Brinckerhoff v. Enbridge Energy Co., Inc. et al., No. 574, 2011; C.A. No. 5526 (Del. May 28, 2013)
In this en banc decision, the Delaware Supreme Court affirmed the Court of Chancery’s decision to dismiss derivative claims by plaintiff Peter Brinckerhoff, a limited partner of Enbridge Energy Partners, L.P. (“EEP”), a publicly traded master limited partnership, challenging the fairness of a joint venture agreement (the “JVA”) entered into between EEP and Enbridge, Inc. (“Enbridge”), the controlling parent of its general partner. In considering whether the terms of EEP’s limited partnership agreement (the “LPA”) barred plaintiff’s claims, the Court of Chancery found that EEP’s general partner, Enbridge Energy Company, Inc. (the “GP” and, together with EEP and Enbridge, the “Enbridge Entities”), had satisfied the LPA’s prerequisites for a “conclusive presumption” that it had acted in good faith by relying on a financial advisor’s fairness opinion. The Supreme Court declined to rule on the effectiveness of the conclusive presumption in the LPA and instead affirmed based on the Court of Chancery’s separate holding that the plaintiff failed to allege facts suggesting that the defendants had acted in bad faith.
The case involved EEP’s plans to construct and operate a crude oil and liquid petroleum pipeline. Enbridge, the indirect owner of the GP, proposed to enter into the JVA with EEP to finance the pipeline project. In response to the proposal, the GP’s board of directors formed a special committee to determine whether the JVA was fair and reasonable to EEP. The special committee received an opinion from a financial advisor that the terms of the JVA were representative of an arm’s-length transaction. The special committee recommended that the GP’s board of directors approve the JVA, and the board of directors approved it on July 17, 2009.
The plaintiff claimed that (i) the JVA was unfair to EEP; (ii) the Enbridge Entities and the directors of the GP breached their contractual duties under the LPA; (iii) the defendants other than the GP aided and abetted the GP’s breach of its duties; (iv) the defendants breached the implied covenant of good faith and fair dealing; and (v) Enbridge tortuously interfered with the LPA. The Court of Chancery looked to the terms of the LPA to determine the nature and scope of the duties owed by the defendants. The LPA provided that transactions between EEP and the Enbridge Entities were subject to a “fair and reasonable” standard, which would be deemed satisfied if the terms of the transaction were no less favorable to EEP than those generally available from unrelated third parties. The LPA also exculpated the GP and its affiliates from money damages as long as they acted in good faith. Finally, the LPA provided that the GP would be conclusively presumed to have acted in good faith if it relied on the opinion of a financial advisor as long as the GP reasonably believed the opinion was within the financial advisor’s professional or expert competence. The Court concluded that the defendants could be held liable for money damages only for a breach of the duty of good faith.
The Court of Chancery then dismissed the complaint, finding first that the GP was entitled to the conclusive presumption of good faith, given that the GP only entered into the JVA after the special committee received the fairness opinion from its financial advisor. The Court then concluded that it need not determine whether the conclusive presumption would apply to other defendants because the complaint failed to allege facts suggesting that either the GP’s board of directors or Enbridge acted in bad faith. The Court focused on the facts that GP’s board of directors appointed an independent special committee that hired its own financial and legal advisors, negotiated an increase in EEP’s equity stake in the JVA, and received and relied upon a fairness opinion from its financial advisor. On remand from the Delaware Supreme Court to consider plaintiff’s claims for equitable remedies of reformation and rescission, the Court of Chancery held that plaintiff waived those claims. On appeal, the plaintiff argued that the Court of Chancery erred by failing to give his complaint the benefit of inferences that the Enbridge Entities and the directors acted in bad faith.
The Supreme Court affirmed the finding that the complaint failed to adequately allege that the defendants acted in bad faith. Quoting the standard for bad faith set forth in Parnes v. Bally Entertainment Corp., 722 A.2d 1243, 1246 (Del. 1999), the Supreme Court noted that the decision to enter into the JVA must have been “so far beyond the bounds of reasonable judgment that it seems essentially inexplicable on any ground other than bad faith.” The Supreme Court further affirmed the Court of Chancery’s ruling that the plaintiff waived his reformation and rescission claims and, therefore, did not reach the merits of those claims. The Supreme Court declined to make a determination as to the effect of the conclusive presumption of good faith resulting from reliance on the financial advisor’s fairness opinion (“either to preclude or limit judicial review”), given that the complaint failed to allege bad faith. Finally, in a footnote, the Supreme Court declined to address the plaintiff’s claims under the implied covenant of good faith and fair dealing, finding that the plaintiff did not challenge on appeal the Court of Chancery’s decision to dismiss the implied covenant claims “because the LPA expressly addresses the events at issue.”