The Private Ordering of Publicly Traded Partnerships

Publicly traded partnerships, or master limited partnerships as they are sometimes called, are hybrid entities. Attempting to achieve the perfect structure for organizing economic activity, new statutes added limited liability to entities that enjoy flow-through taxation. However, because of parallel refinements by federal regulators involving taxation and amendments by state legislatures involving fiduciary duties, a strange genetic mutation flourished: the publicly traded partnership (PTP). The PTP organized as a Delaware limited partnership combines limited liability and tax advantages with elimination of fiduciary duties and free transferability of shares. In what might be the pinnacle of separation of ownership and control, unitholders purchase limited partnership units on a public exchange representing equity interests in an entity whose managers have no fiduciary duties toward the purchasers or their investment. Furthermore, new proposals seek to expand the universe of firms that may choose this structure, creating interesting, or alarming, questions about the future of this once tiny but now growing population of firms. Delaware is home to these PTPs, which benefit from the stated policy of both the legislature and the courts to encourage freedom of contract. Though one reason to allow these hybrid entities full freedom of contract is that they are generally formed by familiar parties with the full ability to negotiate the full relationship, this policy seems to wear thin when the limited partnership, or limited liability company, becomes a publicly held entity. In that case, large numbers of investors are investing in the PTP and taking the duties and rights in the limited partnership agreement without negotiation. The ability to monitor management becomes nonexistent. PTP units are freely traded among strangers. The resulting PTP is indistinguishable from a corporation, but shareholders in a corporation are still owed fiduciary duties by the board of directors and officers. Though the number of PTPs has historically been relatively small, incremental changes in federal tax regulations have opened a path for companies that effectively corporations to remain taxed as partnerships even though they are publicly traded. Hence, a new rise in the number of PTPs that have all the advantages of various entities, such as freely transferable shares, centralized management, perpetual life, and flow-through taxation, but none of the disadvantages, such as fiduciary duties and personal liability. This chapter argues that just as Delaware has remained the market leader in corporate law, it is now becoming a quite distinct producer of limited partnership law. And, just as Delaware corporate law has adjusted over time to support efforts of management to reduce liability for fiduciary duties, Delaware limited partnership law has leapt out in front of even its own corporate law to create an entity whose public owners have little of the rights we associate with owners. Combined with federal tax developments that have liberalized the boundaries of which entities may become publicly traded limited partnerships, the future of these entities becomes very interesting. Finally, this chapter argues that Delaware should recognize a class of limited partnerships, PTPs, for which new rules (or merely historical rules) should apply. Just as closely-held corporations require a different analytical lens than publicly held corporations, PTPs would benefit from a more nuanced contractarian response.