Document: Gerber v. EPE Holdings, LLC, C.A. No. 3543-VCN (Del. Ch. Jan. 18, 2013)
The Delaware Court of Chancery held that a limited partnership agreement effectively supplanted a general partner’s common law fiduciary duties with contractually defined standards by providing that the general partner had no duties or obligations, including fiduciary duties, to the limited partnership or its limited partners, except as provided in the limited partnership agreement.
In this action, plaintiff, a limited partner of Enterprise GP Holdings, L.P. (“EPE”), alleged that EPE’s general partner, EPE Holdings, LLC (“Holdings”), breached an obligation owed to the limited partners to act in good faith in connection with EPE’s purchase of Texas Eastern Products Partners, LLC (“Teppco”) from an affiliate of Holdings. Holdings’ conflicts committee approved the acquisition of Teppco pursuant to Section 7.9(a) of EPE’s limited partnership agreement, which provided that Holdings breached no contractual or fiduciary obligation to EPE’s limited partners by entering into so-called “conflict transactions” if the transactions were approved by the conflicts committee. In this action, plaintiffs contended that the conflicts committee’s approval of the acquisition of Teppco by EPE was ineffective to immunize the transaction under Section 7.9(a) because the conflicts committee acted in bad faith. Section 7.9(a) did not expressly require the conflicts committee to act in good faith. However, the plaintiff claimed that the good faith obligation arose under (1) the implied covenant of good faith and fair dealing, and (2) a separate provision in the limited partnership agreement that required Holdings and its affiliates to act in good faith when making determinations impacting EPE. Moreover, the plaintiff maintained that the test whether the conflicts committee acted in good faith was a question of objective reasonableness.
The Court rejected plaintiff’s claims and dismissed the complaint. According to the Court, the implied covenant of good faith and fair dealing precludes a party from using its discretion under a contract in a manner that utterly frustrates the other party’s reasonable expectations at the time of contracting, but does not require a party to act in a manner that is objectively reasonable. The Court also found that a provision requiring Holdings and its affiliates to act in “good faith” when making determinations impacting EPE did not impose an obligation to act reasonably from an objective point of view. According to the Court, at most, the contractual obligation to act in good faith required the conflicts committee to act with the subjective belief that the acquisition of Teppco was in the best interests of EPE. Because plaintiff had not pled any facts indicating that the members of the conflicts committee subjectively believed that the acquisition of Teppco was contrary to EPE’s best interests, the Court rejected plaintiff’s claim for breach of the agreement.