Sonet v. Timber Company

Delaware Court of Chancery · 1998 · Corporations

722 A.2d 319 (Del. Ch. 1998)

Updated August 22, 2026

CorporationsLimited PartnershipsFiduciary DutiesPartnership Agreement GovernanceMergersDelaware limited partnershipcontractarianismfiduciary duty modification

Facts

Plum Creek Timber Company, L.P. was a Delaware limited partnership whose publicly traded units represented limited partnership interests. Its general partner proposed a merger-based conversion of the partnership into a REIT, under which unit holders would receive REIT shares one-for-one and the general partner would receive 27% of the total REIT shares in exchange for its 2% interest and incentive distribution rights. The plaintiff alleged the allocation to the general partner was unfair and resulted from self-dealing, manipulative conduct, entrenchment, and timing designed to mask imminent losses. The partnership agreement gave the general partner broad managerial power, gave it sole discretion to approve merger terms, and required approval of a merger by holders of at least 66 2/3% of the outstanding units.

Issue

When a Delaware limited partnership agreement unambiguously gives the general partner sole discretion to set the terms of a merger and gives limited partners the power to veto that merger through a supermajority vote requirement, may a court nevertheless review the proposed transaction under default common law fiduciary duty principles? Also, does the appointment of a special committee, without misleading affirmative disclosures, amount to a voluntary assumption of common law fiduciary duties?

Rule

In Delaware limited partnership law, breach of fiduciary duty claims must first be analyzed under the operative partnership agreement. Where the agreement clearly and unambiguously addresses the governance of the challenged transaction, those contractual provisions preempt default fiduciary principles; only if the agreement is silent or ambiguous, or equity is otherwise implicated, should a court look to statutory default rules, traditional fiduciary duties, or extrinsic evidence. A general partner does not voluntarily assume common law fiduciary duties merely by appointing a special committee absent misleading affirmative disclosures on which limited partners are asked to rely.

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Cedar Basin Logistics, L.P., a Delaware limited partnership based in Denver, proposes to merge into a newly formed entity. Its partnership agreement states that the general partner may approve a merger "in its sole discretion," and the merger will occur only if 70% of the outstanding limited partner units vote in favor. A limited partner, Maya Ortiz, sues before the vote, alleging the exchange ratio is unfair because the general partner negotiated terms favoring its affiliate.

How should a Delaware court most likely analyze Maya's claim?

Explanation. The majority opinion holds that in Delaware limited partnerships, a court first looks to the partnership agreement. If the agreement clearly gives the general partner sole discretion over merger terms and requires supermajority limited partner approval, those contractual provisions preempt default fiduciary review of the transaction's fairness. The contractual protection is the investors' ability to reject the deal at the ballot box.