Delaware Partnership Agreement: DRUPA, DRULPA, Court of Chancery

The Delaware Entity Choice

Delaware’s flat $300 annual tax (for LPs, LLLPs, and LLCs) is meaningfully lower than California’s $800 minimum or Massachusetts’s $500 minimum, and the absence of any income-tax filing burden (unlike NY’s Form IT-204 or California’s Form 565) makes Delaware administratively cheaper to maintain.

For partnerships with no actual Delaware operations (the typical Delaware vehicle used by funds, holding companies, and family wealth structures formed in Delaware for legal-environment reasons), Delaware imposes no income tax on the partnership and the partners pay their own state’s personal income tax on K-1 amounts. This makes Delaware tax-neutral compared to home-state alternatives for non-Delaware operations.

Freedom of Contract: The Defining Feature

DRULPA §17-1101(c) provides: “It is the policy of this chapter to give maximum effect to the principle of freedom of contract and to the enforceability of partnership agreements.” The accompanying §17-1101(d) provides that fiduciary duties may be expanded, restricted, or eliminated by provisions in the partnership agreement, except that the implied contractual covenant of good faith and fair dealing may not be eliminated.

This is the broadest entity-law freedom of contract in the country. Sophisticated private equity, venture capital, and hedge fund partnerships routinely include provisions waiving the duty of loyalty, the duty of care, and the duty of full disclosure with respect to specifically enumerated activities. The provisions are routinely upheld by the Court of Chancery so long as they are clearly drafted; ambiguities are resolved against waiver under Delaware’s rule that waivers must be specific and conspicuous.

DRUPA §15-103(f) provides parallel authority for general partnerships and LLPs. The freedom is not unlimited: the implied covenant of good faith and fair dealing is non-waivable, and provisions that purport to indemnify partners for intentional misconduct or knowing violations of law are typically unenforceable. But within these limits, sophisticated parties can customise the fiduciary-duty regime to a degree not possible in any other state.

The Court of Chancery

The Delaware Court of Chancery is the principal trial court for disputes involving Delaware business entities. The court has six judges (one Chancellor and five Vice Chancellors), all selected for business-law expertise and serving 12-year terms. There are no juries; cases are tried and decided by the Chancellor or a Vice Chancellor.

The court’s body of opinion is the de facto national authority on business-entity disputes. Decisions are typically issued promptly (weeks or months, not years for most matters), are well-reasoned, and are cited extensively by courts in other states. The combination of expert judges, no juries, and rapid disposition makes Chancery dramatically more predictable and efficient than ordinary state courts for business disputes.

Delaware partnerships and limited partnerships agree (by default and by partnership agreement) that the Court of Chancery has exclusive jurisdiction over disputes involving the entity’s internal affairs. This means that even partnerships with no other Delaware contacts can rely on Chancery for resolution of partner disputes. Partnership-agreement drafting should explicitly designate Chancery as the venue for disputes.

Sample Delaware-Specific Provisions

The Implied Covenant of Good Faith and Fair Dealing

Delaware partnership agreements can eliminate the duties of loyalty and care, but they cannot eliminate the implied contractual covenant of good faith and fair dealing. The covenant is not a fiduciary duty; it is a default term read into every Delaware contract that requires the parties not to take action that would deprive the other of the fruits of the agreement.

In the partnership context, the covenant has been invoked by Chancery to constrain general partner conduct even where fiduciary duties had been waived. The covenant operates as a back-stop: parties who use Delaware’s broad fiduciary-duty waiver authority to grant themselves wide latitude still cannot use that latitude to act in bad faith. The line between “exercising contractual discretion” (permitted) and “acting in bad faith” (not permitted) is the subject of substantial Chancery case law and ongoing dispute.

Practical implication for drafting: even with extensive fiduciary-duty waivers, the general partner cannot rely on the agreement to insulate plainly self-dealing or oppressive conduct. The covenant is not a substitute for fiduciary duty but it is a meaningful constraint, and limited partners have used it successfully in Chancery to challenge general partner conduct that would have been permitted by literal contract terms.

When to Form in Delaware vs Your Home State

Forming in Delaware while operating elsewhere requires registration as a foreign entity in the operating state, which doubles the entity-administration burden (Delaware annual report plus operating-state annual report; two registered agents; two sets of business licences and tax registrations). Delaware formation is worth the overhead when:

• The partnership has multiple non-trivial investors who expect Delaware governance (most institutional investors strongly prefer Delaware);
• The partnership agreement uses extensive freedom-of-contract provisions (fiduciary-duty waivers, special allocations, complex distribution waterfalls);
• Litigation risk is meaningful and the predictability of Chancery is valuable;
• The partnership may seek institutional capital or eventually convert to a corporation for an IPO (Delaware corporate counterparts are similarly preferred).

For small operating businesses with no institutional investors, no sophisticated drafting requirements, and no expected litigation, home-state formation is usually simpler and equally effective. The Delaware advantages are real but they have costs.

Authoritative Sources

• 6 Del. C. §§15-101-15-1210 (Delaware Revised Uniform Partnership Act). Delaware Code Online.
• 6 Del. C. §§17-101-17-1111 (Delaware Revised Uniform Limited Partnership Act).
• 6 Del. C. §17-1101(d) (fiduciary-duty waiver authority).
• 6 Del. C. §17-214 (LLLP election).
• Delaware Court of Chancery. Court of Chancery.
• Delaware Division of Corporations. DE DOC.
• R.S.M. America v. Blue Bell Creameries, Del. Ch. (2020) and progeny on the implied covenant of good faith and fair dealing in partnership context.

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