Monday, September 26, 2016
Every year I teach RUPA (1997) § 404(e), and every year I am confused. That section states that “[a] partner does not violate a duty or obligation under this [Act] or under the partnership agreement merely because the partner’s conduct furthers the partner’s own interest.” The comment makes the following observations (emphasis added):
Subsection (e) is new and deals expressly with a very basic issue on which the UPA is silent. A partner as such is not a trustee and is not held to the same standards as a trustee. Subsection (e) makes clear that a partner’s conduct is not deemed to be improper merely because it serves the partner’s own individual interest.
That admonition has particular application to the duty of loyalty and the obligation of good faith and fair dealing. It underscores the partner’s rights as an owner and principal in the enterprise, which must always be balanced against his duties and obligations as an agent and fiduciary. For example, a partner who, with consent, owns a shopping center may, under subsection (e), legitimately vote against a proposal by the partnership to open a competing shopping center.
I have always found this shopping center example to be puzzling. Assume that the partner believes that it would be beneficial for the partnership to open a shopping center, but harmful to the partner’s individual interest (because it will compete with his personal shopping center). In other words, the partner is voting against a proposal not because the partner believes that it is in the partnership’s interest to do so, but solely because the partner believes that it is the right decision for him personally. Is § 404(e) conveying that voting in such a manner is not a breach of the partner’s duty of loyalty or the implied covenant?
Under the “cabining in” language of RUPA (1997), the action has to fit within § 404(b) to be considered a breach of the duty of loyalty. Section 404(b)(1) prevents the “appropriation of a partnership opportunity.” When a partner attempts to block the partnership from taking an opportunity to protect the partner’s own related business, can it be argued that the partner is, at least indirectly, seeking to appropriate the opportunity for himself?
Alternatively, might the partner’s vote violate the § 404(b)(3) obligation to “refrain from competing with the partnership”? While the partners have consented to the partner owning his own shopping center, that consent presumably does not extend to self-interested conduct designed to foil the partnership’s effort to open its own shopping center. When a partner votes against what he believes would benefit the partnership solely to protect his own competing business, isn’t that a form of competition with the partnership?
Might the vote violate the implied contractual covenant of good faith and fair dealing? One could argue that the partnership agreement assumes that partner voting will be based on what the partner thinks is good for the partnership. Surely the spirit of the agreement is that a partner has to consider the partnership’s interests, and not solely the partner’s personal interests, when voting.
Is the answer simply that voting is always protected by § 404(e)? A partner’s vote can never give rise to a breach of fiduciary duty or implied covenant claim? Cf. Thorpe v. CERBCO, Inc., 676 A.2d 436, 444 (Del. 1996) (noting that the controlling shareholders “were entitled to pursue their own interests in voting their shares,” and acknowledging “their entitlement as shareholders to act in their self-interest”); see also Jedwab v. MGM Grand Hotels, Inc., 509 A.2d 584, 598 (Del. 1986) (observing that the law “does not … require … controlling shareholders [to] sacrifice their own financial interest in the enterprise for the sake of the corporation or its minority shareholders”); Willard v. Moneta Bldg. Supply, Inc., 515 S.E.2d 277, 288 (Va. 1999) (concluding that majority stockholders are entitled to vote their shares as they see fit absent illegal, oppressive, or fraudulent conduct).
I welcome your thoughts.