Walter E. Ryan, Jr. v. Buckeye Partners, L.P., et a.
Memorandum Opinion, Date Decided: February 9, 2022 (2022)
Rule of Law:
Under Delaware law, limited partnership agreements may contractually eliminate traditional fiduciary duties and restrict distribution rights. Where a limited partnership agreement clearly defines the standards of conduct and unitholder rights, and a transaction is approved by a fully informed unitholder vote, claims for breach of contract, implied covenant, or common law fiduciary duties will fail if the allegations contradict the unambiguous terms of the agreement or fail to show a breach of the contractually defined standard of conduct.
Facts:
- Buckeye Partners, L.P. (Buckeye) was a publicly traded Delaware limited partnership governed by its Limited Partnership Agreement (LPA), managed by Buckeye GP LLC (Buckeye GP), whose board included the individual Board defendants.
- The LPA stated unitholders had no right to receive distributions, giving Buckeye GP discretion, and expressly disclaimed traditional fiduciary duties, replacing them with a contractual standard of good faith requiring belief that actions are 'in the best interests of the Partnership'.
- Between 2018 and 2019, IFM Investors Pty Ltd (IFM) made several unsolicited offers to acquire Buckeye.
- Following arms-length negotiations, on May 10, 2019, Buckeye announced IFM would acquire its outstanding public units for $41.50 per unit, a 27.5% premium.
- The Merger Agreement prohibited Buckeye from making certain distributions to unitholders between signing and closing without the buyer’s consent and required closing five business days after all closing conditions were met.
- Buckeye's Proxy Statement, filed June 25, 2019, disclosed that unitholders would be subject to U.S. federal income tax on allocated income and gain even without cash distribution, and a substantial portion of gain could be taxed as ordinary income under 26 U.S.C. § 751, potentially exceeding net taxable gain.
- A unitholder vote held on July 31, 2019, overwhelmingly approved the Transaction (over 96% of votes cast).
- The Transaction closed on November 1, 2019, prior to the date the Board could consider making a distribution under the Merger Agreement, resulting in no distribution for the third quarter of 2019 or the portion of the fourth quarter prior to closing.
Procedural Posture:
- Certain unitholders filed Ingalls v. Buckeye Partners, L.P. in the United States District Court for the Southern District of Texas.
- Plaintiff Walter E. Ryan, Jr. intervened in Ingalls on September 6, 2019, and was granted Lead Plaintiff status on December 10, 2019.
- On January 13, 2020, Plaintiff moved to transfer the case to the United States District Court for the District of Delaware, which was granted on July 17, 2020.
- Plaintiff's consolidated amended complaint in federal court alleged violations of the Exchange Act (federal law claims) and breaches of the LPA and fiduciary duties (state law claims).
- On May 5, 2021, a Magistrate Judge issued a Report and Recommendation, recommending dismissal of Plaintiff’s federal claims with prejudice and state law claims without prejudice, anticipating re-filing in state court.
- Plaintiff filed the current Verified Class Action Complaint in the Delaware Court of Chancery (this court) before the federal court's Report was adopted.
- On June 2, 2021, the presiding District Court Judge adopted the Report in full, dismissing federal claims with prejudice and state claims without prejudice.
- The Buckeye Defendants and IFM Defendants both filed Motions to Dismiss Plaintiff's Complaint in the Court of Chancery under Rule 12(b)(6).
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Issue:
Does a unitholder of a Delaware limited partnership state a claim for breach of contract, breach of the implied covenant of good faith and fair dealing, or breach of fiduciary duty when the Limited Partnership Agreement expressly disclaims distribution rights and fiduciary duties, replaces fiduciary duties with a contractual good faith standard, and the transaction was approved by a fully informed unitholder vote?
Opinions:
Majority - Slights, Vice Chancellor
No, a unitholder of a Delaware limited partnership fails to state a claim for breach of contract, breach of the implied covenant of good faith and fair dealing, or breach of fiduciary duty under these circumstances. The breach of contract claim fails because Plaintiff did not cite any provision of the LPA allegedly breached, and the LPA's unambiguous terms (Sections 4.7 and 5.2(a)) grant unitholders no right to distributions, instead providing the General Partner with discretion. Historical distributions do not create a contractual right. The implied covenant claim fails because it is limited to filling contractual gaps not anticipated by the parties, and the LPA fully addresses distribution rights, closing dates, and information rights (Sections 4.7, 5.2(a), 8.5), leaving no gaps. The court also found no reasonable allegation that IFM unreasonably withheld consent for distributions. Furthermore, Plaintiff lost information rights upon ceasing to be a unitholder. The fiduciary duty claim fails because the LPA (Section 7.9(c)) explicitly displaced traditional fiduciary duties, replacing them with a contractual good faith standard (belief that actions are 'in the best interests of the Partnership'), as permitted by 6 Del. C. § 17-1101(d). Even if traditional fiduciary duties applied, the transaction was approved by a fully informed, uncoerced majority of disinterested unitholders, invoking the Corwin doctrine and the business judgment rule. The Proxy Statement adequately disclosed potential adverse tax consequences and advised unitholders to consult tax advisors. Allegations of board conflict based on pre-existing change-in-control benefits were insufficient, as such benefits can align interests with unitholders, and the Nominating and Corporate Governance Committee's unanimous approval of the transaction conclusively deemed it fair under LPA Section 7.9(a). Finally, Plaintiff failed to well-plead a lack of good faith under the LPA's contractual standard, offering no factual narrative that the Buckeye Defendants believed the transaction was not 'in the best interests of the Partnership.' Claims against the IFM Defendants for aiding and abetting and tortious interference also fail because Delaware generally does not recognize aiding and abetting a breach of contract or implied covenant, and no predicate breach of contract or fiduciary duty by the Buckeye Defendants occurred. Allegations of 'knowing participation' by IFM were insufficient, as arms-length bargaining for a favorable deal does not constitute aiding and abetting, and IFM acted with justification in pursuing its own financial interests.
Analysis:
This case strongly affirms Delaware's principle of 'freedom of contract' for alternative entities, particularly limited partnerships, allowing them to contractually modify or eliminate traditional common law fiduciary duties and define specific contractual standards of conduct. The decision reinforces that courts will enforce these contractual provisions when clearly articulated. It also highlights the robust application of the Corwin doctrine in the alternative entity context, demonstrating that a fully informed unitholder vote can effectively cleanse a transaction, thereby shielding it from heightened judicial scrutiny. The ruling further sets a high bar for pleading bad faith or knowing participation in a breach, emphasizing the need for concrete factual allegations over conclusory statements.
