In this opinion, the Court of Chancery granted defendants’ motion to dismiss a complaint alleging generally that the former public holders of limited partnership units of a publically traded Delaware master limited partnership, Enterprise GP Holdings, L.P. (“EPE”), did not receive fair value in connection with a series of conflicted, related-party transactions. Those transactions included (1) the sale of Texas Eastern Products Pipeline Company, LLC by EPE to Enterprise Products Partners, L.P. (“Enterprise Products”), the general partner of which was wholly-owned by EPE (the “Sale”), and (2) the later merger of EPE into a wholly-owned subsidiary of Enterprise Products (the “Merger”).
The defendants in this case included Enterprise Products; EPE’s general partner; certain members of the board of directors of EPE’s general partner; the estate of the person that controlled EPE, Enterprise Products and its general partner; and an affiliate of Enterprise Products. The specific claims alleged included, among other things, that all of the defendants breached duties to plaintiff by causing the Sale and the Merger, that certain defendants tortiously interfered with the limited partnership agreement governing EPE (the “Limited Partnership Agreement”) by causing the Sale and Merger and were unjustly enriched in connection with the Sale and Merger, and that certain defendants aided and abetted the alleged breaches of duties. The plaintiff also alleged that defendants breached the implied contractual covenant of good faith and fair dealing.
In asking the Court to dismiss the breach of duty, implied contractual covenant and tortious interference claims related to the Sale, defendants argued that such claims were derivative and plaintiff failed to comply with Chancery Rule 23.1, which governs the procedural aspects of derivative actions. Under Chancery Rule 23.1, a plaintiff may only maintain a derivative claim on behalf of a company if that plaintiff retains an ownership interest in such company from the time of the event giving rise to the claim through the resulting litigation, and makes a demand on the company’s board of directors prior to bringing suit. The plaintiff, a former unit holder and limited partner, did not satisfy those requirements, as EPE no longer existed as a result of the Merger.
While the Court agreed that breach of duty, implied covenant and tortious interference claims generally would be derivative because the alleged harm would have been to EPE as a whole and any remedy would flow to EPE, the Court found that in this instance certain exemptions applied. First, the Court stated that since a principal purpose of the Merger was inequitably to terminate claims of EPE limited partners related to the Sale, such claims could be brought as direct claims, regardless of whether they were asserted prior to the Merger. Second, the Court stated that claims related to inadequate Merger consideration were permitted to be brought as direct claims following the Merger. Even though the Court ultimately dismissed the complaint against defendants in its entirety, as a result of the foregoing it held that plaintiff had standing to bring such claims directly on behalf of the public unit holders of limited partnership units of EPE who continuously held their units from the date of the Sale through the effective date of the Merger.
Defendants countered plaintiff’s claims stemming from the conflicted nature of the Sale and Merger by pointing to certain provisions of the Limited Partnership Agreement regarding potential conflicts of interest fairly typical in limited partnership agreements of publically held master limited partnerships. Under such provisions, when a decision that involves a potential conflict of interest exists or arises between the general partner or any of its affiliates, on the one hand, and the master limited partnership or any partner, on the other hand, it is not a breach of the limited partnership agreement or any duty stated or implied by law or equity, if the resolution or course of action in respect of such conflict of interest is approved by “special approval.” The Limited Partnership Agreement defined “special approval” as approval by a majority of the members of EPE’s Audit and Conflicts Committee (the “Special Committee”). The Limited Partnership Agreement also mandated the composition of the Special Committee by three or more directors who meet the independence, qualification and experience requirements established by the Securities Exchange Act and the rules and regulations promulgated thereunder and by NYSE rules. The Court considered, and rejected, a claim by plaintiff that the Special Committee that approved the Sale and the Merger was not sufficiently independent.
The Delaware Revised Uniform Limited Partnership Act (“DRULPA”) gives parties to a limited partnership agreement the ability to restrict or eliminate the default fiduciary duties and the liability for the breach thereof that persons exercising control over a limited partnership like EPE (e.g. its general partner and the directors of the general partner) would otherwise owe to limited partners. This right is limited only by a prohibition on the elimination of the implied contractual covenant of good faith and fair dealing. The Court acknowledges that the relevant provision of the Limited Partnership Agreement effectively contractually modified the default fiduciary duties. Notably, the Court applies the implied contractual covenant to EPE’s general partner’s decision to use the special approval process. Quoting from another Chancery Court opinion, the Court notes that “when a contract confers discretion on one party, the implied covenant requires that the discretion be used reasonably and in good faith.” The Court reasons that because EPE’s general partner had discretion as to whether to employ the special approval process to benefit from the Limited Partnership Agreement’s contractual limitations of duties, the general partner “had a duty, under the implied covenant, to act in good faith” in doing so.
However, the Court also acknowledges that the Limited Partnership Agreement allows for the creation of a presumption that defendants acted in good faith by providing that if the general partner consults with, among other types of experts, investment bankers, regarding matters it reasonably believes to be in such bankers’ expert competence, any act taken by the general partner in reliance on such experts’ opinions is “conclusively presumed” to have been done in good faith. The investment bank of Morgan Stanly provided such opinions in connection with the Sale and the Merger and the Court deemed such opinions sufficient. Based on the facts presented to it, the Court inferred that the general partner, through the Special Committee, relied on such opinions in making its decision to enter into the Sale and the Merger. As such, even though the Court observes that “the facts of this case take the reader and the writer to the outer reaches of conduct allowable” under the provisions of DRULPA permitting contractual modification of duties, the process followed by defendants met the requirements of the Limited Partnership Agreement and could therefore not give rise to the claims alleged. The Court also recognizes that under Delaware law the implied contractual covenant is a limited and extraordinary remedy. It is meant to fill gaps in contracts and should not be used to infer contradictory language into an otherwise unambiguous provision of an agreement like the Limited Partnership Agreement. The Court could not hold that defendants breached the implied contractual covenant when the Limited Partnership Agreement to which the plaintiff was a party expressly authorized the conduct at issue. In a footnote, the Court concedes that if a contract like the Limited Partnership Agreement has no gaps to be filled with respect to the conduct at issue, then the implied covenant is not applicable to that contract and even an arbitrary or unreasonable exercise of the contractual discretion provided would not breach the implied contractual covenant because the implied contractual covenant does not apply when no gap exists.
Ultimately, the Court refused judicially to imply default fiduciary duties or contractual duties against the defendants because the parties to the Partnership Agreement expressly covered the conduct at issue in this case. Plaintiff’s claims were plainly inconsistent with the text of the Limited Partnership Agreement and the acts of defendants taken in accordance with that text.
The full opinion is available here.