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Hite Hedge LP v. El Paso Corp.: Failure to State a Claim for Breach of Fiduciary Duties Owed by Controlling Partner in a Master Limited Partnership

In Hite Hedge LP v. El Paso Corp., Civil Action No. 7117VCG, 2012 WL 4788658 (Del. Ch. Oct. 9, 2012) the Delaware Chancery Court held that plaintiffs, Hite Hedge LP and Sealedge Partners, LLC (collectively, “Plaintiffs”), failed to state a claim for breach of fiduciary duties against defendants, members of the El Paso Corp. (“El Paso”) board of directors (“Defendants”).

Plaintiffs are limited partners in the master limited partnership (“MLP”) El Paso Pipeline Partners, L.P. (“EPB”).  EPB’s main source of revenue was through “drop down” transactions in which EPB purchased pipeline and related assets from its parent company, El Paso, often at bargain prices, and resold them on the open market.  El Paso and Kinder Morgan agreed to merge, with Kinder Morgan being the surviving entity.  El Paso indicated that Kinder Morgan’s own subsidiary MLP would be receiving a significant portion of the future drop down transactions previously enjoyed by EPB. MLPs, unlike traditional limited partnerships, are publically traded, and if EPB was to have a reduction in drop downs, the unit-holders of EPB (similar to equity shareholders) would see a direct reduction in distributions. After the announcement of the merger, EPB’s stock declined by 15%.

Plaintiffs brought suit against the controlling partners. Plaintiffs specifically alleged that Defendants breached their fiduciary duty by not considering the limited partners’ interests in El Paso’s merger with Kinder Morgan, thereby extracting value from the EPB for their own benefit. Defendants moved to dismiss for failure to state a claim.

Under the Delaware Revised Uniform Limited Partnership Act, fiduciary duties may be eliminated “where the intent to do so is explicit.” According to the limited partnership agreement for EPB, controlling partners were authorized to engage in business activities “to the exclusion of the partnership,” cease drop down transactions, and were not expressly subject to any fiduciary obligation to the limited partners.

The court rejected Plaintiffs’ argument that the express provision did not exempt common law fiduciary duties owed by a controlling unitholder to minority unitholders.  The court found that the express provision limiting fiduciary duties was “plain and unambiguous,” and its intent was clear.

Nonetheless, out of “completeness,” the court also examined whether the plaintiffs had alleged a breach of fiduciary duty by El Paso as a controller.  To maintain such a claim, plaintiffs had to allege that the controller used “its control to direct the actions of the entity it controls against the interests of that minority.” The court found that the behavior alleged in the complaint did not meet this standard.   

The primary materials for this case may be found on the DU Corporate Governance website.

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