Dieckman v. Regency GP LP, et al., C.A. No. 11130-CB (Del. Ch. Mar. 29, 2016) (Bouchard, C.)
In this opinion, the Delaware Court of Chancery reaffirmed that default fiduciary duties, including a duty of disclosure, may be modified or wholly eliminated when such modification or elimination is clearly set forth in a limited partnership agreement. The Amended and Restated Agreement of Limited Partnership (the “LP Agreement”) of Regency Energy Partners LP, a Delaware limited partnership (“Regency”), clearly and unambiguously eliminated fiduciary duties, which had the effect of also extinguishing the common law duty of disclosure under Delaware law. As a result, the Court of Chancery found that the only disclosures required to be made to unitholders of Regency in connection with their vote on a proposed merger of Regency with and into an affiliated entity were those limited disclosures expressly required under the LP Agreement.
Regency was a publicly traded Delaware limited partnership and Adrian Dieckman (“Plaintiff”) was a common unitholder of Regency. Regency was acquired by Energy Transfer Partners L.P. (“ETP”) pursuant to a merger (the “Merger”). Energy Transfer Equity, L.P. indirectly owned and controlled both ETP and Regency at the time of the Merger. Plaintiff brought suit challenging the Merger and claimed that Regency’s general partner, Regency GP LP, which was owned by Regency GP LLC (collectively, the “General Partner”) favored the interests of its affiliates to the detriment of Regency’s unaffiliated unitholders by agreeing to an unfair merger price and thus breached the contractual requirement of the LP Agreement that the General Partner act in good faith. Defendants responded with a motion to dismiss.
In evaluating the defendant’s motion to dismiss, the Court of Chancery first noted that limited partnerships have expansive freedom of contract and as such may expand, restrict or eliminate fiduciary duties, and that the court must first look to the partnership agreement to determine the extent of such duties. The LP Agreement provided that whenever the General Partner makes a determination or takes an action in its capacity as general partner of Regency, it must do so in good faith. Good faith was defined in the LP Agreement to mean that the persons making such determination or taking such action must believe that the determination or other action is in the best interests of Regency. However, the LP Agreement provided that an action by the General Partner would not constitute a breach of the LP Agreement or of any duty stated or implied by law or equity so long as it was taken pursuant to one of four safe harbor provisions specifically set forth in the LP Agreement. The two relevant safe harbor provisions in this case were receipt of “Special Approval” and approval by a vote of the holders of a majority of the common units not affiliated with the General Partner or its affiliates (the “Unitholder Approval”). “Special Approval” was defined to mean approval by a majority of the members of the Conflicts Committee. The Conflicts Committee was a committee of the board to be made up of directors of Regency GP LLC who were deemed independent under standards set forth in the LP Agreement. Thus the
Merger would be shielded from challenge and liability if it was approved in one of the two foregoing methods and the Court would not need to evaluate whether the General Partner breached its duty of good faith.
The Court first examined the Unitholder Approval safe harbor. Plaintiff contended that the Unitholder Approval was not valid because the unitholders of Regency were not fully informed about the transaction, including about certain conflicts of interest. After noting that the duty of disclosure is a fiduciary duty that derives from the duties of care and loyalty, the Court found that the LP Agreement eliminated all fiduciary duties, including the duty of disclosure. As a result, the only disclosures that were required were those expressly set forth in the LP Agreement. The only disclosure required by the LP Agreement was that a copy or a summary of the merger agreement be included with the notice of a special meeting or written consent.
The Court also noted that the implied contractual covenant of good faith and fair dealing (the “Implied Covenant”), which cannot be eliminated or modified in a partnership agreement, did not create any additional disclosure obligations. The Implied Covenant fills gaps in contracts by implying terms that the parties would have agreed to during their original negotiations if they had thought to address them. The Court found that an express waiver of fiduciary duties and the clearly defined disclosure requirement set forth in the LP Agreement prevented the Implied Covenant from adding any additional disclosures. Because the required disclosures under the LP Agreement were provided and Unitholder Approval obtained, the motion to dismiss was granted for the claim of a breach of the LP Agreement. The Court went on to dismiss other related claims, including challenges to the Special Approval process, since one of the four safe harbor approvals had been validly obtained and no breach of the LP Agreement occurred.
This case reminds commercial parties who choose to invest in alternative entity structures, that the great contractual flexibility afforded to them to privately order their affairs can come at a cost and that investors must carefully review those agreements and understand the limitations on their rights, including limitations on fiduciary duties and rights of disclosure.