Employees Retirement System of the City of St. Louis v. TC Pipelines GP, Inc., et al C.A. No. 11603-VCG (Del. Ch. May 11, 2016)

A limited partner (the “LP”) in a Delaware limited partnership (the “Company”) filed suit against the general partner (the “GP”) of the Company for breach of the Company’s Limited Partnership Agreement (the “LP Agreement”). The LP claimed that the GP failed to ensure that a conflicted transaction between the Company and the GP’s parent company was “fair and reasonable” as was required by the LP Agreement.

The Court of Chancery rejected the LP’s claim. The Court reasoned that the conflicted transaction was cleansed by the approval of a special committee under the terms of the LP Agreement, which stated:

“Any conflict of interest and any resolution of such conflict of interest shall be conclusively deemed fair and reasonable to the Partnership if such conflict of interest or resolution is (i) approved by Special Approval (as long as the material facts known to the General Partner or any of its Affiliates regarding any proposed transaction were disclosed to the Conflicts Committee at the time it gave its approval) . . . .”

BOTTOM LINE: In the alternative entity context, you must only agree to terms by which you are willing to be bound and you should always consult counsel as to the advisability and fairness of all terms. Delaware courts will enforce the terms of an alternative entity’s constitutional documents whether or not they are objectively fair.