In Dieckman v. Regency GP LP,[1] the court noted that limited partnerships are governed by their partnership agreements and by Delaware’s limited partnership law. As the court emphasized, the explicit policy of the law is “to give maximum effect to the principle of freedom of contract and to the enforceability of partnership agreements.” In other words, in Delaware, as in many other states, courts would generally respect what the partners agree to in a limited partnership agreement, including expansion or restriction of fiduciary duties under the partnership agreement. And in doing so, a limited partnership may eliminate all fiduciary duties, including the duty of disclosure. The only duty that may not be extinguished under the partnership agreement in Delaware, the court said, is the implied covenant of good faith and fair dealing—the general presumption that the parties to a contract will deal with each other honestly, fairly, and in good faith.
Here, the court found that the LP agreement did precisely that—eliminated all fiduciary duties. As a result, the court said, the LP agreement extinguished the duty of disclosure and replaced it with the obligations explicitly stated in the LP agreement, which was that a copy or summary of the merger agreement be provided to the unitholders. For this reason, the court found that the express waiver of fiduciary duties and the clearly defined disclosure requirement set forth in the LP agreement prevented the implied covenant from adding any additional disclosure obligations to the agreement. In other words, because there was no gap in the LP agreement, the implied covenant had no work to do. Similarly, the court found no gap for the conflicts committee approval because the LP agreement set forth clear standards defining the requirements for membership on the committee, including the requirement that a member may not serve simultaneously on the board of an affiliate while serving on the conflicts committee. And because safe harbors applied, the court said that the merger was immune to challenge for a contractual breach. Although the court recognized that it might seem harsh to shield a conflicted transaction without requiring the disclosure of all material information, the court said that the law gives maximum effect to the principle of freedom of contract to give commercial parties the advantage of great flexibility to privately order their affairs.
So what are investors in a limited partnership or similar business entity to do to protect themselves in a situation like this? As the court, citing the Delaware Supreme Court, emphasized, investors must be careful to read those agreements and to understand the limitations on their rights, including provisions relating to conflicted or affiliated transactions, disclosure requirements, safe harbors, and fiduciary duties. And because these provisions operate differently for different parties, and under different state laws, it would be advisable to work with an experienced business attorney who can advocate for your rights.
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[1] Dieckman v. Regency GP LP, C.A. No. 11130-CB (Del. Ct. Chan. Mar. 29, 2016). Unless otherwise specified, all references to the case are from this citation.