In re El Paso Pipeline Partners, L.P. Deriv. Litig., C.A. No. 7141-VCL (Del. Ch. Apr. 20, 2015) (Laster, V.C.)
In this post-trial opinion, the Delaware Court of Chancery determined that a general partner breached a limited partnership agreement in connection with a “drop-down” transaction. The Court held that the partnership’s independent conflicts committee failed to form a subjective, good faith belief that a sale of assets to the partnership by the general partner’s parent was in the best interests of the limited partnership. The Court held that the partnership overpaid for the asset by $171 million.
El Paso Corporation (“El Paso”) was a publicly traded Delaware corporation focused on the exploration, production, and transmission of natural gas. Among other assets, El Paso owned two subsidiaries that comprised El Paso’s operations at Elba Island, Georgia: one subsidiary that operated a natural gas terminal on Elba Island; and a second subsidiary that owned the pipeline system connecting the Elba Island terminal to interstate gas pipelines (collectively referred to as “Elba”).
El Paso Pipeline Partners, L.P. (“El Paso MLP”) was a publicly traded master limited partnership controlled by El Paso through El Paso MLP’s general partner.
El Paso MLP’s limited partnership agreement (the “LPA”) required certain approvals for transactions between El Paso and El Paso MLP. Such transactions could occur only if, inter alia, a designated Conflicts Committee (the “Committee”), comprised of qualified, independent members of the board of directors of El Paso MLP’s general partner, approved the transaction with the subjective good faith belief that it was in the best interests of El Paso MLP.
In March 2010, El Paso proposed selling a 51% stake in Elba to El Paso MLP. The Committee evaluated the transaction (the “Spring Dropdown”) and, with the help and advice of an independent financial advisor, approved it. In November 2010, El Paso proposed selling the remaining 49% of Elba to El Paso MLP (the “Fall Dropdown”). Again, the Committee evaluated the transaction with the help and advice of a financial advisor, and approved it.
The plaintiff challenged the transaction, arguing that El Paso MLP overpaid for the remaining 49% interests in Elba and that, in so doing, the general partner and its board of directors breached the provision in the LPA with respect to the Committee’s approval of the Fall Dropdown. The Court dismissed the claims against all defendants other than the general partner on summary judgment, holding that only the general partner, as signatory to the LPA, could be held liable. After trial, the Court found that the Committee had “failed to form a subjective belief that the Fall Dropdown was in the best interests of El Paso MLP,” and that the general partner therefore breached the LPA in proceeding with the transaction. The Court criticized the Committee for focusing on whether the transaction was accretive (i.e., whether it would increase cash flow and distributions to common unitholders). The Court, in contrast, focused on the alleged fair value of the asset, and determined that the partnership overpaid for it by $171 million. Accordingly, the Court held that the Committee could not have formed the requisite subjective good faith belief that the drop-down transaction was in the best interests of the limited partnership.