After the 2008 recession, it is difficult to imagine that the public is investing billions of dollars in publicly traded entities with little regulation of board conflicts and no fiduciary duty protections. Yet, that is precisely the case for more than $284 billion of investments. Investors have flocked to publicly traded limited partnerships (LPs) and limited liability companies (LLCs), collectively known as master limited partnerships (MLPs), because many are high-performing energy companies with a tax preference. MLP market capitalization, while only $14 billion in 2000, topped $284 billion as of February 2016, and more initial public offerings are on the horizon. Dazzled by the possibility of high yields, individual investors are likely unaware that they do not enjoy the same fiduciary duty protections that apply to stockholders of publicly traded corporations.
Delaware corporate law offers significant investor protections largely flowing from an unwaivable duty of loyalty. In contrast, Delaware’s alternative entity scheme permits the waiver of all fiduciary duties in LP and LLC agreements. Publicly traded LPs are also exempt from listing rules that normally require independent board members. Even where special committees vet conflicted transactions, committee members may have affiliations with the MLP’s corporate sponsor and owe conflicting duties to the sponsor and the limited partners.
Scholars suggest that “uncorporate” substitutes could theoretically mitigate the absence of fiduciary duties, but empirical research shows that publicly traded MLPs rarely adopt such substitutes. The realities of the MLP marketplace leave investors with only the implied covenant of good faith and fair dealing, which is not a substitute for traditional fiduciary duties.
This Article exposes the many obstacles investors have faced in obtaining remedies under MLP agreements. It argues that Contractarian theories or legal diversification constructs do not justify the under-regulation of publicly traded MLPs. This Article recommends reinstating the duty of loyalty for MLPs and ending the LP exception from board independence requirements.