Monday, March 14, 2016

By Nixing Fiduciary Duties, LP Agreement Tied Investors' Hands

By Anne Sherry, J.D.

Affirming a decision striking down breach-of-duty claims by unitholders in a limited partnership, the Delaware Supreme Court cautioned investors to read limited partnership agreements and understand limitations on their rights. The plaintiffs were bound by a provision of the agreement that substituted a general contractual duty for common law fiduciary duties. Because the general partner obeyed its contractual duties in connection with a corporate reorganization, the breach-of-duty claims were properly dismissed (The Haynes Family Trust v. Kinder Morgan G.P., Inc., March 10, 2016, Strine, L.).

Holders of limited partnership interests alleged that a going-private transaction was unfair. Their lawsuit rested on breach-of-duty theories, but the chancery court observed that the limited partnership agreement eliminated common law fiduciary duties in favor of a general contractual duty to act in the best interests of the partnership. This provision was enforceable under Delaware law and defeated the claims by the limited partnership investors.

The Delaware Supreme Court affirmed on the basis of the chancery court's decision. The court's short opinion reminds investors that "with the benefits of investing in alternative entities often comes the limitation of looking to the contract as the exclusive source of protective rights."

The case is No. 515, 2015.

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