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Fiduciary Duties and Private Equity LPAs: What Have Courts Said?

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Capital Markets and Mergers & Acquisitions Bulletin


In our previous bulletins, we explored two interrelated questions. First, the fiduciary duties owed by general partners (GPs) and their directors to limited partners (LPs) within a PE fund. Second, when LPs may be able to bring a derivative action on behalf of the limited partnership against the corporate GP and/or the GP’s directors for a breach of such fiduciary duties.

We conclude our three-part series on fiduciary duties in the private equity context with the corresponding question of whether the terms of the PE fund’s limited partnership agreement (LPA) can impact either (1) the right of the LPs to bring such a derivative action, or (2) the scope of the fiduciary duties owed by the GP to the limited partnership.

While the courts’ guidance is less than definitive, one implication is clear: the particular drafting of the LPA may be determinative.[1]

Drafting for the Possibility of an LP Derivative Action

Courts have sent somewhat mixed signals on the interaction between an LPA’s terms and an LP’s ability to bring a derivative action against the GP and/or the GP’s directors.

In allowing a derivative action by the LPs to proceed, the court in Binscarth found support in the fact the LPA expressly made the GP and its directors “liable for a material breach of… the fiduciary duty owed to the partnership…”[2] Elsewhere the court also indicated that an LPA’s drafting could have a preclusive effect on an LP’s right to bring a derivative action.[3] Taken together these comments indicate that relevant terms of the LPA will be taken into account in deciding the issue.

By contrast, the court in Asher Place LP rejected the notion that the LPA ousted the LP’s common law right to bring a derivative action. The court’s focus was that clause which “broadly confirm[ed] the exclusive authority of the [GP] to act on behalf of the limited partnership” and the court did not think it could “be interpreted so as to eliminate the right of a [LP] to bring a derivative action regarding wrongs allegedly committed by the [GP].[4] Of course, the question raised is whether the court would have felt differently if confronted with drafting more robust than a mere “exclusive authority” clause in favour of the GP.

The court faced a different situation in CPI Crown Properties. It held an undertaking by the GP in an LPA to act “honestly, in good faith and in the best interests of the limited partners” created a “contractual fiduciary duty” owed to the LPs.[5] The individual LPs were therefore “entitled to exercise their contractual rights to claim damages as a result of any breach of that fiduciary duty.”[6] The implications of CPI Crown Properties are twofold. First, as indicated in Binscarth LP, drafting can and does matter. Second, where the GP makes a fiduciary undertaking directly to the LPs (as opposed to the limited partnership), a derivative action by the LPs may not be necessary given the LP’s personal, contractual right of claim against the GP.

Drafting for the Scope of the GP’s Fiduciary Duties

Caselaw addressing the impact of an LPA’s terms on the scope of fiduciary duty owed is somewhat more detailed.

Some LPAs, such as in Binscarth LP and Tackama, either expressly describe the GP as a “fiduciary” or include an express GP undertaking to act in a “fiduciary capacity”.[7] However, even where no “fiduciary” reference is made, courts can view those duties that are expressly undertaken by the GP as running alongside the fiduciary duties imposed on the GP as a matter of law, such as in Naramalta and Varma.[8]

The general result is that the scope of applicable fiduciary duties will partly be determined against the backdrop of the LPA’s terms. For example, quoting the Supreme Court of Canada (SCC), the court in Simkeslak Investments explained it “will be ‘the facts surrounding the relationship’ and the expectation of the parties that will determine the existence and nature of any fiduciary duties.”[9] Similarly, the British Columbia Court of Appeal (BCCA) in Tackama stated that, “in determining whether a breach of fiduciary duty had occurred… all the relevant terms of the [LPA must be considered] to determine whether the general partner had acted within the scope of his authority.”[10]

Towards this end, a ruling of particular pertinence to private equity is the SCC’s decision in Molchan. The dispute arose from the sale by a GP of limited partnership assets to the GP’s parent. The LPA expressly recognized that the GP, having wider industry interests and operations, could engage in competing ventures without such ventures constituting a conflict of interest and even that the GP could sell partnership assets to “other partnerships or entities managed by the [GP]…”[11] This broad discretion of the GP regarding the sale of partnership assets factored heavily in the SCC’s dismissal of the breach of fiduciary duty claim. That said, the SCC’s ruling also hinged on its findings that (1) there was no evidence of bad faith by the GP, (2) the price paid for the assets was not alleged to be inadequate, and (3) the sale appeared to be in the best interest of the partnership.[12]

This complex relationship between the terms of the LPA, on the one hand, and the scope of the GP’s fiduciary duties to the limited partnership, on the other hand, was also on full display in Tackama. The BCCA first acknowledged that “the rights and obligations of the parties are to be found within the four corners of the partnership agreement properly construed.”[13] Later on, however, the court cautioned that even “sweeping [contractual] powers are not absolute and are to be considered in light of generally applicable legal principles which places [the GP] in a fiduciary relationship toward the limited partners.”[14]

Practical Takeaways

The principal takeaway from the caselaw is that the terms of the LPA will play a significant role in any fiduciary duty dispute among a GP and one or more of its LPs.

Regarding the potential for an LP to bring a derivative action against the GP, the courts have sent mixed signals. That said, judicial treatment of the issue remains relatively brief and it is unclear from the decisions (e.g., because the reader is not privy to the full terms of the LPA) whether more robust drafting, such as a comprehensive “exclusive remedies” clause, could have changed certain results. One also wonders (e.g., because the reader is not privy to all submissions made) whether defendant GPs could have made stronger arguments stressing (1) the sophistication of the parties, (2) the freedom of contract, and/or (3) the various contractual rights of recourse of the LPs under the applicable LPA.

As for the scope of the fiduciary duty owed by the GP, the first takeaway is that courts have honoured express fiduciary undertakings, e.g., the notion of a “contractual fiduciary duty”, including fiduciary duties assumed by a GP to the individual limited partners (as opposed to the limited partnership). Note, however, that an express fiduciary undertaking is not required for fiduciary duties to arise in the limited partnership context: the GP will have fiduciary duties to the limited partnership as a general principle of law. The second takeaway is therefore that courts can be expected to decide an alleged breach of fiduciary duty by the GP owed to the limited partnership against the backdrop of the LPA’s terms. For example, if the events at issue fall reasonably within the scope of a GP’s contractual authority and the GP is acting in good faith, a claim of breach of fiduciary duty may be difficult. If, on the other hand, the events at issue fall into grey zones regarding the GP’s authority under the LPA, the breach of fiduciary duty claim may carry greater force. As such, the overall takeaway is clear: whether acting for GP or LP, draft the LPA for matters of material concern regarding the scope of the GP’s duties and avoid any related gaps, ambiguities or inconsistencies.

As for the possibility of expressly limiting the fiduciary duties owed by a GP, an undercurrent of hostility towards this notion is detectable in some cases.[15] That said, other decisions have signaled the potential for flexibility, i.e., that the scope of the fiduciary duties owed by a GP to the limited partnership could be heavily curtailed by, if not totally subsumed within, the terms of the LPA.[16]

[1] We note that the review conducted in this bulletin is high-level and general in nature. While the authors are not aware of any material discrepancy between the laws of the different common law provinces on the points discussed herein, our review was not exhaustive and a more detailed analysis would be required to comment specifically on the law of any one particular common law province.

[2] Binscarth Holdings LP v. Grant Anthony, 2022 ONSC 3426 (CanLII) [Binscarth LP] at para. 52. 

[3] See Binscarth LP at para. 41.

[4] Asher Place Senior Residency Limited Partnership v. Balcom, 2021 BCCA 162 (CanLII) at para. 43. 

[5] 0738827 B.C. Ltd. v. CPI Crown Properties International Corporation, 2013 ABQB 499 (CanLII) [CPI Crown Properties] at paras. 42, 57, 58, 61 and 69 (emphasis added), affirmed in 0738827 B.C. Ltd v CPI Crown Properties International Corporation, 2014 ABCA 205 (CanLII).

[6] CPI Crown Properties at para. 61.

[7] See Binscarth LP at paras. 18, 31 and 49 and 337965 B.C. Ltd. v. Tackama Forest Products Ltd., 1992 CanLII 5964 (BC CA) [Tackama] at para. 18.

[8] See Naramalta Development Corporation v. Therapy General Partner Ltd., 2012 BCSC 191 (CanLII) at para. 65 and Extreme Venture Partners Fund I LP v. Varma, 2021 ONCA 853 (CanLII) at para. 95. 

[9] Simkeslak Investments Limited v. Kolter Yonge LP Limited, 2011 ONSC 7134 (CanLII) at para. 61, quoting Hodgkinson v. Simms, 1994 CanLII 70 (SCC), [1994] 3 SCR 377. 

[10] Tackama at para. 77. 

[11] Molchan v. Omega oil and Gas Ltd., 1988 CanLII 103 (SCC), [1988] 1 SCR 348 [Molchan] at para. 35. 

[12] Molchan at para. 42. 

[13] Tackama at para. 77. 

[14] Tackama at para. 188. 

[15] See McKnight v. Hutchison, 2013 BCCA 340 (CanLII) at para. 18 where the BCCA stated “it would take very clear wording to exclude the fiduciary principle from any partners’ relationship…” 

[16] See Rochwerg v. Truster, 2002 CanLII 41715 (ON CA) at para. 63 where the ONCA stated that, while the “equitable principles developed over the last century concerning the fiduciary obligations of partners continue to control contemporary partnerships”, they may “require… flexible application to respond to changing partnership structures, activities and settings.” 

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