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On December 19, 2022, Chief Justice Seitz issued an opinion for a unanimous Delaware Supreme Court, sitting en banc, reversing and remanding the Delaware Court of Chancery’s decision in Bandera Master Fund LP v. Boardwalk Pipeline Partners, an action brought by former minority unitholders alleging breaches of the Boardwalk Pipeline Partners, LP (“Boardwalk”) Partnership Agreement.1 In its post-trial opinion, the Delaware Court of Chancery had found that Boardwalk’s general partner, which “owned slightly more than 50% of” Boardwalk’s units and indisputably exercised control over it,2 orchestrated a “sham” trigger of a call right that permitted it to take the entity private by “manipulating” outside counsel to issue a legal opinion (one of the triggering events under the Partnership Agreement) in breach of the Partnership Agreement and awarded Plaintiffs nearly $700 million in damages. The Delaware Supreme Court reversed, finding that the Court of Chancery should have enforced the plain, unambiguous terms of the Partnership Agreement and finding that the general partner was entitled to exercise the call right when it reasonably relied on an opinion of counsel—notwithstanding the Court of Chancery’s factual finding that the general partner acted “intentionally and opportunistically” in obtaining the opinion—and was exculpated from any damages under the Partnership Agreement. The Supreme Court’s opinion serves as an important reminder of the broad contractual powers that parties have under the Delaware Revised Uniform Limited Partnership Act, including the right to impose expansive limits on the liability of controllers.
Boardwalk is a natural gas transportation and storage business. Until it was taken private, its units were publicly traded on the New York Stock Exchange. Loews Corporation (“Loews”) owned a majority of Boardwalk through an interlocking series of agreements in a master limited partnership (“MLP”) structure under Delaware law. Loews owned a majority of Boardwalk’s units through an entity called Boardwalk GP, LP (the “General Partner”), which in turn had its own general partner, Boardwalk GP, LLC (“GPGP”). GPGP was organized with a board of directors (“GPGP Board”) and a sole member (“Sole Member”). The Sole Member, in turn, was a wholly-owned subsidiary of Loews, and its board (“the Sole Member Board”) consisted of a majority of, and thus was controlled by, Loews insiders.
Boardwalk was organized pursuant to two principal documents: the Boardwalk Partnership Agreement (“Partnership Agreement”) and the GPGP LLC Agreement (“LLC Agreement”). These organizational documents permitted the General Partner to exercise a take-private call right pursuant to a two-step framework: first, the General Partner must receive an Opinion of Counsel that the Partnership’s MLP status “has or will reasonably likely in the future have a material adverse effect on the maximum applicable rate that can be charged to customers” (“Opinion Requirement”);3 and second, the General Partner must determine that the Opinion of Counsel was “acceptable” (“Acceptability Determination”) in order to take action and exercise the call right. The Partnership Agreement also contained an exculpation provision (the “Exculpation Provision”) immunizing the General Partner absent a “finding that it acted in bad faith or engaged in fraud [or] willful misconduct,”4 and a reliance provision (the “Reliance Provision”), providing that “the General Partner was conclusively presumed to act in good faith if it took an action in reliance on the advice or opinion of legal counsel.”5
In March 2018, the Federal Energy Regulatory Commission (“FERC”) threw the energy markets into a period of regulatory uncertainty when it considered adjusting the rates that pipelines were permitted to charge shippers and reversing its position on certain tax policies that made MLPs an attractive investment vehicle. These policies significantly reduced Boardwalk’s stock price, including a 7% drop in the value of its units in a single day, and prompted the General Partner to initiate the process for the Partnership Agreement’s call provision to take Boardwalk private. Loews officials engaged the law firm Baker Botts LLP to render the Opinion of Counsel to proceed in exercising the call right. Baker Botts determined that the market conditions in fact constituted a material adverse effect and supported its opinion with a summary of financial data (including a Rate Model Analysis that made assumptions about the negative effects of FERC tax policy on Boardwalk’s rate case) and a detailed memorandum in support of its conclusion. The General Partner also commissioned an opinion from the law firm Skadden, Arps, Slate, Meagher & Flom LLP, which confirmed that the Sole Member could make the determination to satisfy the Acceptability Determination and that it would be reasonable for the Sole Member, on behalf of the General Partner, to accept the Baker Botts Opinion of Counsel. The Sole Member thereafter found the Opinion of Counsel reasonable, accepted the Opinion of Counsel, and directed the General Partner to exercise the call right. Boardwalk purchased the units for $12.06 per common unit, a transaction of approximately $1.5 billion in total, which closed July 18, 2018.
Bandera, a former minority holder of Boardwalk, filed an amended class action complaint on October 14, 2020, alleging that Boardwalk had breached the Partnership Agreement when it exercised the call right, and that the Boardwalk defendants were not exculpated from damages because the Sole Partner acted in bad faith or engaged in fraud or willful misconduct when it relied on Baker Botts’ “contrived” Opinion of Counsel, which the lower court agreed was a product of “motivated reasoning” and a “flawed imitation” of a bona fide opinion.6 On November 12, 2021, after denying Boardwalk’s motion for summary judgment and holding a four-day trial, the Court of Chancery issued its post-trial decision finding the Boardwalk defendants liable and awarding Plaintiffs nearly $690 million in damages, plus fees and interest. The damages award reflected the difference between the take-private transaction price and the court’s approximation of a fair value of $17.60 per unit, multiplied by the number of units held by non-Loews entities or affiliates (nearly 124.5 million). Boardwalk appealed the decision to the Delaware Supreme Court, and Bandera cross-appealed to claim higher damages.
On December 19, 2022, the Delaware Supreme Court reversed. In its opinion, the Court began by detailing the flexibilities that sponsors of MLPs enjoyed under Delaware law and reaffirmed its precedents, including Dieckman v. Regency GP LP, which clarified that investors “must rely on the express language of the partnership agreement to sort out the rights and obligations” and are not owed the presumption of non-contractual fiduciary duties.7 The Court thus narrowed its focus to the take-private provision of the Partnership Agreement, noting that “[t]he Partnership Agreement allowed Boardwalk to exercise the call right to its advantage—and to the disadvantage of the minority unitholders—free from fiduciary duties,”8 and that Boardwalk effectively made “full use of the MLP structure to limit fiduciary duties and to consolidate governing power in its general partner.”9 Given the General Partner’s presumption of good faith in relying on the advice of counsel, the Supreme Court enforced the Partnership Agreement’s presumption after finding that the General Partner reasonably relied on Skadden’s opinion, and found that the General Partner was exculpated from any damages.10
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1Boardwalk Pipeline Partners v. Bandera Master Fund LP, No. 2018-0372, 2022 WL 17750348 (Del. Dec. 19, 2022).
2 Pls.’ Answering Br. in Opp. to Defs.’ Mot. to Dismiss, Bandera Master Fund LP v. Boardwalk Pipeline Partners, No. 2018-0372, 2019 WL 2341786 (Del. Ch. May 28, 2019).
3 2022 WL 17750348, at *9.
4 Id. at *15 n.186 (internal quotation marks omitted).
5 Id. at *16.
6 Id. at *14.
7 Id. at *17 (citing 155 A.3d 358, 366 (Del. 2017)).
8 Id. at *9.
9 Id. at *17.
10 Id. at *27.
11 Id. at *5, *6.
12 Id. at *19.
14 Id. at *27.
16 Id. at *26.
17 Id. at *23.
18 Id. at *30 (Valihura, J., concurring) (citing Nos. 12168, 12337, 2016 WL 3576682, at *11 (Del. Ch. June 24, 2016), aff’d, 159 A.3d 264 (Del. 2017)).