Morris v. Spectra Energy Partners (DE) GP, LP, C.A. No. 2019-0097-SG (Sept. 30, 2019) (Glasscock, V.C.)
In this memorandum opinion, the Delaware Court of Chancery dismissed a complaint asserting direct claims against the general partner of a master limited partnership because the plaintiff lacked standing under In re Primedia, Inc. S’holders Litig., 67 A.3d 455 (Del. Ch. 2013) (“Primedia”). The plaintiff, Paul Morris, a unitholder in Spectra Energy Partners (“SEP”), initially asserted derivative claims against SEP’s general partner, Spectra Energy Partners (DE) GP, LP (“SEP GP”), for improperly approving a transaction with SEP GP’s ultimate parent, Spectra Energy Corp (“SE Corp”). Enbridge, Inc. (“Enbridge”), SE Corp’s successor in interest, however purchased SEP and extinguished Morris’s standing in that litigation. After his derivative case was dismissed, Morris filed a complaint asserting direct claims against SEP GP that the merger price inadequately valued his derivative claims. The Court dismissed this complaint under the three-part test set forth in Primedia.
In the underlying derivative action, Morris claimed SEP GP breached the subjective duty of good faith in SEP’s partnership agreement by accepting SE Corp’s offer of (i) limited partnership unit redemptions and (ii) a waiver of incentive distribution rights for SEP assets with an implied value of $1.5 billion. In approving this transaction, SEP GP’s conflict committee’s financial advisor initially identified approximately $1.4 billion of “components of value” in the offer. These components consisted of the two items identified in the initial offer, and a third newly identified component known as “reduced GP cash flow.” Later in the approval process however, the financial advisor only identified the original two components (aggregately valued at $964 million) as “components of value,” and relegated GP reduced cash flow to a presentation’s appendix. On October 8, 2015, SEP GP’s board approved the transaction after receiving a fairness opinion from the financial advisor.
After reviewing these claims, the Court of Chancery denied SEP GP’s motion to dismiss. Before the Court could rule on SEP GP’s later motion for summary judgment however, Enbridge purchased SEP in a stock for stock merger and Morris’s derivative complaint was dismissed for lack of standing. After this dismissal, Morris filed a direct complaint against SEP GP, alleging that SEP GP again breached the limited partnership agreement by approving the Enbridge merger for unfair consideration.
In the underlying merger approval process, SEP GP’s conflicts committee and its financial advisor spoke with plaintiff and defense counsel in the derivative litigation to value the derivative claims. After reviewing the information from the financial advisor and counsel, the conflicts committee determined that the value of the litigation was zero, consisting only of money saved in litigation expenses. Despite the zero valuation, the conflicts committee made sure that the financial advisor included the amount of saved expenses in its valuation analysis. On December 13, 2018, the SEP unitholders approved the merger.
In the litigation challenging this merger, SEP GP moved to dismiss the complaint for lack of standing and for failure to state a claim. In analyzing the motion, the Court reiterated that unitholders who lose their standing to assert derivative claims by a merger may still assert direct claims challenging the merger if the merger’s price fails to adequately reflect the value of the derivative litigation. To assert such a direct claim, under Primedia, a unitholder must plead (i) that the underlying derivative claim would survive a motion to dismiss, (ii) that the value of the derivative claim is material in the context of the merger, and (iii) an inference that the acquirer would not assert the underlying derivative claim, and the acquirer did not provide value for the claim.
In reasoning, the Court first held the direct claim satisfied the first Primedia prong because the derivative claim actually survived a motion to dismiss. The court rejected SEP GP’s argument that the Court should consider the derivative litigation’s summary judgement evidence because a plaintiff need only show that a claim is “meritorious”; and, under precedent, a claim is meritorious if it survives a motion to dismiss. The Court then held the third prong of Primedia was satisfied because the public unitholders admittedly received no value for their claim.
The Court however held the complaint failed the second Primedia prong because the value of the derivative claim was immaterial in the context of the merger. Under Delaware law, the value of a derivative claim in a Primedia analysis must be discounted to (i) reflect the minority unitholders’ direct beneficial interests in the potential derivative recovery and (ii) the possibility the claim will be unsuccessful. In this instance, the complaint alleged the derivate claim was worth $600 million, calculated by the difference between the implied value of the partnership’s assets ($1.5 billion) and the value allegedly received as consideration for the assets ($946 million plus pre-judgment interest). The Court noted the $600 million figure should be discounted by 83% to reflect the minority shareholders’ 17% interests in SEP. Likewise, the Court noted the 17% amount should be discounted to reflect a one-in-four chance of recovery. The Court reasoned the chance of recovery was “slim” because the Defendants could prevail by proving either that (i) GP cash flow represented adequate value to the partnership, (ii) SEP GP’s reliance on a financial advisor granted a conclusive presumption of good faith under the partnership agreement, or (iii) SEP GP, even without the conclusive presumption, did not act in subjective bad faith.
Accordingly, the court discounted the $600 million amount to reflect the minority unitholders 17% interest and the one-in-four chance of recovery to value the claim at $28,092,500, less than one percent of the total merger value. The Court held this amount was immaterial in the overall context of the merger under Primedia and dismissed the complaint for lack of standing without addressing the failure to state a claim argument.