Law School Case Brief
Dieckman v. Regency GP LP - 155 A.3d 358 (Del. 2017)
Even though the express terms of a limited partnership agreement govern the relationship when fiduciary duties are waived, investors are not without some protections. For instance, in the case of an ambiguous partnership agreement of a publicly traded limited partnership, ambiguities are resolved as with publicly traded corporations, to give effect to the reading that best fulfills the reasonable expectations an investor would have had from the face of the agreement. The reason for this is simple. When investors buy equity in a public entity, they necessarily rely on the text of the public documents and public disclosures about that entity, and not on parol evidence. And, of course, another protection exists. The Delaware Revised Uniform Limited Partnership Act provides for the implied covenant of good faith and fair dealing, which cannot be eliminated by contract.
Plaintiff Adrian Dieckman is a limited partner in the publicly-traded master limited partnership (MLP). Regency GP LP, the general partner, proposed that the partnership be acquired through merger with another limited partnership in the MLP family. Because conflicts of interest often arise in MLP transactions, those who create and market MLPs have devised special ways to try to address them. The general partner in this case sought refuge in two of the safe harbor conflict resolution provisions of the partnership agreement. Under the partnership agreement, if either safe harbor is satisfied, the transaction is deemed not to be a breach of the agreement. The partnership agreement required that the Conflicts Committee be independent, meaning that its members could not be serving on affiliate boards and were independent under the audit committee independence rules of the New York Stock Exchange. The plaintiff alleged in the complaint that the general partner failed to satisfy the Special Approval safe harbor because the Conflicts Committee was itself conflicted.
Did the complaint's allegations overcome the general partner's use of conflict resolution safe harbors to dismiss the case?
The partnership agreement's conflict resolution provision is a powerful tool in the general partner's hands because it can be used to shield a conflicted transaction from judicial review. But the conflicts resolution provision also operates for the unitholders' benefit. It ensures that, before a safe harbor is reached by the general partner, unaffiliated unitholders have a vote, or the conflicted transaction is reviewed and recommended by an independent Conflicts Committee. The implied covenant is well-suited to imply contractual terms that are so obvious—like a requirement that the general partner not engage in misleading or deceptive conduct to obtain safe harbor approvals—that the drafter would not have needed to include the conditions as express terms in the agreement. The plaintiff has pled sufficient facts, which the court must accept as true at this stage of the proceedings, that neither safe harbor was available to the general partner because it allegedly made false and misleading statements to secure Unaffiliated Unitholder Approval, and allegedly used a conflicted Conflicts Committee to obtain Special Approval. Concluding that the lower court had erred in finding that the implied covenant of good faith and fair dealing was inapplicable, the appellate court reversed the order dismissing counts I and II and remanded for further proceedings.
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