Dieckman v. Regency GP LP, et al.

Limited partners of a publicly traded Delaware limited partnership (the “MLP”) claimed that the General Partner (the “GP”) of the MLP failed to satisfy the safe harbors provided in the MLP’s partnership agreement to cleanse a conflict before approving a merger with an affiliate. The MLP’s partnership agreement contained two safe harbor provisions: (1) approval by an independent Conflicts Committee, or (2) the approval a majority of limited partners unaffiliated with the GP. The MLP partnership agreement did not address how the GP was required to conduct itself when seeking limited partner approval. However, the partnership agreement eliminated fiduciary duties and the only requirement in the MLP partnership agreement relating to a merger was that the GP provide a copy of the merger agreement to the limited partners.

The Court of Chancery ruled that the second safe harbor in the MLP partnership agreement had been satisfied. Although plaintiffs argued that proxy statement distributed to them contained materially misleading disclosures, the Court of Chancery determined that “the express waiver of fiduciary duties and the clearly defined disclosure requirement . . . prevent[ed] the implied covenant [of good faith and fair dealing] from adding any additional disclosure obligations to the agreement.” As a result, the Court dismissed the plaintiffs’ claim.

On appeal, the Delaware Supreme Court reversed the Court of Chancery’s decision. The Court determined that the express terms of the safe harbor provisions “naturally and obviously” implied certain conditions including “a requirement that the [GP] not act to undermine the protections afforded unitholders in the safe harbor process.” The Court applied the rarely-used doctrine of good faith and fair dealing to hold that the GP was bound to use good faith when obtaining safe harbor approval.

BOTTOM LINE: The express elimination of fiduciary duties in a limited partnership agreement has no effect on the application of the implied covenant of good faith and fair dealing. If a safe harbor is included in a partnership agreement, the GP will be subject to an implied duty to obtain safe harbor approval in a good faith manor.