Toward Consistent Fiduciary Duties for Publicly Traded Entities

Florida Law Review Volume 68 | Issue 1 Article 5 October 2016 Toward Consistent Fiduciary Duties for Publicly Traded Entities Sandra K. Miller Karie Davis-Nozemack Follow this and additional works at: http://scholarship.law.ufl.edu/flr Part of the Business Organizations Law Commons Recommended Citation Sandra K. Miller and Karie Davis-Nozemack, Toward Consistent Fiduciary Duties for Publicly Traded Entities, 68 Fla. L. Rev. 263 (2016). Available at: http://scholarship.law.ufl.edu/flr/vol68/iss1/5 This Article is brought to you for free and open access by UF Law Scholarship Repository. It has been accepted for inclusion in Florida Law Review by an authorized administrator of UF Law Scholarship Repository. For more information, please contact . Miller and Davis-Nozemack: Toward Consistent Fiduciary Duties for Publicly Traded Entities TOWARD CONSISTENT FIDUCIARY DUTIES FOR PUBLICLY TRADED ENTITIES Sandra K. Miller* Karie Davis-Nozemack** Abstract 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 * Professor Sandra K. Miller is a Professor of Business Law, Widener University, School of Business Administration. She is an American Bar Association (ABA) Advisor to the LLC Series Committee of the National Conference of Commissioners on Uniform State Laws (NCCUSL) and was previously an ABA Advisor to the NCCUSL Committee that drafted the Uniform Limited Liability Company Act. ** Professor Karie Davis-Nozemack is an Assistant Professor of Law and Ethics, Georgia Institute of Technology, Scheller College of Business. The authors would like to thank Chief Justice Leo E. Strine, Jr., Vice Chancellor J. Travis Laster, David Jenkins, Professor Lucien Dhooge, Professor Deven Desai, and Professor Daniel S. Kleinberger for their thoughtful editorial comments and Christian Shea and Rich Cory for their research assistance. 263 Published by UF Law Scholarship Repository, 2016 1 Florida Law Review, Vol. 68, Iss. 1 [2016], Art. 5 264 FLORIDA LAW REVIEW [Vol. 68 theories or legal diversification constructs do not justify the underregulation of publicly traded MLPs. This Article recommends reinstating the duty of loyalty for MLPs and ending the LP exception from board independence requirements. INTRODUCTION .....................................................................................265 I. MLPS AND THE OIL AND GAS INDUSTRY ...............................268 A. MLP Structure ................................................................268 B. MLP Governance ...........................................................270 C. MLP Taxation .................................................................273 D. MLP Performance ..........................................................274 E. Who May Invest in an MLP? ..........................................275 II. CONTEXTUALIZING MLP FIDUCIARY DUTIES.........................276 A. Comparing Corporate and MLP Fiduciary Duties..............................................................................277 1. Board Independence Under Listing Standards .................................................................278 2. Corporate Board Structure and Conflicts Committee Membership ..........................................280 3. Fiduciary Duty Constraints and the Socializing Role of Duty of Loyalty Literature and Jurisprudence......................283 B. Obstacles to Fiduciary Duties and Accountability in MLPs ..........................................................................288 1. The One-Sided Nature of MLP Agreements .............................................................288 2. Difficulty in Challenging Unfair Fairness Opinions ....................................................292 3. Difficulty in Proving Bad Faith...............................295 4. No Affirmative Duty of Disclosure.........................299 5. Problems with Primary and Secondary Liability ...................................................................301 6. The Judicial Role and the Implied Covenant of Good Faith ..........................................305 III. PUBLICLY TRADED MLPS NECESSITATE FIDUCIARY DUTIES ...................................................................................308 A. Continuing Relevance of Fiduciary Duties Despite Challenges to Berle–Means Model ...................309 B. The Contractarian Argument Overlooks Efficiencies of Standard Corporate Terms and Presupposes Perfect Market Conditions .................312 http://scholarship.law.ufl.edu/flr/vol68/iss1/5 2 Miller and Davis-Nozemack: Toward Consistent Fiduciary Duties for Publicly Traded Entities 2016] PUBLICLY TRADED ENTITIES 265 C. Appropriate Legal Diversification as Between Public and Private Companies .......................................314 D. Positive Relationship Between Independent Monitoring and Performance .........................................315 E. The MLP Investor Profile: Who Are the Investors and What Do They Know About MLP Governance? ..................................................................317 F. Approaches to Restoring the Duty of Loyalty for MLPs: The Path Forwar (...truncated)