In Brinckerhoff v. Enbridge Energy Company, Inc., et al., long-term investors of a publicly-traded Delaware limited partnership (the “MLP”) claimed that the General Partner (the “GP”) breached its contractual duty of good faith when the GP agreed to what investors considered an unfair transaction that was influenced by a conflict of interest by intentionally breaching specific requirements of the MLP’s partnership agreement (the “LPA”) by agreeing to a conflicted, unfair transaction (the “Transaction”). Notably, the LPA replaced traditional fiduciary duties with a contractual duty of good faith.
The Court of Chancery dismissed the plaintiffs’ claims for failing to plead a breach of the contractual duty of good faith. On appeal, the Delaware Supreme Court reversed the Court of Chancery’s decision and held that the LPA’s general good faith standard did not displace specific affirmative obligations of the LPA. To hold otherwise would arguably allow the GP to breach other obligations of the LPA as long as it did so in good faith.
In reaching its conclusion, the Court considered the following provisions of the LPA:
a contractual duty of good faith which eliminated traditional fiduciary duties. However, the provision failed to define the term “good faith.” (“Section 6.10”);
a provision to the effect that “[t]he [GP] may not, without written approval of the specific act by all of the Limited Partners . . . take any action in contravention of this Agreement . . . .” (“Section 6.3”);
a provision to the effect that “[n]either the [GP] nor any of its Affiliates shall sell, transfer or convey any property to, or purchase any property from, the Partnership, directly or indirectly, except pursuant to transactions that are fair and reasonable to the Partnership.” (“Section 6.6”); and
a provision that exculpated the GP for monetary damages for actions taken in good faith.
The Supreme Court disagreed with the Court of Chancery and its determination that the plaintiffs were required to show that the GP acted in bad faith under Section 6.10 before it could be determined that the GP breached the “fair and reasonable” standard of Section 6.6. Instead, the Court found that Section 6.6 was an affirmative obligation the GP was required to satisfy, while Section 6.10, “on the other hand, was a general standard of care that operates in the spaces of the LPA without express standards.” “Although [the] GP must act in good faith under the LPA, and is not subject to fiduciary standards of care, it still must comply with the specific requirements of the LPA.” Further, the Court found that, although Section 6.8 immunized the GP from monetary damages, it did not absolutely immunize the GP because equitable remedies were still available to plaintiffs.
Finally, the Court reversed prior precedent that held that pleading bad faith required a showing that the decision at issue was “so far beyond the bounds of reasonable judgment that it seems essentially inexplicable on any ground other than bad faith.” Instead, the Court determined that plaintiffs need only show that the GP did not reasonably believe its action to be in, or not inconsistent with, the best interests of the Partnership.
BOTTOM LINE: Obligations negotiated in a limited partnership agreement cannot be ignored even if a general partner acts in good faith. The same principal should also apply in the LLC context.