Court Upholds Allegedly Unfair Master Limited Partnership Transaction

When alternative entities first came into prominence, questions arose concerning the applicability to them and their stakeholders of corporate law fiduciary duty jurisprudence. Eventually the Delaware General Assembly amended the alternative entity statutes to permit the modification or elimination of fiduciary duties, including the duty of loyalty. While stockholders of Delaware corporations since 1986 were permitted to exculpate directors for liability for monetary damages, they cannot modify, much less eliminate, the duty of loyalty. In contrast, the Delaware courts of late have been consistent in enforcing as written the terms of alternative entity foundational documents that modify or eliminate fiduciary duties, often leaving investors with no remedy even though a similar fact pattern in a corporation would state a claim. The well-written April 29 decision from the court’s newest vice chancellor, Joseph R. Slights III, in Brinckerhoff v. Enbridge Energy, C.A. No. 11314-VCS, illustrates this trend.

Background

Plaintiff Peter Brinckerhoff challenged a transaction whereby a master limited partnership, Enbridge Energy Partners, reacquired an interest in a crude oil pipeline from the general partner in a conflicted transaction at an allegedly unfair price and on terms unfair to the unaffiliated unitholders. To accomplish the transaction the limited partnership agreement was amended “to allocate to the public unitholders significant items of gross income that [would otherwise] have been allocated to [EEP].” The plaintiff brought class and derivative claims against the general partner and its controller, affiliates and directors claiming breach of the limited partnership agreement; the implied covenant of good faith and fair dealing; and default fiduciary duties. Among the remedies the plaintiff sought were damages on behalf of EEP and the public unitholders for all profits and benefits the defendants obtained, disgorgement and restitution to EEP and the class of public unitholders and their successors and transferees, and rescission, reformation of the partnership agreement or rescissory damages. As explained below, the court dismissed the complaint for failure to state a claim pursuant to Court of Chancery Rule 12(b)(6), primarily because the plaintiff failed to allege any bad-faith conduct, the applicable contractually mandated standard governing the transaction.

Principle of Freedom of Contract