A principal difference between alternative entities and corporations under Delaware law is the ability in the former to modify or eliminate fiduciary duties. A Delaware court is required by statute to give effect to the principle of freedom of contract in interpreting limited liability company or master limited partnership agreements. When properly drafted, agreements modifying or eliminating fiduciary duties in alternative entities have real-world consequences particularly in conflict-of-interest transactions. A transaction with a controlling party that may not pass muster when challenged by equity holders in the corporate setting may be dismissed at the pleading stage when investors attacking the transaction must overcome the contractual standards in an alternative entity agreement. The recent case of In re Kinder Morgan Corporate Reorganization Litigation, Cons. C. A. No. 10093-VCL (August 20, 2015), illustrates this principle and reaffirms that Delaware courts will enforce alternative entity agreements as written.
Background to the Transaction
The Kinder Morgan transaction involved a corporate reorganization whereby the ultimate parent of a publicly-traded master limited partnership would survive as the sole publicly traded entity. To accomplish the transaction, the partnership would merge with a wholly owned subsidiary of its general partner and the entity to which the general partner had delegated authority to manage the partnership would merge into a different wholly owned subsidiary of the general partner. As permitted by the partnership’s governing agreement, the general partner sought special approval of the transaction by a committee of the board of directors of the general partner composed of three individuals who were neither officers nor employees of the general partner or its affiliates. The partnership committee was not empowered to review or explore transactions involving third parties; its review and special approval was limited to the proposed merger with the ultimate parent or alternatives that involved the parent. The same three individuals who served on the partnership committee also served on a committee to review and if appropriate approve the delegate merger.
