Delaware Limited Partnership Law Update
January 30, 2024
Publication| Limited Liability Company & Partnership Advisory
Cantor Fitzgerald, L.P. v. Ainslie: Delaware Supreme Court Upholds Validity of Forfeiture-for-Competition Provisions in Limited Partnership Agreement Based on Freedom of Contract Principles
In Cantor Fitzgerald, L.P. v. Ainslie, C.A. No. 9436 (Del. Jan. 29, 2024), the Delaware Supreme Court reversed a prior ruling by the Delaware Court of Chancery and found that provisions of a limited partnership agreement authorizing a partnership to withhold distributions otherwise owed to former partners who compete with the partnership (forfeiture-for-competition provisions) are enforceable. The Court distinguished forfeiture-for-competition provisions in a partnership agreement from restrictive non-competition covenants and liquidated damages provisions used to enforce such covenants. While restrictive non-competition covenants and related liquidated damages provisions are generally subject to scrutiny for reasonableness under Delaware law, the Court held that absent unconscionability, bad faith, or other extraordinary circumstances, forfeiture-for-competition provisions in a partnership agreement are not subject to reasonableness review. Instead, the Court found that the express and stated public policy of the Delaware Revised Uniform Limited Partnership Act of giving effect to the principle of freedom of contract and the enforceability of partnership agreements supported enforcing a forfeiture-for-competition provision without regard to reasonableness.
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Whitestone v. Pillarstone: Delaware Court of Chancery Holds Adoption of Poison Pill Breaches Implied Covenant of Good Faith and Fair Dealing
In Whitestone REIT Operating Partnership, L.P. v. Pillarstone Capital REIT, C.A. 2022-0607-LWW (Del. Ch. Jan. 25. 2024), the Delaware Court of Chancery held that the general partner of a limited partnership breached the implied covenant of good faith and fair dealing when it adopted a shareholder rights plan (the “Rights Plan”) that effectively thwarted a limited partner from exercising the unfettered contractual redemption right it obtained in connection with its investment in the partnership. In ruling for the limited partner, the Court found that the limited partner’s redemption right contained a corresponding implied condition that the general partner not frustrate the exercise of the redemption right by taking self-interested actions to force the limited partner into an economically unfavorable position. As a result, the Court held that the Rights Plan was unenforceable as to the limited partner.
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