Delaware limited partnership agreements frequently have provisions governing how to deal with conflict of interests between the GP, the limited partners and the owners of the GP. This decision sets out the language needed to protect the GP and its owners from attacks in conflict transactions when the deal is approved by a conflicts committee. If the committee acts in the subjective good faith belief the transaction is in the best interests of its constituency, an attack alleging objective unfairness will be dismissed.
This then may be the definitive guide to drafting limited partnership agreements. And while the Court recognizes that the decision offers little protection for limited partners, it points out that is part of the risk they bear when they invest in such LPs.
I'm particularly struck by the discussion at 36-37:
The near absence under the [limited partnership agreement] of any duties whatsoever to Encore‘s public equity holders presumably would discourage risk averse investors unwilling to take a leap of faith from investing their money in an enterprise controlled by the General Partner and its Affiliates. But, the right to enter into good and bad contracts makes the implied covenant an ersatz substitute for the warning 'caveat emptor.‘ Investors apprehensive about the risks inherent in waiving the fiduciary duties of those with whom they entrust their investments may be well advised to avoid master limited partnerships like Encore. Having decided to take a leap of faith and to reach for the kind of returns a master limited partnership investment might yield, however, Plaintiffs cannot reintroduce fiduciary review through the backdoor of the implied covenant [of good faith]. Rather, Delaware law "give[s] maximum effect to the principle of freedom of contract and to the enforceability of partnership agreements."
I think that's basically sound. As I explain in Agency, Partnership & Liabilitiy Companies:
Default statutory rules provide cost savings comparable to those provided by standard form contracts, because both can be accepted without the need for costly negotiation. At the same time, however, because the default rule can be modified by contrary agreement, idiosyncratic parties wishing a different rule can be accommodated. Given these advantages, a fairly compelling case ought to be required before we impose a mandatory rule. Indeed, mandatory rules seem justifiable only if a default rule would demonstrably create significant negative externalities or, perhaps, if one of the contracting parties is demonstrably unable to protect itself through bargaining.
Does this justification for freedom of contract extend to the fiduciary duties of LLC members? [Or a limited partnership?] ...
Fiduciary duties function as gap-fillers; they provide rules to govern the parties’ conduct in the absence of agreement. Where the parties have gone to the effort of bargaining over specific matters, however, there is no gap to be filled. Instead, absent negative externalities or other forms of market failure, the basic principle of freedom of contract mandates that courts respect the bargain struck by the parties. Consequently, to invoke fiduciary obligation to trump actual contracts sets the process on its head. Worse yet, doing so often results in an unjustified windfall. When the parties entered into their bargain, the price paid by each member for an LLC interest (or what have you) reflected their estimate of the trade offs inherent in that investment, including the protections (or lack thereof) provided by the operating agreement. Allowing parties to subsequently invoke fiduciary obligation to escape a bargain that turned out badly gives them an undeserved second bite at the apple. Put another way, the parties made their bed and courts ought to let them—indeed, make them—lie in it.
Delaware seems to agree.
The case also contains an interesting discussion of the meaning of the term "good faith." One might wonder whether subjective intent/believe that one is acting contrary to the company's interests is really the right standard, but that's a question for another day.