Conclusive Presumption of Good Faith in MLP Agreements

The Delaware Supreme Court provided helpful guidance on the operation of the conclusive presumption of good faith in master limited partnership agreements in three recent decisions: Brinckerhoff v. Enbridge Energy, No. 574, 2011 (Del. May 28, 2013); Norton v. K-Sea Transportation Partners L.P., No. 238, 2012 (Del. May 28, 2013); and Gerber v. Enterprise Products Holdings LLC, No. 46, 2012 (Del. June 10, 2013). These decisions validate the use of conclusive presumption provisions in accordance with the intent of the Delaware Revised Uniform Limited Partnership Act (DRULPA) to give "maximum effect to the principle of freedom of contract and to the enforceability of partnership agreements," yet demonstrate that such contractual freedom is not without limits.

In both Brinckerhoff and K-Sea, the Supreme Court affirmed dismissals of complaints brought against MLPs, their general partners and directors, upholding, among other things, the enforceability of provisions providing for a conclusive presumption of good faith where the general partner reasonably relies upon an opinion prepared by a competent expert. Moreover, the protections of the provision may be invoked even if the general partner did not directly rely on a financial adviser's opinion. For example, the provision as drafted in K-Sea created a presumption that K-Sea Transportation Partners L.P.'s general partner, K-Sea General Partner L.P., had acted in good faith if K-Sea GP relied on a competent expert's opinion. Although the conflicts committee of the board of K-Sea GP's general partner, K-Sea General Partner GP LLC (KSGP), actually obtained the financial adviser's opinion, K-Sea GP nevertheless was entitled to the protection of the presumption. Under the court's analysis, it was "unreasonable to infer" that the entire board did not rely on the opinion obtained by the conflicts committee, and "because K-Sea GP is a 'pass through' entity controlled by KSGP, the only reasonable inference is that K-Sea GP relied on the fairness opinion."