Gerber v. Enterprise Products Holdings, LLC

Supreme Court of Delaware · Corporations

CorporationsLimited partnershipsDelaware alternative entitiesImplied covenant of good faith and fair dealingDRULPA6 Del. C. § 17-1101(d)limited partnership agreementimplied covenant

Facts

Gerber, a former public unitholder of EPE, challenged two affiliated transactions: EPE's 2009 sale of Teppco GP to Enterprise Products LP and EPE's 2010 merger into a subsidiary of Enterprise Products LP. The 2009 sale was approved through the LPA's Special Approval process, and Morgan Stanley issued a fairness opinion addressing the total consideration for the combined 2009 Sale and separate Teppco LP Sale, but not the fairness of the consideration allocable to the 2009 Sale itself. The Court of Chancery found that a principal purpose of the 2010 merger was to eliminate EPE's 2007 and 2009 claims, yet neither Morgan Stanley nor EPE independently valued those claims in fixing the merger consideration. The LPA replaced default fiduciary duties with a contractual good-faith standard, provided a Special Approval safe harbor, and created a conclusive presumption of good faith for acts taken in reliance on expert opinions.

Issue

Whether the LPA's conclusive presumption of good faith and Special Approval safe harbor barred Gerber's claims that EPE's general partner breached the implied covenant of good faith and fair dealing in carrying out the 2009 Sale and 2010 Merger. Also, whether the complaint adequately pleaded implied-covenant claims against the general partner sufficient to survive dismissal.

Rule

Under DRULPA and this LPA, a contractual conclusive presumption of good faith based on reliance on expert advice applies to the agreement's contractual fiduciary duty of good faith, but it does not eliminate or bar claims under the implied covenant of good faith and fair dealing. The implied covenant attaches to every contract, constrains the exercise of contractual discretion and the use of contractual safe harbors, and asks whether the defendant acted arbitrarily or unreasonably in a way that frustrated the fruits of the bargain as measured by the parties' reasonable expectations at the time of contracting. The implied covenant binds only parties to the contract.

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Granite Basin Partners, L.P., a Delaware limited partnership based in Denver, has an agreement stating that the general partner is conclusively presumed to act in good faith when it relies on a qualified investment banker's opinion. The general partner approved a sale of a pipeline subsidiary to an affiliate after receiving a banker letter opining only that a larger package of three related transactions was fair as a whole, while expressly declining to opine on the fairness of the subsidiary sale standing alone.

If a public unitholder sues the general partner for breach of the implied covenant of good faith and fair dealing, what is the strongest argument against dismissal at the pleading stage?

Explanation. The majority held that a conclusive presumption tied to expert reliance establishes compliance with the contract's express good-faith standard, but it does not eliminate or bar the implied covenant. The implied covenant attaches to every contract and can constrain a general partner's attempt to use contractual protections arbitrarily or unreasonably. A fairness opinion that does not evaluate the consideration actually received for the challenged transaction can support a plausible implied-covenant claim. (Derived from Gerber v. Enterprise Products Holdings, LLC (n.d.).)