Brickell Partners v. Wise
2001 Del. Ch. LEXIS 106, 794 A.2d 1, 2001 WL 1006642 (2001)
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Rule of Law:
When a limited partnership agreement unambiguously establishes a contractual safe harbor procedure for resolving conflicts of interest, such as approval by a special committee, that procedure replaces default fiduciary duties. A claim challenging a transaction approved under this procedure will be dismissed unless the plaintiff pleads facts showing the procedure itself was not followed or was tainted by bad faith.
Facts:
- El Paso Energy Corp. ('Energy') owned and controlled DeepTech International, Inc., which served as the general partner for a limited partnership, El Paso Energy Partners, L.P. ('El Paso').
- Energy also owned 34.5% of El Paso's limited partnership units and wholly owned another company, Crystal Gas Storage, Inc.
- A conflict of interest arose when El Paso purchased Crystal Gas from Energy for $170 million in newly issued El Paso preference units.
- The El Paso Partnership Agreement contained a provision (§ 6.9) allowing for such conflicts of interest to be resolved through 'Special Approval' by a 'Conflicts and Audit Committee'.
- DeepTech, the general partner, sought and obtained 'Special Approval' for the Crystal Gas acquisition.
- The two members of the Conflicts and Audit Committee, Michael Bracy and H. Douglas Church, were both directors of DeepTech.
- Additionally, Bracy was a former employee of Energy, the parent company on both sides of the transaction.
Procedural Posture:
- Brickell Partners, a limited partner, filed a derivative lawsuit on behalf of El Paso Energy Partners, L.P. in the Delaware Court of Chancery.
- The complaint alleged that the acquisition of Crystal Gas was a breach of fiduciary duty because the transaction was substantively unfair and the approval process was flawed.
- The defendants, DeepTech and its directors, filed a motion to dismiss the complaint for failure to state a claim upon which relief can be granted.
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Issue:
Does a limited partnership agreement that creates a 'Special Approval' safe harbor for conflict-of-interest transactions, to be granted by a committee composed of the general partner's directors, effectively eliminate traditional fiduciary duty claims challenging such a transaction?
Opinions:
Majority - Strine, Vice Chancellor
Yes, the limited partnership agreement's 'Special Approval' safe harbor effectively eliminates traditional fiduciary duty claims. The Delaware Limited Partnership Act permits parties to modify or eliminate default fiduciary duties through the partnership agreement. Here, the agreement's plain language displaces traditional duties with a specific contractual procedure. The 'Special Approval' by the Conflicts and Audit Committee is defined as conclusive evidence of fairness. The plaintiff's argument that the committee was not independent fails because directors of a corporate general partner are inherently in a position of structural conflict, and the agreement did not require committee members to be unaffiliated with the general partner. Without specific factual allegations that the committee members were personally beholden to the parent company or acted in bad faith, compliance with the contractual safe harbor is sufficient to defeat a fiduciary duty claim.
Analysis:
This opinion strongly affirms the contractarian nature of Delaware limited partnerships, emphasizing that the partnership agreement is the primary source for determining the duties and obligations of the parties. It clarifies that when an agreement provides a specific mechanism for cleansing conflict transactions, that contractual standard will preempt default fiduciary principles like entire fairness. This decision provides significant certainty and protection for general partners in conflict transactions, so long as they scrupulously follow the procedures laid out in the governing agreement. Consequently, it places a higher burden on plaintiffs to plead specific facts showing a breach of the contract itself, rather than relying on broader fiduciary duty claims.
