As a litigator, I regularly encounter clients who have invested in a limited partnership and are outraged at the actions of the general partner and its principals.  Most of the time, they believe the general partner has mismanaged the partnership.  Not infrequently, they contend that the general partner represented that the partnership would invest in one category of asset, when in fact it invested in something else.  Unfortunately, these clients often face an uphill battle, should they wish to sue to recover their investments.  These situations underscore a key point of investment diligence: read your partnership agreement carefully and assume it means what it says, particularly if it is governed by Delaware law.

Waiver of fiduciary duties: Delaware law permits parties to a limited partnership agreement to disclaim all fiduciary duties based on the principle of freedom of contract.  Frequently, a limited partnership agreement will do so, though most provide exceptions in cases involving fraud, bad faith, or gross negligence.  LPAs also generally provide broad exculpation and indemnification provisions for the general partner and its officers and affiliates.  Delaware courts will enforce these provisions according to their terms.

The only duty that may not be disclaimed under Delaware law is the covenant of good faith and fair dealing, which is implied into Delaware contracts.  But the Delaware Supreme Court has stated that this implied covenant is not a remedy for rebalancing economic interests after events that could have been anticipated, but were not.  See Nemec v. Shrader, 991 A.2d 1120, 1128 (Del. 2010).  In other words, the implied covenant does not apply when the contract addresses the conduct at issue and will not allow an investor to get around an unfavorable, but enforceable, contract provision.

Conflict-of-interest transactions: Transactions between a general partner and an affiliate necessarily pose a conflict of interest, thereby implicating the duty of loyalty.  But since fiduciary duties can be waived in limited partnership agreements, LPAs regularly permit the general partner to engage in these transactions subject to an approval process.  Frequently, this approval process requires approval by either a percentage of the disinterested limited partners or approval by a committee appointed to address these transactions.  Provided the process outlined in the LPA is followed in good faith, Delaware courts will not generally set aside an interested transaction.

Use of investor funds: Delaware LPAs usually provide the general partner with sole discretion regarding how funds should be invested.  When a partnership fails, investors often want to sue the general partner and its principals on the basis that they were told their funds would be invested in one type of asset, when they were in fact invested elsewhere.  While an LPA that provides wide latitude to the general partner on investment decisions is not an ironclad defense against a lawsuit for securities fraud or fraudulent inducement, it does make prevailing in a lawsuit much more difficult for the investor.  Further, all LPAs contain a merger clause, which states that the investor is not relying on any representations not expressly contained in the LPA.

Access to books and records: Section 17-305(f) of the Delaware Revised Uniform Limited Partnership Act allows a partnership agreement to expand or restrict limited partners’ access to books and records.  Based on this statute, LPAs often severely restrict or even eliminate a limited partner’s access to information.  While the enforceability of a provision that completely eliminates access to information is an unsettled issue in Delaware, the cautious investor should assume that these provisions would be enforced.

Moral of the story: The diligent limited partnership investor will read the LPA carefully.  If possible, provisions that provide a general partner with unacceptable leverage should be renegotiated.  For high demand investments, the general partner will usually refuse to renegotiate.  In those situations, the investor should understand that the LPA means what it says.