In re Kinder Morgan, Inc. Corporate Reorganization Litigation: Delaware Court of Chancery Dismisses Claims Challenging MLP Reorganization Transactions
August 21, 2015
Publication| Limited Liability Company & Partnership Advisory
The Delaware courts have consistently held, in the context of Delaware limited partnerships, that clear, express and unambiguous language modifying default fiduciary duties will be enforced. Given this precedent, the Court of Chancery’s decision four months ago in In re El Paso Pipeline Partners, L.P. Derivative Litigation, C.A. No. 7141-VCL (Del. Ch. Apr. 20, 2015), in which the Court awarded damages against the general partner of a master limited partnership (“MLP”) in connection with a conflict of interest transaction, received significant attention. The Court’s very recent decision in In re Kinder Morgan, Inc. Corporate Reorganization Litigation, C.A. No. 10093-VCL (Del. Ch. Aug. 20, 2015), confirms that the Delaware courts will continue to enforce the language of partnership agreements (and modifications of fiduciary duty in partnership agreements) as written.
Kinder Morgan involved a corporate reorganization in which Kinder Morgan, Inc. (“Parent”) would emerge as the only publicly traded entity and, among other things, two previously publicly traded entities controlled by Parent—Kinder Morgan Energy Partners, L.P. (the “Partnership”) and Kinder Morgan Management, LLC (“GP Delegate”)—would become wholly owned indirect subsidiaries of Parent. The acquisition of the Partnership was approved by a conflicts committee at the general partner of the Partnership, and the acquisition of the GP Delegate was approved by a conflicts committee at the general partner of the GP Delegate. Both of these conflicts committees consisted of the same three individuals. Plaintiffs alleged, among other things, that the committee did not act in good faith. They claimed that, had the committee acted in good faith, it would have refused to approve Parent’s acquisition of the Partnership and, if there were to be a transaction, would have extracted greater consideration from Parent and greater consideration relative to what was paid to acquire GP Delegate.
The Court ruled that based on the language of the Partnership’s partnership agreement and Delaware Supreme Court precedent interpreting identical language, all default fiduciary duties had been eliminated and replaced by a contractual obligation for the general partner to act in manner that it “reasonably believed … to be in, or not inconsistent with, the best interests of the Partnership.” Therefore, there could be no breach of fiduciary duty claim. Turning to the language of the partnership agreement, the Court held that the relevant standard required that the conflicts committee consider and make a determination as to the fairness of the transaction to, and the best interests of, the Partnership itself as opposed to the limited partners of the Partnership. Notably, the Court stated that if the partnership agreement had required the conflicts committee to make a determination as to the best interests of the limited partners, then the complaint would have been sufficient to withstand a motion to dismiss. Nevertheless, given that the standards in the partnership agreement were based on the interests of the Partnership, the Court applied the standards as written and dismissed plaintiffs’ claims.
The Kinder Morgan decision further confirms the contractual flexibility with Delaware limited partnerships and that Delaware courts will enforce clear, express and unambiguous language modifying default fiduciary duties. As the El Paso decision demonstrated, however, care should be taken in structuring transactions and the process to comply with the contractual standards established by a partnership agreement.