CHANCERY COURT REAFFIRMS THE ABILITY OF LIMITED PARTNERSHIPS TO CONTRACT AROUND FIDUCIARY DUTIES
By: Scott Waxman and Tony Brown
In Adrian Dieckman v. Regency GP LP, C.A. No. 11130-CB (Del. Ch. Mar. 29, 2016), the Court of Chancery held that a limited partnership agreement can extinguish the common law duty of disclosure that exists under Delaware law. Where a limited partnership agreement expressly eliminated fiduciary duties and replaced them with an alternative contractual governance scheme, the court declined to reinsert a duty of disclosure and determined that additional disclosure obligations are not compelled by the implied covenant of good faith and fair dealing.
The case arises out of the acquisition of Regency Energy Partners LP (“Regency”) by an affiliate, Energy Transfer Partners, L.P. (“ETP”), through a merger transaction. Regency is a limited partnership that was publicly traded until the date of the merger at issue in the case, and Regency is in the business of gathering, processing, compressing, treating and transporting natural gas. Prior to the merger, Regency GP LP was the general partner of Regency, and Regency GP LLC was the general partner of Regency GP LP (for simplicity, Regency GP LP and Regency GP LLC are referred to herein, collectively, as the “General Partner”). Regency, the General Partner and ETP are affiliated entities, as they are all under the common control of a top level parent company, Energy Transfer Equity, L.P.
Importantly, Regency’s limited partnership agreement (the “LP Agreement”) explicitly replaces the common law fiduciary duties under Delaware law with a contractual governance scheme. The LP Agreement retains the requirement of good faith, but also includes a series of safe harbor provisions, each of which, if satisfied, would provide a conclusive presumption of good faith and operate to shield a conflicted transaction from challenge. The two safe harbor provisions at issue in the case were: (1) approval by the majority of the common units owned by unaffiliated parties (the “Unitholder Approval Safe Harbor”) and (2) approval by a designated conflicts committee (the “Special Approval Safe Harbor”).
The merger was approved by the requisite number of unitholders and closed in April 2015. In June 2015, the plaintiff, a former unitholder of Regency, filed a complaint on behalf of a class of Regency common unitholders naming, among others, Regency, the General Partner and ETP as defendants. The defendants subsequently filed a motion to dismiss.
The plaintiff alleged that the General Partner breached the duty of good faith contained in Section 7.9(b) of the LP Agreement because it knew that the merger was not in the best interests of Regency’s unaffiliated unitholders and instead favored the interests of the General Partner’s affiliates. When the defendants argued in response that the merger was shielded from review under Section 7.9(b) because the General Partner’s actions satisfied the Unitholder Approval Safe Harbor, plaintiff further contended that the defendants could not invoke the Unitholder Approval Safe Harbor because the unitholders were not informed about the transaction to the extent required by common law principles of ratification and the common law duty of disclosure under Delaware corporate law (the principles of ratification and the duty of disclosure would have required the disclosure of all material information related to the merger, which goes far beyond the LP Agreement’s disclosure requirement that stated only a copy or summary of the merger agreement needed to be provided to each of the unitholders before they voted on the transaction).
Citing the Delaware Revised Uniform Limited Partnership Act’s express policy of freedom of contract, the court rejected the plaintiff’s argument and explained that unlike corporations, limited partnerships may expand or restrict the fiduciary duties owed to the partnership or partners, provided that, the implied covenant of good faith and fair dealing cannot be removed completely. The court held that because the LP Agreement expressly eliminated common law fiduciary duties and replaced them with an alternative contractual scheme to address the General Partner’s duty of good faith with respect to potentially conflicted transactions, the LP Agreement did not require additional disclosures to the unitholders. It was undisputed that the unitholders received the disclosures required by the terms of the LP Agreement, which required only that a copy or summary of the merger agreement be provided to each unitholder. Because that was what the parties contracted for, the court determined that it would be inappropriate to reinsert the duty of disclosure or any other common law requirements into the Unitholder Approval Safe Harbor. The court also held that the implied covenant of good faith and fair dealing did not require the addition of any other disclosure requirements or fiduciary duties to the LP Agreement. The court stated that implied covenants operate to fill gaps in contracts by implying terms that the parties would have agreed to if they had thought to address them, but because the contractual scheme of the LP Agreement clearly addressed fiduciary duties and disclosure requirements, the court determined that the implied covenant of good faith and fair dealing should not add additional disclosure obligations to the LP Agreement.
Because the court’s analysis of the Unitholder Safe Harbor was dispositive, it declined to address the parties’ contentions concerning the Special Approval Safe Harbor and reliance on a financial advisor. For the same reason, the court summarily rejected plaintiff’s additional claims based on a breach of the implied covenant of good faith and fair dealing, aiding and abetting breaches of contract, and tortuous interference with the LP Agreement. Accordingly, the court granted the defendants’ motion to dismiss.