Bandera Master Fund LP, et al. v. Boardwalk Pipeline Partners, LP, et al., C.A. No. 2018-0372-JTL (Del. Ch. Nov. 12, 2021) (Laster, V.C.)
In this post-trial opinion, the Delaware Court of Chancery analyzed claims by unitholders of a limited partnership that a general partner exercised a call right in a way that breached the limited partnership agreement. The Court agreed with the unitholders that (1) the legal opinion the general partner obtained was not given in good faith and (2) the determination that the transaction was acceptable was made by the wrong entity.
The case focused on a call right in the partnership agreement of Boardwalk Pipeline Partners, LP (“Boardwalk”). Loews Corporation (“Loews”) formed Boardwalk in 2005 as a master limited partnership to take advantage of regulatory changes that made MLPs attractive investment vehicles for pipeline companies. Loews controlled Boardwalk’s general partner and maintained a call right to acquire the publicly held limited partnership interests under certain conditions. The purpose of the call right was to give Loews the ability to take Boardwalk private if the Federal Energy Regulatory Commission (“FERC”) implemented regulatory changes that would have a materially adverse effect on Boardwalk.
The parties disputed whether two necessary conditions for exercising the call right were satisfied. The first was the “Opinion Condition” which required Boardwalk’s general partner to obtain an “Opinion of Counsel that the Partnership’s status as an association not taxable as a corporation and not otherwise subject to an entity-level tax for federal, state or local income tax purposes has or will reasonably likely in the future have a material adverse effect on the maximum applicable rate that can be charged to customers.”
The second was the “Acceptability Condition” which required that the general partner determine that the opinion of counsel was acceptable. The general partner of Boardwalk was itself a limited partnership whose general partner was an LLC with both a sole member and a board of directors connected to Loews. According to the Court, it was unclear from Boardwalk’s partnership agreement whether the LLC’s board of directors or its sole member had the authority to make the acceptability determination.
FERC proposed new regulations in March 2018 which, although not final, would have potentially made master limited partnerships less attractive business structures for pipeline companies. The question of how FERC would treat accumulated deferred income taxes (“ADIT”) under the new regulatory scheme was left unanswered, and Boardwalk acknowledged that the effect of this new regulatory scheme on Boardwalk would depend on FERC’s resolution of that issue. Loews used the regulatory uncertainty to cause Boardwalk’s general partner to exercise the call right a day before to the new regulations were finalized. Those new regulations actually made master limited partnerships more attractive business structures for pipeline companies.
In analyzing the events, the Court concluded that the Opinion and Acceptability Conditions had not been met.
As to the Opinion Condition, the legal opinion the general partner obtained did not satisfy the requirements of the partnership agreement because it was not provided by counsel in good faith. The Court concluded the opinion “was a contrived effort to reach the result that the General Partner wanted” because it was based on “counterfactual assumptions” that “addressed an imaginary scenario that was never reasonably likely to come to pass.”
The Court also held that the Acceptability Condition had not been met, because the incorrect entity declared the opinion acceptable. The partnership agreement was ambiguous as it was susceptible to two readings: (1) the approval should be by the directors of the LLC, which had outside directors and therefore would “inject a measure of independence into the determination of acceptability,” or (2) the general partner, which was controlled by Loews and by definition had already made a determination of acceptability by exercising the call right. The Court adopted the first reading by applying the doctrine of contra proferentem to interpret the ambiguity against the general partner as the drafter.
Thus, the Court held that because neither of these necessary conditions had been met, the general partner’s exercise of the call right constituted a breach of Boardwalk’s partnership agreement. While the general partner argued that it was immune from liability because of two provisions in the partnership agreement, the Court disagreed. First, the general partner pointed to an exculpatory provision, but this provision contained an exception for willful misconduct. The Court believed such willful misconduct occurred because the general partner’s breach was intentional and opportunistic. Second, the general partner pointed to a provision that immunized the general partner from liability if it had relied on the opinions of someone reasonably believed to be an expert. The Court again disagreed, holding that the general partner had knowingly encouraged outside counsel to draft a contrived opinion.
The Court held the general partner liable for $689,827,343.38 in damages, plus pre- and post-judgment interest and costs. This damages award represented the difference between the present value of the future distributions, of which the general partner deprived the plaintiffs by exercising the call right, and the deal price. The Court added that this damages award was conservative in light of other damages estimates it considered. The Court did not reach the claims for breach of the implied covenant of good faith and fair dealing against the general partner or for unjust enrichment or tortious interference against the general partner’s affiliates.