.”).
73
million Subsidiary Holdco Units—not just their Remaining Units. Put differently,

they received—and Carlyle Inc. issued—about 26.3 million shares more than they

were entitled to under the MRA. This overissuance was dilutive.285 Our law

recognizes that claims for dilution cause harm to the company.286 Plaintiff has pled

Carlyle Inc. was damaged by the overissuance.

* * *

Plaintiff has pled a claim for breach of the MRA against Holdings I GP Sub,

Intermediate Holdco I, and Intermediate Holdco II. Plaintiff’s claim for breach of

the MRA against Clare, Rubenstein, D’Aniello, Youngkin, and Conway is

dismissed.

2. Tortious Interference With The MRA

Count VIII asserts a claim for tortious interference with the MRA against

Clare, Hance, Rubenstein, D’Aniello, Youngkin, Buser, Ferguson, Finn, and

Conway. Defendants argue that Plaintiff failed to plead a predicate breach.287 As

285
This is so even though, as Defendants point out, the Initial Transfer Units eventually
ended up in Carlyle Inc.’s possession, because more Carlyle Inc. shares were issued than
should have been under the MRA.
286
Brookfield Asset Mgmt., Inc. v. Rosson, 261 A.3d 1251, 1266 (Del. 2021).
287
Defendants also argued that Plaintiff lacks standing to bring the tortious interference
claim because it is not a party to the MRA. Plaintiff’s claim is derivative, and Defendants
did not argue Plaintiff lacked standing to proceed derivatively so long as Plaintiff pled
demand futility.

74
explained, Plaintiff has pled a predicate breach. Defendants’ motion is denied as to

this claim.

3. Unjust Enrichment

Count IX asserts a claim for unjust enrichment against the Private Unitholder

Defendants. To state a claim for unjust enrichment, a plaintiff must plead “(1) an

enrichment, (2) an impoverishment, (3) a relation between the enrichment and the

impoverishment, and (4) the absence of justification.”288 A plaintiff’s claim for

unjust enrichment may be dismissed where the parties’ relationship is governed by

contract.289 At least at the pleading stage, our courts have denied motions to dismiss

unjust enrichment claims based on the receipt or retention of overpaid or wrongfully

Defendants further argued that Plaintiff cannot bring a tortious interference claim
against Clare because he is a party to the MRA. “Under the tort of interference with an
existing contract, the principle that a party to the contract cannot be sued thereunder for
interference is well settled in Delaware.” CPM Indus., Inc. v. ICI Ams., Inc., 1990 WL
28574, at *1 (Del. Super. Feb. 27, 1990). Plaintiff offered no response. This count is
dismissed as against Clare.
288
Riverside Risk Advisors LLC v. Chao, 2022 WL 14672745, at *28 (Del. Ch.
Oct. 26, 2022) (citing Garfield, 277 A.3d at 341–51).
289
Nemec v. Shrader, 2009 WL 1204346, at *6 (Del. Ch. Apr. 30, 2009) (“Delaware courts
. . . have consistently refused to permit a claim for unjust enrichment when the alleged
wrong arises from a relationship governed by contract.”), aff’d, 991 A.2d 1120 (Del. 2010);
accord Kuroda, 971 A.2d at 891 (“A claim for unjust enrichment is not available if there
is a contract that governs the relationship between parties that gives rise to the unjust
enrichment claim.”).
75
obtained consideration under a valid, enforceable agreement.290 Defendants’ motion

is denied as to the unjust enrichment claim.

C. Post-Closing Breach Of Fiduciary Duty Claims

I now turn to Plaintiff’s post-Conversion breach of fiduciary duty claims.

After Buser became Carlyle Inc.’s CFO on January 1, he directed the transfer of

228,028,388 shares to the Private Unitholders to occur on January 2, notwithstanding

the failure to transfer their Initial Transfer Units.291 As explained, this figure

exceeded the number of shares to which the Private Unitholders were entitled under

the MRA. For purposes of this motion, it is reasonable to infer that transfer occurred

290
See Pfeiffer v. Leedle, 2013 WL 5988416, at *10 (Del. Ch. Nov. 8, 2013) (denying a
motion to dismiss an unjust enrichment claim on the basis that a contract governs the
parties’ relationship where the plaintiff pled the defendant received more stock options
than he was entitled to under a valid and enforceable stock incentive plan); see also
Garfield, 277 A.3d at 340–51 (denying a motion to dismiss an unjust enrichment claim
based on an alleged overpayment under a valid and enforceable equity compensation plan);
Ryan v. Gifford, 918 A.2d 341, 361 (Del. Ch. 2007) (denying a motion to dismiss an unjust
enrichment claim based on an allegedly wrongful receipt of stock options under an
enforceable stock option plan). To be sure, the plaintiff in Pfeiffer did not assert a breach
of contract claim for the same conduct. I find this distinction irrelevant as I have concluded
Plaintiff did not plead a breach of contract against the defendants who were allegedly
unjustly enriched. Where, as here, the contract claim and the unjust enrichment claim arise
from a common nucleus of fact such that dismissing one of the claims is unlikely to
simplify discovery or the presentation of evidence, and because there is no right to a
pleading stage ruling, there is no benefit to be gained from dismissing the unjust enrichment
claim. See Garfield, 277 A.3d at 360–62.
291
Foulds Aff., Ex. 5 at -2578. Because Buser sent the letter as Carlyle Inc.’s CFO, I infer
that it was sent after the Conversion was completed.
76
on or after January 2. The first Deferred Payment was made on January 31, 2020,

and three more were made before Plaintiff filed its Amended Complaint.292

Plaintiff alleges that the Director Defendants breached their fiduciary duties

by failing to prevent Carlyle Inc. from making the Deferred Payments and

overissuing Carlyle Inc. stock to the Private Unitholders. Plaintiff also asserts a

breach of fiduciary duty claim against Clare, Hance, Rubenstein, D’Aniello,

Youngkin, and Conway for receiving the Deferred Payments and overissued shares

in clear violation of the MRA. And Plaintiff brings claims for breach of fiduciary

duty stemming from violations of Sections 152 and 153 of the DGCL. Finally,

Plaintiff asserts a breach of fiduciary duty claim against the Founders as a control

group. Plaintiff’s claim against the Founders as a control group fails. The other

claims survive.

1. Section 152

Plaintiff contends that Carlyle Inc. violated Section 152 of the Delaware

General Corporation Law by issuing 26.3 million shares of unauthorized stock, and

that the Director Defendants breached their fiduciary duties by causing, allowing, or

failing to prevent that violation.293 Defendants appear to argue that no violation of

292
MRA § 3.1(a).
293
Defendants do not argue that such a claim cannot be brought as a claim for breach of
fiduciary duty.
77
Section 152 occurred because the Board approved the stock issuances necessary to

effectuate the MRA.

The relevant version of Section 152 provides:

The consideration, as determined pursuant to § 153(a) and (b) of this
title, for subscriptions to, or the purchase of, the capital stock to be
issued by a corporation shall be paid in such form and in such manner
as the board of directors shall determine. . . . The board of directors
may determine the amount of such consideration by approving a
formula by which the amount of consideration is determined.294
A board of directors may delegate this power so long as it does so through a

resolution that: “(i) fixes the maximum number of shares that may be issued; (ii)

sets a time period during which such shares may be issued; and (iii) establishes a

minimum amount of consideration for which such shares may be issued.”295 Plaintiff

pled that Buser’s letter directing the issuance of Carlyle Inc. common stock

authorized not only stock sufficient to exchange the Remaining Units, but also an

additional 26.3 million shares in exchange for the Initial Transfer Units. The

question is whether his direction to issue shares in exchange for the Initial Transfer

Units was done pursuant to a proper delegation of authority under Section 152.

294
8 Del. C. § 152 (2015). Section 152 was amended in 2022. 83 Del. Laws. ch. 377 § 3
(2022). It was again amended in 2023. 84 Del. Laws. ch. 98 § 1 (2023). This opinion
applies the statute as it read at the time of the Conversion. See Fountain v. State, 139 A.3d
837, 841 (Del. 2016) (“It is a general rule that statutory amendments operate prospectively
unless the legislature expressly states, to the contrary, that the amendments shall be
retrospective.”).
295
I Robert S. Saunders et al., Folk on the Delaware General Corporation Law § 152.01,
at 5-57 (7th ed. 2020).
78
The Board granted broad authority to the Transaction Committee to effectuate

the Conversion and related transactions.296 The Transaction Committee authorized

the issuance of Carlyle Inc. common stock “as provided in the Plan of Conversion”

and MRA.297 Through formulas set forth in those agreements, the Transaction

Committee authorized the issuance of only enough shares of Carlyle Inc. common

stock to convert specified types of partnership units and the Private Unitholders’

Remaining Units on a one-for-one basis—it did not authorize the issuance of

additional stock to convert the Initial Transfer Units.298 Though the Transaction

Committee gave Carlyle LP’s officers and other agents authority to take actions

“necessary, desirable or appropriate” to effectuate those agreements, it did not

delegate to them authority to issue additional Carlyle Inc. shares to the Private

Unitholders.299 Thus, through the MRA, the Transaction Committee authorized the

296
Henry Aff., Ex. 20 at 6. The mechanics and effectiveness of the authorization and
delegation to the Transaction Committee are unchallenged.
297
Henry Aff., Ex. 26 at -0195.
The Transaction Committee resolved “that the resolutions adopted by the
Transaction Committee pursuant to this written consent shall have the effect . . . after the
effectiveness of the Conversion, of [Carlyle Inc.’s] Board taking them on behalf of [Carlyle
Inc.].” Id. at -0199. The mechanics and effectiveness of the Transaction Committee’s
resolution are unchallenged and so I assume compliance with Section 152.
298
The Plan of Conversion contemplated issuing shares of common stock equal to the
number of outstanding units in three types of partnership securities. Plan of Conver. §
2.01(i). The MRA contemplated Carlyle Inc. issuing shares of common stock of equal
value to the number of Subsidiary Holdco Units held by the Private Unitholders following
the transfer of the Initial Transfer Units. MRA § 9.1(b).
299
Henry Aff., Ex. 26 at -0199 to -0200.
79
issuance of roughly 201,728,388 shares of common stock, representing the

228,028,388 units the Private Unitholders held immediately before the Conversion

minus the 26.3 million Initial Transfer Units.

Nevertheless, Buser’s letter directed the transfer of 228,028,388 shares of

Carlyle Inc. common stock.300 This exceeds the number of authorized shares.

Because those issuances lacked the required authorization, Plaintiff has pled a

violation of Section 152. Defendants raise no other reason to dismiss this breach of

fiduciary duty claim.

2. Section 153

Count I also asserts a claim for breach of fiduciary duty for causing, allowing,

or failing to prevent Carlyle Inc. from violating 8 Del. C. § 153. Section 153(a)

provides that “[s]hares of stock with par value may be issued for such consideration,

having a value not less than the par value thereof, as determined from time to time

by the board of directors, or by the stockholders if the certificate of incorporation so

provides.”301

As explained, the 26.3 million overissued shares were unauthorized. The

parties did not meaningfully brief whether this lack of authorization also caused a

300
Foulds Aff., Ex. 5 at -2578.
301
8 Del. C. § 153(a) (1969). Section 153 was amended in 2022. 83 Del. Laws. ch. 377
§ 4 (2022). It was again amended in 2023. 84 Del. Laws. ch. 98 § 2 (2023). This opinion
applies the statute as it read at the time of the Conversion. See Fountain, 139 A.3d at 841.
80
violation of the version of Section 153 then in effect. The motion to dismiss is denied

as to this claim.

3. Dereliction of Duty

Count I alleges the Director Defendants breached their fiduciary duties “by

knowingly and intentionally causing or allowing Carlyle [Inc.] to make substantial

overpayments and share over-issuances to the [Private Unitholders] on terms that

the Director Defendants knew disproportionately benefitted the [Private Unitholder

Defendants] and were not entirely fair to the public stockholders.”302 Count III

asserts a claim for breach of fiduciary duty against Lee, Youngkin, Ferguson, Hance,

Clare, Finn, and Buser (the “Officer Defendants”). It alleges they breached their

fiduciary duties of care, loyalty, and good faith by “knowingly and intentionally

causing or allowing Carlyle [Inc.] to make substantial overpayments and share

over-issuances to the [Private Unitholders] on terms that [they] knew

disproportionately benefitted the [Private Unitholder Defendants] and were not

entirely fair to the public stockholders.”303

Plaintiff is not bringing a breach of fiduciary duty claim relating to the

negotiation, consideration, and approval of the Conversion and related transactions,

including the TRA Buyout—it could not do so, as Carlyle LP directors did not owe

302
Am. Compl. ¶ 255.
303
Id. ¶ 268.
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fiduciary duties under the LPA.304 After the Conversion became effective on January

1, 2020,305 Carlyle Inc.’s directors and officers owed the “fundamental fiduciary

duties of loyalty and care to the corporation and its shareholders.”306 Plaintiff asserts

Carlyle Inc.’s fiduciaries acted in bad faith by failing to stop the Deferred Payments

and share overissuance even though they knew such payments were being made in

furtherance of a scheme to extract value at the expense of the unaffiliated

stockholders. Plaintiff’s claim sounds in the duty of loyalty’s subsidiary element of

good faith.307 A plaintiff can plead a claim for bad faith by alleging facts

demonstrating “intentional dereliction of duty, [or] a conscious disregard for one’s

responsibilities.”308 Officers of a Delaware corporation owe the same fiduciary

duties as directors.309

Defendants contest these claims on relatively narrow grounds. They do not

meaningfully challenge Plaintiff’s allegation that the Director Defendants or Officer

304
Defendants nevertheless argue that Plaintiff is essentially attacking those decisions and
the Court should evaluate Plaintiff’s claims as such. I understand Plaintiff’s argument to
rely on the pre-Conversion period as establishing that these defendants were aware of or
participated in the alleged scheme that concluded with the MRA breaches.
305
Plan of Conver. § 1.02; id. at Ex. A at 31.
306
Polk v. Good, 507 A.2d 531, 536 (Del. 1986); Gantler v. Stephens, 965 A.2d 695, 708–
09 (Del. 2009) (holding officers owe the same fiduciary duties as directors).
307
Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 370 (Del. 2006).
308
In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 66 (Del. 2006).
309
Gantler, 965 A.2d at 708–09.
82
Defendants knew about the share overissuance.310 Rather, they point out that the

validity of the underlying agreements is undisputed and argue that the named

defendants acted pursuant to binding contractual commitments. From there, they

conclude that noncompliance would likely result in litigation, and so their

compliance cannot have been a breach of fiduciary duty.311

A director’s fiduciary duties do not give her extraordinary powers to escape

from a contract for the benefit of the corporation or its stockholders.312 Nevertheless,

as this Court explained in Frederick Hsu Living Trust v. ODN Holding Corporation,

the existence of a binding contract does not preclude the applicability of fiduciary

duties in determining how to handle that contract:

310
Defendants address this issue only by prefacing a sentence with the introductory clause:
“Setting aside conclusory allegations of “participat[ion]” and “aware[ness] . . . .” D.I. 23
at 53 (alterations in original) (quoting Am. Compl. ¶ 216). I do not read this language as
a challenge to the merits of Plaintiff’s claim.
311
Defendants’ arguments, and Plaintiff’s response, overlook many issues. For example,
Defendants do not challenge that the Board could have stopped the Deferred Payments
despite the fact Intermediate Holdco I, not Carlyle Inc., was responsible for making the
Deferred Payments. MRA § 3.1(a). The parties make no distinction between the
knowledge of any individual defendant, including between those in the Conversion
Working Group and those on the Conflicts Committee. And the parties do not distinguish
between the role of the Director Defendants and the Officer Defendants in both perpetrating
the scheme and failing to stop the scheme once they became fiduciaries. For example, the
Amended Complaint alleges Buser actively carried out the scheme by withholding
information from the Conflicts Committee and directing the overissuance, while there are
no allegations as to the role many other Officer Defendants played. I take on only the
arguments Defendants raised.
312
Frederick Hsu Living Tr. v. ODN Hldg. Corp., 2017 WL 1437308, at *23 (Del. Ch.
Apr. 14, 2017) (“It is true that the fiduciary status of directors does not give them
Houdini-like powers to escape from valid contracts.”).
83
[T]he fact that a corporation is bound by its valid contractual
obligations does not mean that a board does not owe fiduciary duties
when considering how to handle those contractual obligations; it rather
means that the directors must evaluate the corporation’s alternatives in
a world where the contract is binding. Even with an iron-clad
contractual obligation, there remains room for fiduciary discretion
because of the doctrine of efficient breach.313
And so, directors must exercise their fiduciary duties in deciding how to proceed in

the face of an agreement, understanding they are no differently situated than any

other contractual counterparty.314 The existence of such a contract “does not

foreclose the fiduciary standard of conduct from governing.”315

I read Defendants’ argument as amounting to no more than a declaration that

the existence of a valid contract forecloses Plaintiff’s breach of fiduciary duty claim.

That is inconsistent with our law. And Defendants’ perception of the MRA’s

sanctity is in question: Plaintiff pled multiple breaches, including the failure to

313
Id. at *24.
314
Id. (“[A] party to a contract may decide that its most advantageous course is to breach
and pay damages. Just like any other decision maker, a board of directors may choose to
breach if the benefits (broadly conceived) exceed the costs (again broadly conceived).”);
see Hokanson v. Petty, 2008 WL 5169633, at *6 (Del. Ch. Dec. 10, 2008) (noting that the
argument that directors should have caused a company to breach a contract and invited a
valid breach claim would still leave the company in the same place as if the company had
performed was “unsustainable”).
Defendants’ argument depends on the premise that the Director Defendants and
Officer Defendants were bound to perform under the MRA and lacked the discretion to
deviate from its terms. But Plaintiff alleges that they already did so in executing the share
overissuance.
315
Frederick Hsu, 2017 WL 1437308, at *24.
84
transfer the Initial Transfer Units. From there, the parties did not seriously brief the

issue. Defendants’ narrow legal challenge fails to establish that Plaintiff cannot

recover under any set of facts. Defendants made no other argument that Plaintiff

failed to state a claim for breach of fiduciary duty.

4. Receipt Of The Deferred Payments And Overissued Shares

Plaintiff alleges Lee, Youngkin, Ferguson, Hance, Clare, Finn, and Buser

breached their fiduciary duties by “receiving the TRA Buyout payments and the”

overissued shares “in violation of clear and unambiguous provisions of the [MRA]

and 8 Del. C. [§§] 152–153.”316 Plaintiff pled that Carlyle Inc. overissued shares in

violation of the MRA, and that each of these defendants received those overissued

shares. Past decisions out of this Court have concluded that plaintiffs state a claim

for breach of fiduciary duty by alleging that a fiduciary received stock options,

grants, or other similar awards in violation of the applicable compensation plan or

agreement where the recipient knew or should have known that such awards violated

the applicable plan or agreement.317 I find those cases instructive and applicable

316
Am. Compl. ¶ 269.
317
Garfield, 277 A.3d at 334–35; Pfeiffer, 2013 WL 5988416, at *10; Weiss v. Swanson,
948 A.2d 433, 449 (Del. Ch. 2008); see also Ryan, 918 A.2d at 356 (“Plaintiff alleges that
three members of a board approved backdated options, and another board member accepted
them. These are sufficient allegations to raise a reason to doubt the disinterestedness of
the current board and to suggest that they are incapable of impartially considering
demand.”).
85
here. Plaintiff pled a claim for breach of fiduciary duty against these defendants for

receipt of the overissued shares.

As for receipt of the Deferred Payments, Defendants contest this claim only

by reciting the truism that a fiduciary is not required to “sacrifice benefits to which

they are legally entitled simply because the remaining stockholders, all of whom

were aware of the arrangement through public disclosures, might have preferred a

‘better deal.’”318 But Plaintiff is challenging the receipt of benefits that were the

product of multiple breaches of the LPA—breaches in which at least some of these

defendants participated in personally—and Plaintiff has pled that these same

defendants breached their fiduciary duties by failing to prevent those breaches of

contract. At this stage, it is reasonably inferable that the Deferred Payments were

the product of an impermissible scheme to enrich certain Defendants at the expense

of Carlyle Inc. and its stockholders. Defendants’ narrow challenge to this claim

fails.

Defendants’ arguments as to the rest of Count III are identical to their

arguments as to Count I. Thus, the outcome is the same.

318
D.I. 23 at 56–57 (citing In re Synthes, Inc. S’holder Litig., 50 A.3d 1022, 1041 (Del.
Ch. 2012)).
86
5. Breach Of Fiduciary Duty Against The Founders As A
Control Group
Count II asserts a claim for breach of fiduciary duty against the Founders as

controllers of Carlyle Inc. Plaintiff contends “the Founders acted together with the

shared goal of pushing through the Tax-Free Exchange and TRA Buyout on terms

they knew were not entirely fair to the public stockholders.”319 Defendants argue

Plaintiff failed to plead the existence of a control group.

There are “two scenarios in which a stockholder could be found a controller

under Delaware law: where the stockholder (1) owns more than 50% of the voting

power of a corporation or (2) owns less than 50% of the voting power of the

corporation but ‘exercises control over the business affairs of the corporation.’”320

“[O]ur law recognizes that multiple stockholders together can constitute a control

group exercising majority or effective control, with each member subject to the

fiduciary duties of a controller.”321 “The alleged members of a control group . . .

must be ‘connected in some legally significant way’—such as ‘by contract, common

319
Am. Compl. ¶ 263.
320
In re KKR Fin. Hldgs. LLC S’holder Litig., 101 A.3d 980, 991 (Del. Ch. 2014)
(emphasis omitted) (quoting Kahn v. Lynch Commc’ns Sys., Inc., 638 A.2d 1110, 1113–14
(Del.1994)), aff’d sub nom. Corwin v. KKR Fin. Hldgs. LLC, 125 A.3d 304 (Del. 2015).
321
Sheldon v. Pinto Tech. Ventures, L.P., 220 A.3d 245, 251 (Del. 2019).
87
ownership, agreement, or other arrangement—to work together toward a shared

goal.’”322

Defendants argue that the Founders do not constitute a control group because

the Founders were not connected in a “legally significant way” and because Carlyle

Management did not control Carlyle Inc. after the Conversion. Plaintiff did not

address these arguments in its answering brief. Defendants pointed out that Plaintiff

failed to respond in their reply brief.323 Plaintiff did not make any argument on this

point at the hearing. Plaintiff waived this argument by failing to make it in its

answering brief.324 Count II is dismissed.

D. Breach Of Carlyle Inc.’s Charter

Count VII asserts a claim for breach of Carlyle Inc.’s charter against Carlyle

Inc. Plaintiff argues that Carlyle Inc. breached its charter by violating Sections 152

and 153. “[T]he DGCL forms a part of every Delaware corporation’s charter.”325

322
In re Crimson Expl. Inc. S’holder Litig., 2014 WL 5449419, at *15 (Del. Ch.
Oct. 24, 2014) (quoting Dubroff v. Wren Hldgs., LLC, 2009 WL 1478697, at *3 (Del. Ch.
May 22, 2009)).
323
D.I. 34 at 17.
324
Raj & Sonal Abhyanker Fam. Tr. ex rel. UpCounsel, Inc. v. Blake, 2021 WL 2477025,
at *4 n.24 (Del. Ch. June 17, 2021) (“Because Plaintiff failed to respond to this argument
in its answering brief, any response is deemed waived.”).
325
In re Activision Blizzard, Inc. S’holder Litig., 124 A.3d 1025, 1049 (Del. Ch. 2015)
(citing 8 Del. C. § 394) (collecting cases); 8 Del. C. § 394 (“This chapter and all
amendments thereof shall be a part of the charter or certificate of incorporation of every
corporation except so far as the same are inapplicable and inappropriate to the objects of
the corporation.”).
88
“[A] corporate charter is both a contract between the State and the corporation, and

the corporation and its shareholders.”326 “The elements of a breach of charter claim

are the same as a breach of contract claim.”327 As explained above, I have concluded

Plaintiff adequately pled a violation of DGCL Section 152, and perhaps Section 153.

It follows that Plaintiff has pled a violation of Carlyle Inc.’s charter. The motion to

dismiss is denied as to Count VII.

III. CONCLUSION

The motion to dismiss is GRANTED as to Count II. The motion is

GRANTED IN PART as to Counts VI and VIII. The motion is DENIED as to

Counts I, III, IV, V, VII, and IX. The parties shall submit a stipulated proposed

order to that effect, as well as a scheduling order for the remainder of the case.

326
STAAR Surgical Co. v. Waggoner, 588 A.2d 1130, 1136 (Del. 1991) (citing Lawson v.
Household Fin. Corp., 152 A. 723, 727 (Del. 1930)).
327
Cedarview Opportunities Master Fund, L.P. v. Spanish Broad. Sys., Inc., 2018 WL
4057012, at *20 n.171 (Del. Ch. Aug. 27, 2018) (citing Alta Berkeley VI C.V. v. Omneon,
Inc., 41 A.3d 381, 385–86 (Del. 2012)).
89