The Going-Private Freeze-Out: A Unique Danger for Investors in Delaware Non-Corporate Business Associations
Brent J. Horton
This Article is the first to empirically examine provisions that limit or eliminate the fiduciary duties of managers (in the case of LLCs) and general partners (in the case of LPs) in the operating agreements of publicly traded non-corporate business associations, and link those findings to a problem faced by investors in such entities, the going- private freeze-out. In a going-private freeze-out, public stockownership is eliminated and the company becomes closely held. This Article is especially timely given the exponential growth of LPs and LLCs over the past fifteen years. In 2011, in Delaware, the state of formation for most publicly traded companies, seventy-five percent of newly formed companies were either LPs or LLCs (up from twenty percent in 1997).
This Article begins with an explanation of corporate going-private freeze-outs, and the dissatisfaction that may arise among cashed-out shareholders seeking a fair price. In the corporate context such shareholders are protected by the fiduciary doctrine of entire fairness. The cashed-out shareholders can bring a lawsuit to force a fair price.
In contrast, for non-corporate entities, the protection of entire fairness may fail. In Delaware, LPs and LLCs can draft provisions in their operating agreements that eliminate fiduciary duties, including the applicability of entire fairness to going-private freeze-outs. The Author discusses cases where challenges to going-private freeze-outs based on entire fairness were foreclosed by provisions in the applicable operating agreement. Most prominent among these cases are In re Atlas Energy Resources, LLC, and Lonergan v. EPE Holdings, LLC.
This Article, The Going-Private Freeze-Out, culminates with an empirical analysis, that is to say, a count of how many publicly traded non-corporate business associations contain provisions like those in Atlas Energy and Lonergan–specifically special approval provisions and fiduciary elimination provisions. The Author concludes that almost ninety percent of publicly traded non-corporate business associations subject their investors to a unique susceptibility (beyond that experienced by investors in publicly traded corporations) to going- private freeze-outs.