In the latest in a series of decisions addressing conflict of interest transactions involving Delaware limited partnerships, the Delaware Supreme Court confirmed in Dieckman v. Regency GP LP, C.A. No. 11130 (Del. Jan. 20, 2017), that although Delaware courts will enforce clear, express and unambiguous language modifying or eliminating default fiduciary duties, a conflict of interest transaction may still run afoul of implied contractual standards.
In Dieckman, the transaction at issue involved a merger of Regency Energy Partners LP, a publicly traded Delaware limited partnership (the "MLP"), with an affiliated entity. To reconcile this inherent conflict of interest, the general partner of the MLP attempted to satisfy two safe harbor mechanisms enumerated in the partnership agreement, either of which could be used to insulate the transaction from legal challenge—"Special Approval" by an independent Conflicts Committee and "Unaffiliated Unitholder Approval." The plaintiff, a common unitholder of the MLP, alleged that (1) the general partner failed to satisfy the Special Approval safe harbor because there was a conflicted member on the Conflicts Committee, and (2) the general partner failed to satisfy the Unaffiliated Unitholder Approval safe harbor because the general partner made false and misleading statements in a proxy statement to secure such approval. The Court of Chancery, while not reaching the defendants' Special Approval defense, found that the Unaffiliated Unitholder Approval safe harbor had been satisfied because (i) the partnership agreement had eliminated all fiduciary duties, including the duty of disclosure, and (ii) the disclosures expressly required by the partnership agreement had been made. The Court of Chancery therefore granted the defendants' motion to dismiss.
On appeal, the Delaware Supreme Court noted that even when a partnership agreement waives fiduciary duties, investors of publicly traded partnerships still have protections afforded to them through principles of contra proferentem (ambiguities are construed against the drafter to give effect to the reasonable expectations of the investors) and the implied covenant of good faith and fair dealing. The Supreme Court focused on the safe harbor process in its entirety and found that the language in the partnership agreement's conflict resolution provision implicitly required the general partner to act in a manner that would not undermine the protections afforded to the unitholders in connection with the safe harbor process.
In analyzing the Unaffiliated Unitholder Approval defense, the Supreme Court noted that the general partner had issued a comprehensive proxy statement, which went far beyond the minimal disclosures required by the express terms of the partnership agreement, to induce the unitholders to approve the merger transaction. The Supreme Court held that once the general partner determined to go beyond the minimal disclosure requirements under the partnership agreement, then—pursuant to the implied covenant of good faith and fair dealing—the general partner had an obligation not to mislead investors. The Supreme Court found that the plaintiff pled facts raising sufficient doubt concerning whether the proxy statement misled investors by creating the false appearance that the Conflicts Committee, which had approved the transaction, was composed solely of unaffiliated and independent persons.
In analyzing the Special Approval defense, the Supreme Court found the general partner had an obligation to form a conflicts committee as set forth in the partnership agreement, which required committee members to be independent from and unaffiliated with the general partner. The plaintiff alleged the general partner created a two-member committee that included an individual who began reviewing the merger transaction while still a member of an affiliate board, which is not consistent with the independent status of the Conflicts Committee members as required by the partnership agreement. The Supreme Court concluded that the plaintiff had raised sufficient doubt as to whether the Conflicts Committee was properly constituted, which would call into question whether the general partner could utilize the safe harbor provisions under the partnership agreement to preclude judicial review of the merger transaction.
The Dieckman decision is a reminder that although contractual flexibility afforded to Delaware limited partnerships can be used to provide general partners with significant protections, general partners must still comply with implied contractual responsibilities in the partnership agreement.