Delaware LLC & Partnership Law Update: Allen v. Encore Energy Partners, L.P.

July 23, 2013

Publication| Limited Liability Company & Partnership Advisory

Delaware Supreme Court Affirms Court of Chancery’s Dismissal of Lawsuit Challenging Conflict of Interest Transaction Involving Publicly Traded Delaware Limited Partnership

In the latest of a series of decisions addressing conflict of interest transactions involving Delaware limited partnerships, the Delaware Supreme Court once again confirmed that clear, express and unambiguous language modifying default fiduciary duties will be enforced.  The transaction at issue in Allen v. Encore Energy Partners, L.P., No. 534, 2012 (Del. July 22, 2013), was a merger of a publicly traded Delaware limited partnership with its general partner’s controller.  Plaintiff was a limited partner of Encore who alleged that the general partner, its controller, and its directors breached the contractual duties imposed by the limited partnership agreement in connection with the merger.  The Court of Chancery dismissed the complaint, and the Delaware Supreme Court affirmed such dismissal upon appeal by the plaintiff.

The Supreme Court noted that the limited partnership agreement replaced default fiduciary duties with a contractual duty that would be satisfied if the transaction at issue was approved in “good faith” (as defined by the limited partnership agreement) by the conflicts committee of the board of directors of the general partner.  The Supreme Court concluded that the contractual “good faith” standard under the Encore limited partnership agreement requires a subjective belief that the determination or other action is in the best interests of Encore.  Thus, for plaintiff to meet his pleading burden, he would have to adequately plead either that (i) the conflicts committee believed it was acting against Encore’s best interests when approving the merger or (ii) the conflicts committee consciously disregarded its duty to form a subjective belief that the merger was in Encore’s best interests.  As the Supreme Court observed, it would likely take an extraordinary set of facts to meet such a pleading burden, and plaintiff failed to do so here.  

The Allen v. Encore Energy decision is yet another example that Delaware courts will not import standards of conduct from corporate or tort law where a limited partnership agreement effectively modifies default duties and establishes clear contractual standards.  The contractual flexibility afforded to Delaware limited partnerships can be used to provide general partners with significant protections.

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