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Employees Ret. Sys. of the City of St. Louis v. TC Pipelines GP, Inc., et al, CA No. 11603-VCG (Del. Ch. May 11, 2016) (Glasscock, V.C.)

May 11, 2016

In this letter opinion the Court of Chancery granted a motion to dismiss claims for breach of contract and breach of the implied covenant of good faith and fair dealing in connection with a challenge to a dropdown transaction between a master limited partnership (“MLP”) and the parent corporation of its general partner, finding that the safe harbor provision of the limited partnership agreement governing the MLP (the “LPA”) precluded judicial review of the transaction and contained no gaps to be filled by the implied covenant of good faith and fair dealing.

This action arose from a dropdown transaction in which an MLP, TC Pipeline, LP (“TCP” or the “Partnership”), acquired a pipeline asset from the parent corporation (the “Parent”) of its general partner, TC Pipelines GP, Inc. (the “General Partner”), in exchange for a combination of cash, debt, and newly issued units in the Partnership (the “Dropdown”). The plaintiff, a limited partner of TCP (“Plaintiff”), filed a complaint for, inter alia, breach of the LPA and breach of the implied covenant of good faith and fair dealing, alleging that the Dropdown was unfair to the Partnership and orchestrated in bad faith.

The Court first considered the breach of contract claim, noting the LPA’s requirement that transactions between TCP and the General Partner or its affiliates must be “fair and reasonable” to TCP. The Court further explained that the LPA contained a “safe harbor” provision providing that such conflicted transactions are to be deemed conclusively fair and reasonable if approved by a duly constituted and fully informed conflicts committee (“Special Approval”), whom the LPA granted broad discretion to determine whether a transaction is fair and reasonable.

Because the Dropdown received Special Approval, the defendants argued that judicial review of the Dropdown was precluded. Plaintiff contended, however, that the Special Approval requirements of the LPA were not satisfied because the conflicts committee did not approve the Dropdown in good faith.  The Court rejected this argument, noting that the safe harbor provision contains no language imposing a good faith requirement.  Citing to the Delaware Supreme Court’s decision in The Haynes Family Trust v. Kinder Morgan G.P.—a case involving interpretation of a nearly identical safe harbor provision in a partnership agreement—the Court explained that the LPA leaves no room for judicial scrutiny of a conflicted transaction, where, as here, Special Approval was given and Plaintiff did not challenge whether the conflicts committee was either duly constituted or fully informed.

The Court next considered Plaintiff’s implied covenant claim. Plaintiff argued that, to the extent the safe harbor provision did not contain a good faith requirement, a gap existed which the Court ought to fill by holding that Special Approval could only be obtained if the conflicts committee determined in good faith that a conflicted transaction was fair and reasonable.  The Court rejected this argument as well, finding that there was no evidence suggesting that, at the time of contracting, the parties to the LPA did not anticipate that a transaction such as the Dropdown could be approved by Special Approval.  Rather, the Court stated, the parties contracted for a procedural safeguard permitting conflicted transactions like the Dropdown to be cleansed in the manner explicitly provided in the LPA.  Having found that the LPA’s safe harbor provision did not require, explicitly or implicitly, that the conflicts committee act in good faith in granting Special Approval, the Court dismissed Plaintiff’s claims.

The full opinion is available here