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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Showing 11 posts in Limited Partnerships.
Court of Chancery Addresses Contractual Fiduciary Duties, Secondary Liability, and Banker Liability in the MLP Context
This is the latest decision in a long-running saga in the master limited partnership (MLP) context involving Enbridge Energy. The Court of Chancery had previously dismissed the complaint for failure to state a claim. The Delaware Supreme Court reversed that dismissal while providing important guidance on properly construing contractual fiduciary duties in the MLP context. The defendants moved to dismiss the amended complaint on remand. This is the Court of Chancery’s decision granting in part and denying in part that motion. More ›
Court Of Chancery Stresses Proper Procedure When Relying On A Contractual Safe Harbor In The MLP Context
Conflicted transactions are commonplace in the master limited partnership (MLP) context. The entity’s operating agreement usually authorizes conflicted transactions that are “fair and reasonable” to the entity, or some similar phrase. The same agreements often provide one or more safe harbors capable of creating a presumption of fairness and reasonableness, such as using a conflicts committee process. This decision teaches, among other things, that if managers want to take advantage of such a safe harbor, proper process matters. If, for example, a conflicts committee is not properly formed, its approval will not insulate the transaction from judicial review nor avoid potential liability for the conflicted managers. Technicalities matter and it is best to start all over again if a flaw is identified rather than trying to rewrite history.
This Order is helpful in setting out how to plead that a board decision subject to a “good faith” test in an LP agreement did not meet that standard.
Master limited partnership agreements typically provide protection for the general partner who engages in a self-dealing transaction with the MLP. This decision reviews the existing precedent on how to apply those provisions, especially when a conclusive presumption of good faith is available to the GP. It also explains what language should be used to invoke at least the subjective standard of good faith that is most helpful to a GP using a conflicts committee. Hence, the decision is required reading for drafters of MLP agreements.
It matters whether a claim may be characterized as a direct claim belonging to the owners of an entity or as a derivative claim that may only be brought in the name of the entity. This decision explains which is which in the context of a limited partnership.
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. More ›
The case involves the issuance of certain convertible units offered to some, but not all, the limited partnership unitholders, and whether that offering and subsequent issuance violated provisions of the partnership agreement concerning distributions. While the Court of Chancery was unable to resolve the parties’ competing theories on summary judgment, the decision offers insight into how the Court will examine contractual distribution related claims in the alternative entity context.
Agreements for publicly-traded limited partnerships often disclaim any fiduciary duties and provide safe harbors for transactions involving a conflict for the controller. The safe harbor provisions frequently contain minimal disclosure requirements for any minority unitholder approval. All that is fine under Delaware law. However, when the controller asks the minority unitholders to approve a transaction under the safe harbor provision and does so in a fulsome proxy statement containing more than the minimal required disclosures, the controller must act fairly. As the Court finds here, the safe harbor provisions of the agreement necessarily imply an obligation to be honest with the investors. That is a classic example of when the covenant of good faith and fair dealing applies.
This is an interesting decision for at least two reasons. First, in it the new Vice Chancellor demonstrates that he is both well-versed in Delaware business entity law and fully capable of carrying out the Court of Chancery’s tradition of well-written, comprehensive decisions. Second, the decision explains what is required to adequately allege the bad faith sufficient to overcome an LLP’s exculpatory provisions for a conflicted transaction. In general, the use of a special negotiation committee, receipt of an adequate fairness opinion and use of independent counsel are sufficient to overcome mere allegations that a transaction was approved in bad faith. There is no need to also submit the transaction to a majority vote of the entity’s owners, at least when the entity is a limited partnership and when the LLP agreement does not require such a vote.
This is an interesting decision for 2 reasons. First, the Court explains what might have seemed obvious to most, that the LP agreement governs the rights of the limited partners to partnership distributions. Generally, each limited partner is to receive what each other similar limited partner receives and no side deal can alter what the LP agreement says in that respect. Second, the GP has only the rights to do what the partnership agreement says he can do. Thus, the GP cannot give some limited partners special privileges absent explicit authority to do so in the agreement.
This is a great explanation of the scope of the waiver of a general partner or other fiduciary’s duties under the terms of an LP agreement. More ›