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Delaware alternative entity law, such as limited partnerships, is explicitly contractual; it allows parties to eschew a corporate-style suite of fiduciary duties and rights, and instead to provide for modified versions of such duties and rights - or none at all - by contract. This custom approach can be value enhancing, but only if the parties are held to their bargain. Where equity holders in such entities have provided for such a custom menu of rights and duties by unambiguous contract language, that language must control judicial review of entity transactions, subject only to the cautious application of the implied covenant of good faith and fair dealing.
Plaintiff Employees Retirement System of the City of St. Louis owned common units representing a limited partner interest in Nominal defendant TCP, a publicly traded Delaware MLP formed to acquire, own, and participate in the management of energy infrastructure businesses in North America. The Partnership was managed and operated by its general partner, defendant TC Pipelines-GP, a subsidiary of defendant TransCanada Corporation. Defendant TransCanada American Investments Ltd. was a wholly owned subsidiary of TransCanada Corporation and was the entity that was used to perfect the transaction at issue here. Prior to February 2015, defendant owned 70% of Gas Transmission Northwest LLC (GTN). GTN owned the GTN pipeline and defendant acquired its 70% interest from TransCanada through two previous transactions in which defendant paid cash and assumed GTN debt in return for its interest. Defendant then entered into a definitive agreement to acquire the remaining 30% ownership interest in GTN from TransCanada upon payment (The Dropdown). It was approved by the defendant’s Conflicts Committee and required an amendment to the Second Amended Partnership Agreement (The LPA) for the issuance of newly created Class B shares. Plaintiff filed its verified complaint asserting six counts challenging the Dropdown. Under the LPA, conflicted transactions by the General Partner must be "fair and reasonable" to the Partnership. In relief, plaintiff sought an order directed at defendant, TransCanada, or any related entity to disgorge any distribution beyond the value assigned to the Class B units as of April 1, 2015, an order to return some or all of the Class B units; an order rescinding the April 1, 2015 amendments to the LPA; an order enjoining defendant from entering into future transactions whereby Class B units were issued to TransCanada or any of its subsidiaries; and damages. Before the court is the defendant’s motion to dismiss.
Should the defendant’s motion to dismiss be granted?
The court granted the motion and held that a limited partnership's motion to dismiss an action by a limited unitholder, challenging a conflicted transaction that allegedly breached the LP agreement (LPA) because the transaction was approved by a special committee (SC) in accordance with the LPA, thus, created a conclusive presumption that the transaction was fair and reasonable, such that judicial scrutiny was precluded. Moreover, the court held that the unitholder did not allege that the Special Committee was not duly constituted, or that it lacked material information as required by the safe harbor provision, such that there was no breach of the LPA. The court also ruled that the implied covenant of good faith and fair dealing under Del. Code Ann. tit. 6, § 17-1101(d) was not implicated, as the challenge was to the approval of the allegedly unfair transaction at that time, rather than at the time of contracting.