Delaware courts have consistently held, in the context of Delaware limited partnerships, that clear, express and unambiguous language modifying default fiduciary duties will be enforced. As demonstrated by the post-trial decision in In re El Paso Pipeline Partners, L.P. Derivative Litigation, C.A. No. 7141-VCL (Del. Ch. Apr. 20, 2015), however, even where default fiduciary duties have been modified or eliminated, a conflict of interest transaction may still run afoul of the contractual standards set forth in the partnership agreement.
In El Paso, the transaction at issue was the second of two so-called dropdown transactions by which El Paso Pipeline Partners, L.P. (“El Paso MLP”) acquired all of the business involving the liquefied natural gas terminal on Elba Island, Georgia, from El Paso Corporation (“Parent”). Parent owned the general partner of El Paso MLP, and thus controlled El Paso MLP. El Paso MLP’s partnership agreement eliminated default fiduciary duties and replaced them with a contractual standard requiring that the persons approving an action on behalf of El Paso MLP subjectively believe that the action is in the best interests of El Paso MLP. Here, the conflicts committee responsible for approving the dropdown transaction was composed solely of independent directors, had engaged its own legal and financial advisors, had received from its financial advisor an opinion that the challenged transaction was fair from a financial point of view to the unaffiliated unitholders of El Paso MLP, and ultimately approved the transaction.
The Court ruled that under El Paso MLP’s partnership agreement each conflicts committee member had an affirmative duty to conclude that the challenged transaction was “in the best interests of [El Paso MLP].” The Court found several flaws with the conflicts committee’s process and the valuation analysis. More significantly, the Court found that, despite trial testimony to the contrary, the conflicts committee members did not actually conclude that the challenged transaction was in the best interests of El Paso MLP. The Court found that the conflicts committee had focused extensively on the expected accretion from the challenged transaction—i.e., the amount by which the cash distributions for common unitholders of El Paso MLP would be expected to increase—but failed to take sufficiently into account the valuation of the assets being acquired under traditional valuation analyses. As a result of these findings, the Court awarded damages of $171 million, which the Court determined to be the difference between what El Paso MLP actually paid for the assets acquired in the challenged transaction and the fair value of the assets. Notably, only the general partner entity was held liable for the award, as none of the other defendants was a party to the partnership agreement and the plaintiff did not present a meaningful theory of secondary liability.
The El Paso decision is a reminder that, although contractual flexibility afforded to Delaware limited partnerships can be used to provide general partners with significant protections, there is still room for courts to scrutinize compliance with contractual standards.