Morris v. Spectra Energy Partners (DE) GP, LP, C.A. No. 12110–VCG (Del. Ch. June 27, 2017) (Glasscock, V.C.)
In this memorandum opinion, the Court of Chancery found that a limited partner adequately pled that the general partner of a master limited partnership breached its contractual duty to act in good faith in connection with a conflicted transaction between the partnership and the general partner’s parent. The Court found that, under reasonably conceivable circumstances, the terms of the transaction contained a facially unreasonable disparity in the consideration exchanged sufficient to infer that the general partner approved it in subjective bad faith.
The lawsuit arose from a transaction proposed by Spectra Energy Corp. (“SE Corp”), a Delaware corporation, to Spectra Energy Partners, LP (the “Partnership”), a Delaware master limited partnership, through SE Corp’s wholly owned subsidiary, Spectra Energy Partners (DE) GP, LP (the “General Partner”), a Delaware limited partnership and the Partnership’s general partner. The General Partner’s board of directors created a Conflicts Committee, which ultimately approved the transaction and, in so doing, relied on a fairness opinion from its financial advisor. The transaction was a reverse dropdown, pursuant to which SE Corp obtained a one-third interest in two pipeline companies from the Partnership, which interest SE Corp had already publicly promised to contribute to a joint venture with a third party at an implied value of $1.5 billion. The final terms of the transaction allegedly supplied the Partnership with consideration worth approximately $946 million.
The plaintiff asserted three claims challenging the transaction. The first alleged that the General Partner breached the terms of the Partnership’s limited partnership agreement (the “LPA”), specifically the General Partner’s good-faith obligation, by, among other things, approving the “patently unfair and unreasonable” transaction. The second alleged, in the alternative, that the General Partner breached the implied covenant of good faith and fair dealing in doing the same. The third claim alleged that SE Corp tortiously interfered with the LPA by intentionally causing the General Partner to approve the transaction in bad faith.
In its analysis of the breach of contract claim, the Court of Chancery first addressed the threshold issue of whether the rebuttable presumption of good faith arising from the “Special Approval” of the Conflicts Committee under the conflicts-of-interest provision applied or whether the conclusive presumption of good faith applied by virtue of the Conflicts Committee’s reliance on the fairness opinion of its financial advisor. The Court determined that the rebuttable presumption stemming from Special Approval under the conflicts-of-interest provision applied rather than the conclusive presumption for reliance on advisors, citing to the contract construction principles that specific provisions of a contract control over more general ones and that any ambiguities should be resolved in favor of the unitholder. After concluding that the LPA’s conflicts-of-interest provision afforded the defendants a rebuttable presumption of subjective good faith, the Court determined that the alleged disparity in value of the consideration exchanged in the transaction—$1.5 billion in pipeline assets in exchange for less than $1 billion in consideration—made it reasonably conceivable that the General Partner had acted in subjective bad faith. Accordingly, the Court declined to dismiss the breach of contract claim.
Having determined the rebuttable presumption of good faith applied, the Court dismissed the alternative implied covenant of good faith and fair dealing claim. The Court observed that its construction of the LPA left no gap for the implied covenant to fill, but noted that it would have to revisit the claim were the conclusive presumption to attach instead of the rebuttable presumption.
Lastly, the Court dismissed the claim against SE Corp for tortious interference with the LPA. Among other things, the Court found that aside from claiming that SE Corp “orchestrated” the transaction, the complaint alleged no acts by SE Corp other than making the initial offer and subsequently negotiating with the Conflicts Committee, both of which the LPA contemplated, and thus the complaint fell far short of alleging malice or bad faith as required in light of the “affiliate privilege” applicable to parent-affiliate transactions.