Toward Consistent Fiduciary Duties for Publicly-Traded Entities

Abstract

After the 2008 recession it is difficult to imagine billions of dollars being invested in publicly-traded entities with little regulation of board conflicts and no fiduciary duty protection for investors, and yet that is precisely the case for more than $516 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, only $14 billion in 2000, now tops $516 billion, and more IPOs 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 a duty of loyalty that cannot be waived. In contrast, Delaware’s alternative entity scheme permits the waiver of all fiduciary duties in LP and LLC agreements. Publicly-traded MLPs that are LPs are also exempt from listing rules that normally require independent board members. Even where special committees are formed to 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 note “uncorporate” substitutes that theoretically could mitigate the absence of fiduciary duties, but empirical research shows that such substitutes are rarely adopted in publicly-traded MLPs. 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 the under-regulation of publicly-traded MLPs is not justified by Contractarian theories or legal diversification constructs. This article recommends reinstating the duty of loyalty for MLPs and ending the LP exception from board independence requirements.

Keywords: MLP, Master Limited Partnership, PTP, Publicly Traded Partnership, fiduciary duty, waiver

JEL Classification: K2, K20, K22, K29