Delaware Chancery Court Decision Provides Reminders for MLP Transactions


November 23, 2021

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On November 12, 2021, the Delaware Courtroom of Chancery issued a put up-demo determination acquiring that the typical partner of a Master Constrained Partnership (“MLP”) breached the partnership arrangement of the MLP that it controlled and engaged in willful misconduct that remaining the general partner unprotected from the exculpatory provisions in the partnership arrangement. It is uncommon for a court docket to obtain these a breach on the element of the general partner of an MLP, and this selection is based on the individual info of the scenario, not a transform in proven regulation. The determination features useful reminders to participants in MLP transactions about the limits of acceptable perform beneath normal partnership agreement provisions.

Background

In 2005, Loews Company (“Loews”) formed and took Boardwalk Pipeline Partners, LP (the “Partnership” or “Boardwalk”) general public as an MLP just after the Federal Electrical power Regulatory Commission (“FERC”) executed a regulatory coverage that designed MLPs an eye-catching expenditure motor vehicle for pipeline providers. Boardwalk served as a holding organization for its subsidiaries that function interstate pipeline units for transportation and storage of natural fuel. Loews, as a result of its regulate of the general husband or wife of the Partnership (the “General Partner”), controlled Boardwalk.

The Basic Partner by itself was a normal partnership managed by its basic partner, Boardwalk GP, LLP (“GPGP”). GPGP had a sole member, Boardwalk Pipelines Holding Corp., a wholly owned subsidiary of Loews (“Holdings”). Holdings experienced unique authority in excess of the business and affairs of GPGP not relating to the management and management of Boardwalk. Holdings’ board of administrators consisted solely of directors affiliated with Loews. GPGP had its own 8-man or woman board (the “GPGP Board”), consisting of 4 administrators affiliated with Loews and four administrators unaffiliated with Loews. The GPGP Board experienced authority over the company and affairs of GPGP connected to the management and management of Boardwalk. The different composition of the GPGP Board and the Holdings Board meant that if Holdings created a selection for GPGP as its sole member, then Loews controlled the final decision. If the GPGP Board created the selection for GPGP, nevertheless, then the 4 administrators unaffiliated with Loews could possibly stop GPGP from having the action that Loews required.

Boardwalk’s Settlement of Limited Partnership (“Partnership Agreement”) included a provision that would let the Standard Husband or wife to receive all of the common fairness of Boardwalk not owned by Loews by the work out of a Connect with Proper, so extended as a few circumstances had been met. Initially, the Standard Partner experienced to own “more than 50% of the full Limited Partnership Interests of all lessons then Outstanding.” Second, the Basic Husband or wife had to get “an Impression of Counsel (the “Opinion”) that Boardwalk’s position as an association not taxable as a corporation and not usually issue to an entity-stage tax for federal, point out or community revenue tax needs has or will reasonably likely in the long run have a materials adverse impact on the greatest applicable amount that can be billed to customers” (the “Opinion Condition”). Third, the General Lover had to ascertain that the Feeling was satisfactory (the “Acceptability Condition”). The Partnership Agreement did not specify whether or not the GPGP Board, as the board that managed the publicly traded partnership, or Holdings, as the Typical Partner’s sole member, should really figure out no matter if the Viewpoint was satisfactory on behalf of the Standard Companion.

If the 3 circumstances earlier mentioned have been satisfied, then, under the terms of the Partnership Agreement, the Common Husband or wife could training the Connect with Suitable in its particular person capability “free of any fiduciary duty or obligation in any way to the Partnership, any [l]imited [p]artner or [a]ssignee” and not topic to any contractual obligations. The Phone Ideal would be exercised dependent on a trailing sector price typical.

On March 15, 2018, the FERC proposed a bundle of regulatory procedures that  probably manufactured MLPs an unattractive financial investment car or truck for pipeline corporations. The buying and selling price of Boardwalk’s popular models declined subsequent the FERC announcement. In reaction to the March 15th FERC motion, many MLPs issued push releases stating that they did not anticipate the proposed FERC guidelines would have a material effect on their prices, principally for the reason that consumers were being locked into negotiated price agreements. Boardwalk issued a push release stating that it did not anticipate FERC’s proposed change to have a substance impact on revenues (fairly than prices). A couple weeks following the push launch, Boardwalk publicly disclosed the Common Partner’s intention to most likely exercising the Contact Appropriate (the “Potential-Workout Disclosure”). The widespread unit cost of Boardwalk additional declined.

Loews retained outdoors counsel to get ready the Impression essential under the Partnership Settlement. The Court uncovered that counsel, following dialogue with Loews, designed a “contrived” impression in buy to come across an adverse effect on charges when the FERC proposals have been not last. Loews also sought guidance from supplemental exterior counsel to advise on irrespective of whether the Viewpoint was enough for functions of the Belief Affliction necessities underneath the Partnership Arrangement and no matter whether Holdings had the authority to make the acceptability resolve, or regardless of whether the GPGP really should make these willpower. In the end, following the lawful tips it gained, Loews experienced the Holdings board, comprised fully of Loews insiders, come across the Opinion appropriate.

On May possibly 24, 2018, Boardwalk’s unitholders submitted match in the Courtroom of Chancery searching for to reduce the Normal Lover from performing exercises the Phone Right using a 180-day measurement period of time that involved investing times affected by the Likely-Exercising Disclosure, claiming that the disclosure artificially lowered the device trading price tag and undermined the contractual connect with price tag methodology. The events soon reached a settlement on the 180-working day measurement interval. On July 18, 2018, Loews exercised the Connect with Appropriate and closed the transaction just a person working day prior to FERC declared a remaining deal of regulatory measures that built MLPs an even more interesting expenditure motor vehicle. Soon after the Courtroom of Chancery rejected the settlement Loews arrived at with the first plaintiffs, the recent plaintiffs took more than the litigation.

The Court’s Conclusions

In its put up-demo belief, the Court docket held that the Common Spouse breached the Partnership Arrangement by working out the Call Right devoid of initially fulfilling the Viewpoint Affliction or the Acceptability Problem. The Court observed that the Basic Husband or wife acted manipulatively and opportunistically and engaged in willful misconduct when it exercised the Phone Suitable. Even more, the Court held that the exculpatory provisions in the Partnership Arrangement do not guard the Basic Companion from legal responsibility.

The Court docket held the Viewpoint failed to satisfy the Viewpoint Problem, since the Impression did not reflect a good faith effort and hard work on the portion of the outside the house counsel to discern the points and utilize professional judgment. In making the resolve, the Courtroom reviewed in element factual events submitted at trial and took into account the expert and personalized incentives the exterior counsel confronted in rendering the View.

In keeping the Typical Partner unsuccessful to fulfill the Acceptability Problem, the Court mentioned that a partnership agreement for an MLP is not the merchandise of bilateral negotiations and the minimal partners do not negotiate the agreement’s conditions, and, as a final result, Delaware courts would construe ambiguous provisions of the partnership settlement versus the standard husband or wife. The Court docket located that, “because the issue of who could make the acceptability determination was ambiguous, effectively-settled interpretive rules require that the court construe the agreement in favor of the constrained associates.” As these, the Court decided that the GPGP Board, which integrated directors who were being unbiased of Loews, was the system that had the authority to make the acceptability resolve. Because the GPGP Board did not make the dedication concerning the Acceptability Ailment, the Basic Partner breached the Partnership Agreement by exercising the Connect with Appropriate.

The Courtroom more held that the provision in the Partnership Agreement stating the Normal Spouse would be “conclusively presumed” to have acted in excellent faith if it relied on viewpoints, experiences or other statements furnished by an individual that the Typical Associate moderately thinks to be an qualified did not implement to defend the Normal Husband or wife from legal responsibility, mainly because the General Companion participated knowingly in the endeavours to develop the “contrived” Impression and provided the propulsive pressure that led the outdoors counsel to get to the conclusions that Loews needed.

In addition, the Courtroom held the exculpation provision in the Partnership Arrangement, which would usually guard the Normal Partner from legal responsibility besides in case of undesirable faith, fraud or willful misconduct, did not utilize due to the fact the Typical Husband or wife engaged in willful misconduct when it exercised the Call Correct.

The Court found the Standard Spouse liable for damages of somewhere around $690 million, additionally pre- and post-judgment desire.

Crucial Takeaways

When this situation does not replicate a departure from established regulation, it provides practical classes for participants in MLP transactions to look at, which includes:

  • Exterior counsel and advisors must be independent. The Boardwalk selection highlights the worth of retaining unbiased outside counsel and advisors in transactions involving conflicts of interest.  Exterior counsel and advisors should really independently discern the facts, carry out investigation, and use skilled judgment.  
  • Ambiguity in the partnership arrangement may possibly be solved in favor of the community limited partners. MLPs and their sponsors should meticulously take into consideration their approach when building determinations with respect to any ambiguous provisions of the partnership arrangement. While the partnership agreement may possibly provide for a presumption that they have acted in very good religion, the common companion and sponsor should really perform their activities with regard to a conflict transaction as if there were no this kind of presumptive provision. 
  • Target on precise compliance with the partnership agreement. Steady with earlier issued scenario law, to attain the added benefits supplied in the partnership agreement, MLPs and their sponsors will have to strictly comply with the conditions of the partnership agreement. Similarly as crucial, they must be ready to build a crystal clear and regular document of gratification of this kind of situations. 
  • Usually be conscious of composed communications and that steps will be judged with profit of hindsight. The Court cited a number of e-mails, handwritten notes and other composed communications (like from attorneys and in legislation companies) released as proof at the demo. The Courtroom also cited drafts of minutes of committee conferences in examining the created document. Individuals in MLP transactions really should be aware that any prepared communications, which include these considered to be privileged, could be evidence in litigation.  Participants should really also identify that communications and actions taken will be reviewed with the gain of 20/20 hindsight.    

For the total feeling, be sure to reference: Bandera Grasp Fund LP v. Boardwalk Pipeline Partners, LP


Gibson Dunn’s lawyers are out there to help in addressing any questions you could have about these developments. Be sure to speak to the Gibson Dunn lawyer with whom you ordinarily function, any member of the firm’s Mergers and Acquisitions, Oil and Gas or Securities Litigation practice teams, or the next authors:

Hillary H. Holmes – Houston (+1 346-718-6602, [email protected])
Gerry Spedale – Houston (+1 346-718-6888, [email protected])
Tull Florey – Houston (+1 346-718-6767, [email protected])
Brian M. Lutz – San Francisco/New York (+1 415-393-8379/+1 212-351-3881, [email protected])

Special appreciation to Stella Tang and Matthew Ross, associates in the Houston business office,  for their operate on this client notify.

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Attorney Advertising:  The enclosed products have been prepared for normal informational needs only and are not meant as authorized tips.



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