Top 10 Practice Tips: Master Limited Partnerships

Posted on 12-19-2017

By: Joshua Davidson, Baker Botts LLP

If you are internal counsel to a publicly traded corporation that has decided to form a master limited partnership (MLP) and would like to become better educated about MLPs before starting the IPO process, below are 10 practice tips for you.

1. Obtain a basic understanding of the tax qualifying income rules.

MLPs have a special tax status. Unlike corporations, they are not taxed at the entity level and unitholders are taxed on their allocated share of income, not on their distributions. This is only the case, however, if the MLP satisfies certain complex qualifying income rules. Ninety percent of the MLP’s income must be from certain activities related to natural resources or other qualifying sources. If the MLP fails that test in any one year, it will become taxable as a corporation. Although specialist tax counsel handles the qualifying income analysis, you should be aware of the following:

  • Equity investors care very much about the qualifying status of MPLs and so outside counsel will be required to give what is known as a will opinion on qualifying income for each equity raise.
  • In order to give this opinion, outside counsel will perform detailed diligence on the sources of income and require certifications from management.
  • When the company makes an acquisition, it will need to carefully investigate the qualifying nature of the acquired company’s income.
  • How customer contracts are structured (e.g., lease vs. services agreement) or whether the MLP’s customer is an end user of the product can affect whether the revenue from that contract is qualifying.

2. Read an MLP partnership agreement

Unlike a corporation, a Delaware limited partnership is a creation of contract and a court will look to the words of the partnership agreement to determine the rights of the parties. MLP agreements generally contain very similar provisions. The key provisions deal with:

  • The replacement of default fiduciary duties with contractual duties
  • Methods of resolving conflicts of interest
  • Cash distribution policy
  • Governance
  • Indemnification
  • Unitholder voting rights
  • Tax allocations
  • Dissolution

The agreement runs close to 100 pages, which demonstrates how many aspects of the MLP are governed by contract.

3. Understand the fiduciary duty provisions of the partnership agreement.

When the general partner or its officers and directors are acting on behalf of the partnership, they must act in good faith, meaning that they must subjectively believe that their decision is in, or not opposed to, the best interest of the MLP (or in some cases, simply not adverse to the MLP). In any case, the actor is presumed to have acted with the requisite standard and a plaintiff will have the difficult burden of showing otherwise. When the general partner or the parent acts in its own capacity, it owes no fiduciary duty to the MLP.

To read the full practice note in Lexis Practice Advisor, follow this link.

Joshua Davidson is a partner in Baker Botts’ Houston office and handles a wide range of corporate and securities work. He is nationally recognized for his experience in transactions involving MLPs, YieldCos, and royalty trusts. Mr. Davidson is head of the firm’s Capital Markets and MLP/YieldCo Practice and has concentrated on MLPs for almost 25 years. He has participated in hundreds of equity and debt public offerings and private placements of MLPs and other alternative entities, including more than 60 initial public offerings. Mr. Davidson works with companies in the pipeline, midstream, oil and gas, renewable energy, shipping, refining, coal, propane, and heating oil industries.


Related Content

For information on the taxation of master limited partnerships, see

> TAXATION OF PUBLICLY TRADED PARTNERSHIPS

RESEARCH PATH: Capital Markets & Corporate Governance > Beneficial Ownership: Reporting, Compliance and Tax Matters > Tax Consequences > Practice Notes

For an overview on the disclosure requirements for master limited partnerships in the oil and gas industry, see

> OIL AND GAS INDUSTRY PRACTICE GUIDE

RESEARCH PATH: Capital Markets & Corporate Governance > Industry Practice Guides > Oil & Gas > Practice Notes