Court of Chancery Articulates Alternative Entity Governance Standards

In a recent Chancery Court case, Diekman v. Regency GP LP, et al. (C.A. No. 11130-CB), Chancellor Bouchard considered whether the general partner of a limited partnership breached the limited partnership agreement in connection with the approval of a merger with an affiliated entity.  The plaintiff, a former unitholder of Regency Energy Partners LP ("Regency"), contended that the general partner of Regency favored the interests of affiliated entities to the detriment of Regency's unaffiliated unitholders when it approved the acquisition of Regency by an affiliated entity.  Regency's limited partnership agreement eliminated all fiduciary duties and replaced them with a contractual governance scheme, which included certain safe harbors to address conflicted transactions.  Once such safe harbor was approval of a conflicted transaction by a majority of unaffiliated common units ("Unitholder Approval").  It was undisputed that a majority of unaffiliated common units approved the merger, but plaintiff contended that such approval was ineffective because the disclosures to the unitholders related to the merger were insufficient.   

Based on its analysis of the limited partnership agreement, the Court concluded that the merger fit squarely within Unitholder Approval safe harbor and therefore, plaintiff's claim that the general partner breached the limited partnership agreement failed.  While this case does not break new ground, it is a concise summary of the law related to contractually defined governance duties in the alternative entity context.  The key points of law from this case are:

  • "When a limited partnership eliminates fiduciary duties, Delaware courts will refrain from providing judicial review that typically is available to protect corporate stockholders."
  • "In the limited partnership context, 'absent contractual modification, a general partner owes fiduciary duties that include a duty of full disclosure,'" but, unlike in the corporate context, "a limited partnership may eliminate all fiduciary duties, including the duty of disclosure."
  • Given the elimination of fiduciary duties in the limited partnership agreement, "it would be inappropriate to reinsert the duty of disclosure or any other common law disclosure requirements into the Unitholder safe harbor."
  • "The implied covenant of good faith and fair dealing does not create any additional disclosure obligations."
  • "The implied covenant fills gaps in contracts by implying terms … But if no gap exists, the implied covenant has no work to do."
  • "I recognize it may seem harsh to shield a conflicted transaction from judicial review under Delaware law based on a vote of unitholders without requiring the disclosure of all material information … however, it always must be kept in mind that the express policy of this State is to give maximum effect to the principle of freedom of contract."