Delaware Supreme Court Issues New Standards Governing Master Limited Partnership Cases
Agreements for limited partnerships, in particular for publicly-traded master limited partnerships, are notoriously complicated and often hard to understand, so much so that two of the state’s judges co-wrote a detailed article calling for more standardization in this area. One consequence is that general partners in the MLP context may expose themselves to potential liability for decisions they thought protected by the partnership agreement’s terms, which often purport to eliminate common law fiduciary duties, replace them with a contractual duty to act in “good faith,” and provide safe harbors for conflict transactions. This is another case where that may happen.
This decision features several significant takeaways. First, the Court held that the partnership agreement’s good faith standard for the general partner did not displace specific affirmative obligations contained in other provisions of the agreement. Thus, a breach of an affirmative obligation—such as a transaction having to be fair and reasonable to the partnership—is still a breach, even if it was in good faith.
Second, the decision holds that even when the partnership agreement provides exculpation for damages claims, equitable remedies remain available. Thus, for example, if the MLP’s general partner carries out an unfair transaction with the partnership, a court may consider rescission or reformation even when monetary liability is contractually unavailable. This is a big protection for limited partners.
Third, the Court lowered the pleading standard for asserting a claim of bad faith in this context. The new pleading standard is that the allegations must support an inference that the general partner did not reasonably believe its decision to be in the partnership’s best interests. This is a lesser standard than the former test of whether the transaction essentially constituted “waste”— a test that required the deal be so bad that no rational person would have done it.Share