Brinckerhoff v. Enbridge Energy Co., Inc., C.A. No. 5526-VCN (Del. Ch. May 25, 2012) (Noble, V.C.)
The Court of Chancery, in a case originally dismissed by it and appealed by plaintiff to the Delaware Supreme Court, on remand from the Delaware Supreme Court, addressed whether plaintiff had viable claims that could be remedied through contract reformation or rescission.
In the original case decided on September 30, 2011 (the “Original Action”), the Court of Chancery dismissed breach of fiduciary duty claims because the plaintiff failed to allege facts suggesting that the defendants acted in bad faith, which the Court found was required to impose liability on the defendants under a limited partnership agreement. The Court also dismissed claims for breach of the implied contractual covenant of good faith and fair dealing in the Original Action.
Plaintiff was the holder of limited partner units in Enbridge Energy Partners, L.P., a publicly traded Delaware master limited partnership (the “MLP”). The MLP was managed by Enbridge Energy Company, Inc., a Delaware corporation (the “MLP GP”), which delegated the power and authority to manage the MLP to Enbridge Management, a Delaware limited liability company (“Enbridge Management”). The MLP GP, in turn, was wholly owned by Enbridge, Inc., a Canadian corporation (“Enbridge”), which also owned Enbridge Employee Services, Inc., a Delaware corporation (“EES”), which employed all of the employees at the MLP, the MLP GP, and Enbridge Management.
In 1991, the MLP was formed to own and operate a pipeline system extending from Northern Alberta Canada through the Great Lakes to Eastern Canada. More recently, the MLP conceived of the Alberta Clipper project (the “ACP”) that consisted of the construction and operation of a $1.2 billion pipeline from Canada to Wisconsin. Soon thereafter, Enbridge approached the MLP with a joint venture agreement (the “JVA”) whereby Enbridge and the MLP would split profits from the ACP.
After receiving the JVA proposal, the MLP GP’s board of directors (the “MLP GP Board”) formed a special committee (the “Special Committee”) to determine whether the JVA was fair and reasonable to the MLP and its unitholders. The Special Committee hired legal advisors and Tudor Pickering Holt & Co. (“Tudor”) as its financial advisor. Tudor opined that the terms of the JVA were representative of those that the MLP would have obtained in an arm’s length transaction. After Tudor rendered its opinion, the Special Committee recommended that the MLP proceed with the JVA. The MLP GP Board accepted the recommendation and approved the deal on July 17, 2009.
Following the approval, plaintiff filed a complaint alleging that the MLP GP, the MLP GP Board, Enbridge Management, Enbridge, and EES (collectively the “Defendants”) breached their duties under the MLP’s limited partnership agreement (the “LPA”) and the implied contractual covenant of good faith and fair dealing by causing the MLP to enter into a financially unfair and unreasonable deal.
In the Original Action arising out of such complaint, the Court of Chancery held, among other things, that (i) EES owed no fiduciary duties to the MLP because plaintiff failed to allege that EES exercised any control over the MLP, (ii) to the extent the other Defendants owed any fiduciary duties, the LPA modified those duties because, as permitted by the LPA, the MLP GP relied on Tudor’s expert opinion before approving the JVA, (iii) plaintiff failed to allege Defendants acted in bad faith, which would have been necessary to sustain claims for breach of fiduciary duty, and (iv) the implied contractual covenant of good faith and fair dealing was not applicable because the MLP GP was the only Defendant bound by it (as it was the only Defendant that was an actual party to the LPA), and at the time the parties entered into the LPA, the parties thought about related party transactions and the MLP GP’s reliance on expert opinions.
On remand of the Original Action, the Court of Chancery considered whether rescission of the JVA or reformation of its terms would be a viable alternative remedy to money damages, which the Court in the Original Action held were not available pursuant to exculpatory provisions of the LPA. On remand, the Court determined that plaintiff failed in the Original Action to make any argument regarding rescission or reformation of the JVA and thereby waived those remedies. Nevertheless, the Court also addressed the merits of plaintiff’s requests for rescission or reformation. With respect to the remedy of rescinding the JVA, the Court concluded that plaintiff failed to meet its burden of explaining how the parties could be restored to the positions they were in prior to the entering into of the JVA. As such, the Court held that rescission was not a viable remedy at law.
With respect to the remedy of reformation, the Court concluded that it would potentially be possible for the JVA to be reformed so that, as requested by plaintiff, the percentage interest of Enbridge in the ACP could be reduced to some lesser amount deemed fair based on Enbridge’s investment. In making this determination, the Court noted that even though plaintiff was asking for equitable relief and not money damages, as a practical matter, reducing Enbridge’s percentage interest would be “at best, one step removed from money damages.” However, the Court also noted that it “will not expand the exculpatory rights of an alternative entity’s controller beyond the protections clearly provided in the governing agreement. If the governing agreement only provides exculpation from money damages, and a plaintiff adequately pleads entitlement to an equitable remedy, the plaintiff states a claim that may survive a motion to dismiss.” This is an important message by the Court of Chancery to those advising on or utilizing Delaware alternative entities.
In reaching its conclusions on remand, the Court cited to a provision of the LPA that requires that terms of agreements like the JVA be fair and reasonable to the MLP, which the Court interpreted as requiring something similar, or equivalent, to entire fairness review. The Court determined that the Tudor opinion by itself could not satisfy the entire fairness standard. Even though pursuant to the terms of the LPA, the reliance by the MLP GP on such fairness opinion provided the MLP GP with a presumption that it acted in good faith, the satisfaction of a good faith standard is not equivalent to having acted fairly. While stressing that reformation of contract is rarely sought and obtained, the Court ultimately held on remand that if such remedy was not waived it could conceivably be available such that the complaint could survive a motion to dismiss on this point.