Norton v. K-Sea Transportation Partners L.P.
2013 WL 2316550, 67 A.3d 354, 2013 Del. LEXIS 251 (2013)
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Rule of Law:
A limited partnership agreement may contractually define a general partner's duty of good faith as a reasonable belief that its actions are not inconsistent with the partnership's best interests. In such cases, reliance on a qualified independent expert's fairness opinion regarding the overall transaction creates a conclusive presumption of good faith, even if the opinion does not specifically evaluate every conflicted component of the transaction.
Facts:
- K-Sea Transportation Partners L.P. (K-Sea) was a publicly traded Delaware limited partnership with K-Sea General Partner L.P. (K-Sea GP) as its general partner, which held Incentive Distribution Rights (IDRs) projected to have low value for decades.
- In December 2010, the K-Sea Board awarded phantom common units (incentive compensation) to Conflicts Committee members Abbate, Alperin, and Salerno, which would vest upon a change of control, despite an LPA provision restricting such holdings.
- Kirby Corporation (Kirby) approached K-Sea in early 2011 to discuss a strategic transaction.
- Kirby's initial $806 million offer was rejected by K-Sea's McCarthy, who advised Kirby to include consideration for K-Sea GP's general partner interest and IDRs in future offers.
- Kirby subsequently offered $829 million for K-Sea, including an $18 million payment for the IDRs.
- The K-Sea Board referred the proposed merger to its Conflicts Committee, acknowledging a 'possible conflict of interest' due to the IDR payment.
- The Conflicts Committee hired Stifel, Nicolaus & Co. (Stifel) as an independent financial advisor, which opined that the consideration for K-Sea's unaffiliated common unitholders was fair, but explicitly excluded evaluating the fairness of compensation to officers, directors, or affiliates.
- The K-Sea Board and Conflicts Committee approved the merger, and a majority of K-Sea's unitholders voted in favor, leading to the closing of the merger on July 1, 2011, with K-Sea GP receiving $18 million for its IDRs.
Procedural Posture:
- Edward F. Norton III and Ken Poesl (Norton) filed a class action complaint in the Court of Chancery shortly after K-Sea announced the Merger.
- The amended complaint contained four counts, including allegations that the Conflicts Committee members breached their fiduciary duties and that K-Sea GP, KSGP, and the K-Sea Board members breached the LPA.
- The Vice Chancellor denied Norton’s motion for expedited discovery.
- After initial briefing and supplemental briefing requested by the Vice Chancellor, the Vice Chancellor dismissed Norton’s Complaint.
- Norton appealed from the Vice Chancellor’s dismissal of Counts I, II, and III of that Complaint to the Supreme Court of Delaware.
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Issue:
Does a general partner breach its contractual duty of good faith under a limited partnership agreement by approving a merger involving conflicted compensation (IDRs) if the agreement's conflict-of-interest provision acts as a permissive safe harbor, and the general partner relies on an expert fairness opinion covering the overall transaction but not the specific conflicted compensation?
Opinions:
Majority - STEELE, Chief Justice
No, a general partner does not breach its contractual duty of good faith under a limited partnership agreement by approving a merger involving conflicted compensation, where the agreement's conflict-of-interest provision is a permissive safe harbor and the general partner relies on an expert fairness opinion covering the overall transaction. The Delaware Revised Uniform Limited Partnership Act (DRULPA) prioritizes freedom of contract, allowing parties to modify or eliminate fiduciary duties, except the implied covenant of good faith and fair dealing. K-Sea's Fourth Amended and Restated Agreement of Limited Partnership (LPA) permitted K-Sea GP to approve mergers 'in its discretion' (Section 14.2) and to 'consider only such interests and factors as it desires' (Section 7.9(b)). Section 7.10(d) modified common law fiduciary duties, imposing a contractual duty that K-Sea GP must 'reasonably believe[] that its action is in, or not inconsistent with, the best interests of the Partnership,' which the Court equated with the LPA's general 'good faith' standard. The Court determined that Section 7.9(a), the conflict of interest provision, constituted a 'permissive safe harbor,' meaning that while resolving a conflict in a 'fair and reasonable' manner would immunize K-Sea GP from breach, it did not impose an affirmative obligation to establish such fairness. Other LPA sections demonstrated that the drafters knew how to impose affirmative 'fair and reasonable' standards when intended. Critically, Section 7.10(b) created a 'conclusive presumption' of good faith if K-Sea GP relied on a competent expert's opinion. The Conflicts Committee obtained Stifel's fairness opinion, which affirmed the fairness of consideration for unaffiliated common unitholders. While Stifel's opinion did not specifically evaluate the IDR Payment's fairness, the LPA did not require K-Sea GP to consider interests other than those of the Partnership as a whole, nor did it mandate a specific evaluation of conflicted components. Since K-Sea GP relied on Stifel's competent opinion, it was conclusively presumed to have acted in good faith, fulfilling its contractual duties. The unitholders' remedy for dissatisfaction with the merger terms was the majority vote, which approved the transaction. Claims against other defendants (K-Sea Board members, KSGP) were also dismissed because they could not be liable for causing K-Sea GP to take an action that did not breach its duties.
Analysis:
This case strongly reaffirms the principle of freedom of contract in Delaware limited partnership law, particularly regarding the ability to define, restrict, or eliminate common law fiduciary duties. It provides a clear blueprint for drafting partnership agreements that afford general partners significant discretion and protection through contractual safe harbors and expert reliance provisions. The decision underscores that courts will strictly interpret the plain language of an LPA, refusing to impose 'fair and reasonable' standards unless explicitly mandated by the contract. This puts the onus on limited partners to negotiate robust protections at the agreement's inception, as the ruling highlights the power of 'conclusive presumption' clauses tied to expert opinions, making it very difficult for unitholders to challenge transactions approved under such terms.
