## Facts

- A Delaware master limited partnership was controlled by its corporate sponsor through ownership of the partnership’s sole general partner.
- The limited partnership agreement (LPA) eliminated common-law fiduciary duties and replaced them with contractual standards governing conflict transactions.
- For conflicted transactions, the LPA provided a contractual safe harbor (“Special Approval”) requiring approval by a conflicts committee acting in “good faith,” defined as a subjective belief that the action was in the partnership’s best interests.
- In March 2010, the partnership purchased from the sponsor a 51% interest in two LNG-related entities for approximately $963 million in cash, partnership units, and assumed debt.
- The acquired assets depended on long-term capacity contracts with Shell- and British Gas-related special-purpose entities, with limited parent guarantees relative to projected revenues.
- The general partner formed an ad hoc conflicts committee of three outside directors, which retained a financial advisor, obtained a fairness opinion, met multiple times, reviewed information, and negotiated terms before approving the transaction.
- During the same period, the sponsor declined an option to buy other LNG assets at a more favorable multiple; the conflicts committee was not told of that decision.
- Limited-partner unitholders brought a derivative action alleging breach of the LPA and breach of the implied covenant of good faith and fair dealing based on the general partner’s approval of the March 2010 transaction.
- After discovery, defendants moved for summary judgment and plaintiffs cross-moved for summary judgment on liability; the opinion addressed only the March 2010 transaction.

## Issues

1. Whether plaintiffs produced evidence creating a triable issue that the conflicts committee lacked the LPA-required subjective good-faith belief that the March 2010 transaction was in the partnership’s best interests.
2. Whether the implied covenant of good faith and fair dealing could impose additional fiduciary-like obligations or disclosure requirements beyond the LPA’s negotiated conflict-transaction framework.

## Decision

- The court granted defendants’ motion for summary judgment as to the March 2010 transaction and denied plaintiffs’ cross-motion.
- On the LPA claim, plaintiffs failed to raise a genuine issue that the conflicts committee members did not actually believe the transaction was in the partnership’s best interests when granting Special Approval.
- On the implied-covenant claim, the court held the implied covenant could not be used to add fiduciary-style duties where the LPA eliminated fiduciary duties and supplied a detailed contractual scheme and express good-faith standard.
- The court noted that alleged process criticisms and later-appearing economic concerns did not, without evidence of actual disbelief or conscious disregard, satisfy the contractual bad-faith showing required to defeat summary judgment.

## Legal Principles

- When an alternative-entity agreement eliminates fiduciary duties and substitutes contractual standards, courts enforce the parties’ contractual allocation of authority, risk, and review.
- A contractually defined “good faith” standard requiring a subjective belief is not an objective reasonableness or entire-fairness test; liability requires evidence of actual bad faith (i.e., absence of the required belief).
- Special Approval under an LPA safe harbor is evaluated under the agreement’s stated standard; an active committee process and reliance on advisors may support the absence of evidence of subjective bad faith.
- The implied covenant of good faith and fair dealing is limited to filling unanticipated contractual gaps and cannot be used to reintroduce fiduciary-duty review or add obligations the parties did not contract for in a comprehensive governance scheme.

## Conclusion

The court enforced the LPA’s fiduciary-duty waiver and held that the March 2010 conflicted drop-down was protected because plaintiffs lacked evidence that the conflicts committee did not subjectively believe the deal served the partnership’s interests; the implied covenant could not be used to impose extra fiduciary-like disclosure or fairness requirements beyond the LPA’s express framework.


In re El Paso Pipeline Partners, L.P. Derivative Litigation, No. 7141-VCL, 2014 WL 2768782 (Del. Ch. June 12, 2014)