This case involves an analysis of derivative claims in the context of a limited partnership based on allegations that a joint venture was entered into in violation of the duties described under the Limited Partnership Agreement. The Court determined that pre-suit demand would be futile, and therefore addressed the motion to dismiss under Rule 12(b)(6).
The Court recognized the established Delaware law that a general partner owes a partnership fiduciary duties similar to the duties directors owe to a corporation. See footnote 27. The Court also reiterated the established principle recited in prior cases to the effect that certain persons or entities affiliated with a corporate general partner, such as its board of directors and controller, also owe fiduciary duties to the limited partnership that the general partner manages. See footnote 28.
The Court referred to the seminal decision in the case of In re: USACafes, L.P. Litigation, 600 A.2d 43 (Del. Ch. 1991), in which the Court of Chancery held that the directors of a corporate entity serving as a general partner of a limited partnership owed fiduciary duties to the limited partnership.
The holding in USACafes was based on the “principle of fiduciary duty, stated most generally, [which] is, that one who controls the property of another may not, without implied or express agreement, intentionally use that property in a way that benefits the holder of the control to the detriment of the property or its beneficial owner. If an entity does not exercise control over partnership property, however, then there is no reason for the Court to fear that the entity will use partnership property through the partnership’s detriment.” In this case, the Court found that because EES has no direct role in how EEP is managed, nor does it exercise any control over an entity that does, therefore EES does not owe any fiduciary duty to EEP.
Contractual Limitation on Fiduciary Duties Under 6 Del. C. Section 17-1101(d)
The Limited Partnership Agreement in this case took advantage of Section 17-1101(d) which authorizes a Limited Partnership Agreement (LPA) to expand, restrict, or eliminate the duties, including fiduciary duties, that any person may owe to either the limited partnership or any other party to the Limited Partnership Agreement with the exception that it may not eliminate the implied contractual covenant of good faith and fair dealing. The Court noted in footnote 32 however, that a Limited Partnership Agreement can not impose duties on a person that neither owes common law duties to the partnership nor signed the Partnership Agreement. The LPA specifically allowed interested transactions as long as they would “be deemed to have been fair and reasonable” and are “no less favorable than those generally being provided to or available from unrelated third parties.”
Importantly, the LPA also had a provision which allowed for reliance on the opinion of an investment banker, which reliance “shall be conclusively presumed to have been done or omitted in good faith and in accordance with such opinion.” The Court determined that there was a failure to demonstrate the bad faith that was necessary to overcome the limitation on duties provided in the LPA.
Good Faith v. The Implied Covenant of Good Faith and Fair Dealing
The LPA provided that monetary liability could only be imposed for acts not taken in good faith.
The Court clarified the distinction between “conventional good faith” and the separate “implied duty of good faith and fair dealing” that can not be waived under the statute. The Court determined that “the good faith referred to in the LPA would appear to impose a duty as broad, and likely broader,” than the duty imposed by the implied covenant of good faith and fair dealing. The Court clarified that “the implied covenant is a limited and extraordinary legal remedy that addresses only events that could not reasonably have been anticipated at the time the parties contracted.” In this case, the parties to the LPA thought about related party transactions and reliance upon investment banker opinions, and they explicitly addressed those issues. The terms of the LPA prevented an implied covenant claim from being presented based on the facts of this case. See footnotes 40 to 43.