Fiduciary Duty Claims on Behalf of Master Limited Partnership Against General Partner Dismissed as a Result of Delaware’s Flexible Limited Partnership Regulations, Notwithstanding “Harsh” Consequences
 

In Peter Brinckerhoff v. Enbridge Energy Company, Inc., et al., C.A. No. 11314-VCS, memo. op. (Del. Ch. Apr. 29, 2016), newly appointed Vice Chancellor Slights of the Delaware Chancery Court dismissed class and derivative claims brought by an investor in a master limited partnership, Enbridge Energy Partners, L.P. (the “MLP”), against the general partner, Enbridge Energy Company, Inc., and its controlling parent (together, “Enbridge”), and Enbridge’s affiliates and directors.  This opinion is the latest in a series of Delaware court decisions reinforcing that, under Delaware law, “a limited partnership agreement may eliminate the fiduciary duties owed by the general partner to the partnership and its limited partners in favor of” specifically delineated contractual obligations. 

In this case, the plaintiff investor alleged various claims against Enbridge related to Enbridge’s sale to the MLP of Enbridge’s share of an oil pipeline for $1 billion, in a transaction that also shifted substantial tax costs from Enbridge to the unitholders of the MLP.  Notably, this same investor in the MLP had sued the same defendants unsuccessfully in 2009 after alleging that the MLP was shortchanged when Enbridge paid $800 million to buy the same share of the same pipeline. 

According to the court, the limited partnership agreement authorized Enbridge to approve the transaction on behalf of the MLP, notwithstanding a conflict of interest, as long as the transaction was determined to be “fair and reasonable” to the MLP.  The court further determined that the limited partnership agreement displaced common law duties that would have otherwise been owed by Enbridge to the MLP with a contractual standard of care that limited Enbridge’s liability in the context of conflict transactions to actions taken in “bad faith.” 
The court thus granted defendants’ motion to dismiss, holding that plaintiff failed to plead that the transaction was undertaken in bad faith.  The court highlighted, among other things, that Enbridge’s manager formed a special committee charged with considering whether the proposed transaction was fair and reasonable to the MLP.  The special committee in turn engaged legal counsel and an investment banking firm, which conducted a thorough review and issued a fairness opinion recommending the transaction as fair to the MLP and its unitholders.    

In dismissing plaintiff’s claims, the Vice Chancellor held that the limited partnership agreement contained “broad protections” for Enbridge, and enforcing these protections “harmonize[s] well” with Delaware’s policy of “giv[ing] maximum effect to the principle of freedom of contract and to the enforceability of partnership agreements.”  While the court found that plaintiff’s “claims are rich in allegations of wrongdoing that likely would gain traction if the Defendant’s conduct were to be measured under traditional corporate governance standards,” the court emphasized that Delaware’s partnership laws offer substantially more latitude.  This decision thus continues a well-established line of Delaware jurisprudence confirming that a Delaware partnership can exempt its general partner from traditional fiduciary duties, notwithstanding that this may result in what the court referred to as “harsh consequences” for the limited partners.