Del. Court: Partnership Agreement Validly Disclaimed Fiduciary Duties to Limited Partners

Fiduciary DutiesDelaware’s Court of Chancery dismissed breach of fiduciary duty claims by limited partners against the controlling partner of their limited partnership, where the partnership agreement expressly disclaimed any fiduciary duties owed to the limited partners. HITE Hedge LP v. El Paso Corp., No. 7117-VCG (Del. Ch. Oct. 9, 2012).

In this case, the limited partners (referred to in the opinion as “unitholders”) had invested in El Paso Pipeline Partners, L.P. (EPB), a publicly traded limited partnership (referred to as a “master limited partnership“). El Paso Corporation (El Paso) was the controlling unitholder of EPB. EPB’s business model was to acquire pipeline and related assets in “drop down” transactions from El Paso, and to generate revenues from operating those assets. In 2011, El Paso announced that it would merge with Kinder Morgan, another company engaged in similar drop down transactions with another master limited partnership. Under the agreement and plan of merger, El Paso would be absorbed into Kinder Morgan, leaving Kinder Morgan as the surviving entity. The effect of the merger was that the assets to be dropped down from the merged entity would be offered to another master limited partnership. As a result of the merger announcement, unit prices for EPB dropped by more than 15%.

The limited partners sued El Paso, alleging that it breached fiduciary duties to them by entering into a merger that injured the partnership. Specifically, they contended “that El Paso, as a controller of EPB, had a duty to represent, or at least account for, the interests of EPB’s minority unitholders in its merger negotiations with Kinder Morgan.” Moreover, according to the plaintiffs, “in agreeing to a merger that will likely result in reduced drop downs to EPB, El Paso … extracted value from EPB at the expense of the minority shareholders and for its own benefit.”

El Paso moved to dismiss the action, pointing out that the partnership agreement (1) contained an explicit waiver of any fiduciary duties owed by the controlling and general partners to the limited partners; and (2) allowed the controlling partner to engage in business activities “to the exclusion of the partnership.” In addition, the EPB prospectus declared that the controlling partner had no contractual duty to sell any assets to the partnership.

The court agreed with El Paso and dismissed the action. The court explained that the Delaware Revised Uniform Limited Partnership Act, 6 Del. C. § 17-1101(c), “permits the elimination of fiduciary duties by contract where the intent to do so is explicit.” The court found that the EPB partnership agreement was both explicit and unambiguous in eliminating fiduciary duties to limited partners. Moreover, controlling partner “cannot be liable for breaching fiduciary duties owed to minority holders unless it uses its control to direct the actions of the entity it controls against the interests of that minority.” In the present case, the limited partners were complaining about El Paso’s merger of itself into Kinder Morgan; they did not contend that El Paso used its control over EPB to direct EPB to act in a manner that injured the limited partners. For these reasons, and because El Paso was not obligated to continue to offer drop down transactions to EPB, the court found that El Paso did not breach any fiduciary duties to the limited partners.

 by Shawn N. Sullivan, Oct. 25, 2012.

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