Dieckman v. Regency GP LP, C.A. No. 11130 (Del. Ch. Mar. 29, 2016)

The Court of Chancery analyzed a limited partnership agreement that eliminated all fiduciary duties but included a contractual governance structure. The governance structure contained a number of safe harbors that, if satisfied, “cleansed” potentially conflicted transactions. A former unit holder of the limited partnership (the “LP”) claimed that the General Partner of the LP violated the “good faith” contractual standard set forth in the LP agreement by favoring the interests of its affiliates in a unit-for-unit merger (the “Merger”).

The LP Agreement mandated that “whenever the General Partner makes a determination or takes any action, it must do so in good faith.”  One of the safe harbors available cleansed a potentially conflicted transaction if it was “approved by the vote of a majority of the [unaffiliated] Common Units . . . .”

Although a majority of unaffiliated common units approved the Merger, the former unitholder argued the safe harbor did not apply because the unitholders were not fully informed about the transaction. The Court disagreed and determined it would be “inappropriate to reinsert the duty of disclosure or any other common law disclosure requirements into the unitholder approval safe harbor” based on the following language of the LP Agreement:

Except as expressly set forth in this Agreement, neither the General Partner nor any other Indemnitee shall have any duties or liabilities, including fiduciary duties, to the Partnership or any Limited Partner and the provisions of this Agreement, to the extent that they restrict, eliminate or otherwise modify the duties and liabilities, including fiduciary duties, of the General Partner or any other Indemnitee otherwise existing at law or in equity, are agreed by the Partners to replace such other duties and liabilities of the General Partner or such other Indemnitee.

BOTTOM LINE: A properly drafted LP Agreement can foreclose all claims of breach of fiduciary duty, including the duty of disclosure.