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January 21, 2013

General Partner's Transaction Without Limited Partner Consent Not Considered Fiduciary Duty Breach Under Limited Partnership Agreement

By Jay Fishman, J.D.

The Delaware Court of Chancery dismissed the plaintiff limited partner's breach of fiduciary duty complaint against the general partner (GP) of a Delaware limited partnership for the GP's approval of a transaction without limited partnership consent. The court found instructive that the Limited Partnership Agreement (LPA) permitted a conflicts committee, composed of the GP's board of directors, to specially approve transactions without owing common law fiduciary duties to limited partner unitholders (Gerber v. EPE Holdings, January 18, 2013, Noble, J).

The plaintiff, following a merger of the limited partnership, brought an amended class action complaint on behalf of all former limited partners whose units lost value from a pre-merger transaction. The plaintiff contended that the GP breached its fiduciary duty to the unitholders because the LPA conditioned the GP's effecting transactions without unitholder consent on the GP's meeting an "independence standard" that it did not meet. The plaintiff relied on Section 303A.02 of the NYSE Listed Company Manual, claiming a director is only independent to make decisions without unitholder consent if the board affirmatively determines that the director has no material relationship with the listed company (either as a partner, shareholder or officer of an organization that has a relationship with the company) and meets five additional standards. The court, however, said that the manual only required a board to prove its independence by affirmatively determining that the directors on the conflicts committee have no material relationship with the listed company and that the board met this requirement by affirmatively stating on its February 2007 Form 10-K that the conflicts-committee members were independent directors under the NYSE rules and by disclosing the basis for that determination, which statements were incorporated into the LPA.

The plaintiff next contended that the LPA required transactions involving the sale or purchase of partnership property to be fair and reasonable but that the GP's transaction was not reasonable because it involved a purchase of units for hundreds of millions of dollars more than the units' fair value. The court declared, however, that the Delaware Revised Uniform Limited Partnership Act permits an LPA to set forth a contractual-review standard that supplants any fiduciary duties owed to the limited partners, except for an implied covenant of good faith and fair dealing. The LPA, the court stated, contained language exonerating the general partner and its board from any fiduciary duties owed to the partnership or limited partners, including a duty that the conflicts committee act in good faith, except for any nonwaiveable default obligations imposed by the implied covenant of good faith and fair dealing. Regarding the transaction itself, the court acknowledged that price fluctuations do occur but explained that it is not the court's responsibility to speculate whether the price paid by the GP was appropriate under market conditions at the time of the transaction.

As to the plaintiff's further contention that an implied covenant of good faith was breached, the court declared that an implied covenant is not generally a placeholder for full fiduciary analysis. According to the court, the plaintiff bore the burden of proving how, under a reasonable-conceivability standard, the transaction's special approval by the board frustrated the limited partners' reasonably expected fruits of the bargain but failed to meet the burden.

Attorneys: Jessica Zeldin (Rosenthal, Monhait & Goddess), Jeffrey H. Squire (Bragar Eagel & Squire, PC) and Daniel L. Carroll (Ingram Yuzek Gainen Carroll & Bertolotti, LLP) for Gerber. Richard D. Heins (Richard L. Renck) and Stacy L. Newman (Ashby & Geddes) for EPE Holdings LLC.

Companies: EPE Holdings Inc.

Enforcement: CorporateGovernance DelawareNews DirectorsOfficers MergersAcquisitions

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