PPL Corp. v. Riverstone Holdings LLC, C.A. No. 2018-0868-JRS (Del. Ch. Oct. 23, 2019) (Slights, V.C.)
In 2014, PPL Montana, LLC sold hydroelectric assets (the “Sale”) to a third party. The proceeds of the Sale were then distributed upstream to various affiliates of PPL Corporation (“PPL”), which was the indirect parent corporation of PPL Montana, LLC. In 2015, PPL effectively spun off (the “Spin”) certain of its assets by entering into a transaction pursuant to which a new holding company, Talen Energy Corporation (“Talen”), was formed. In that transaction, a number of PPL entities were transferred to Talen, including PPL Montana, LLC, in exchange for the issuance of approximately 65% of Talen’s capital stock to PPL’s stockholders. Following the transfer, PPL Montana, LLC was renamed Talen Montana, LLC (“Talen Montana”). In addition, Riverstone Holdings LLC (“Riverstone”) contributed certain other assets to Talen and received 35% of Talen’s capital stock thereby becoming Talen’s largest single stockholder. The terms of the Spin were memorialized in a “Separation Agreement,” which provided that the Sale proceeds and any liabilities arising from the Sale would remain with PPL. Additionally, the Separation Agreement included a forum selection clause designating the Delaware Court of Chancery as the exclusive forum for disputes arising thereunder.
In 2016, Riverstone and Talen engaged in a going private transaction pursuant to which Riverstone acquired the shares of Talen’s capital stock that it did not already own. One year later, Riverstone caused Talen to distribute a $500 million special cash dividend to Riverstone. In 2018, Riverstone informed PPL that it intended to cause Talen to declare an additional $500 million dividend and that it would seek to hold PPL liable for its 2014 distribution of Sale proceeds because Talen Montana had been insolvent since that time.
In late 2018, two lawsuits were filed against PPL in Montana, both alleging that PPL’s post-Sale distributions caused Talen Montana to become insolvent, and thus constituted a fraudulent transfer. In response, PPL filed a complaint in the Court of Chancery, which included, among other things, the following claims: (1) breach of the Separation Agreement against Talen and certain subsidiaries for violating the forum selection clause, (2) breach of the implied covenant of good faith and fair dealing against Talen and certain subsidiaries and associated parties, and (3) a tortious interference claim against Riverstone for causing entities it controlled to breach the Separation Agreement. Defendants moved to stay or dismiss certain claims under McWane for improper venue and moved to dismiss other claims under Rule 12(b)(6).
In addressing defendants’ request to stay or dismiss in favor of the Montana litigation, the Court noted that the application of the McWane doctrine can be preempted by the Court in cases involving a valid forum selection clause. Defendants did not challenge the validity of the Separation Agreement’s forum selection clause but instead asserted that the Montana plaintiffs were non-signatories to the agreement and therefore not bound by it. In response, the Court considered the doctrine of equitable estoppel, which prevents a non-signatory to a contract from embracing a contract while disregarding unfavorable provisions. In determining whether equitable estoppel bound the non-signatories to the forum selection clause, the Court noted that it must consider whether: (1) the clause was valid; (2) defendants were third-party beneficiaries or closely related to the contract; and (3) the claims arose from defendants’ standing relating to the agreement.
Defendants contested only the third factor, arguing that the Montana litigation did not arise from or relate to the Separation Agreement because the claims in that litigation involved statutory and contractual claims that are not dependent on the existence of the Separation Agreement. In rejecting that argument, the Court found that the Montana defendants would rely upon the Separation Agreement as “their first and principal line of defense” and therefore any litigation in Delaware or Montana would lead back to the Separation Agreement. The Court also found that plaintiffs’ complaint included well-pled allegations that Riverstone, in its role as Talen’s controller, caused non-parties to the Separation Agreement to pursue the Montana litigation, in part, to avoid the Delaware forum selection provision. The Court noted that, if that allegation proves to be true, it would be inequitable to refrain from enforcing the contractually bargained for forum selection clause.
Having determined that there was no need to engage in the McWane analysis, the Court then determined that plaintiffs’ complaint included a well-pled claim that defendants breached the Separation Agreement. Accordingly, the Court denied defendants’ motion to dismiss the breach of contract claim.
Next, the Court considered plaintiffs’ allegations that Talen’s failure to support Talen Montana with intercompany financial support and the act of filing the Montana lawsuits served to breach the implied covenant of good faith and fair dealing. The Court observed that, while the implied covenant attaches to every contract, the application of the doctrine is a cautious enterprise. Ultimately, the Court found that plaintiffs failed to show a contractual “gap” in the Separation Agreement to be filled by the implied covenant and that mere silence regarding Talen’s obligation to provide intercompany support to Talen Montana did not create a contractual gap, especially where the Separation Agreement provided no indication that the parties contemplated or bargained for Talen to provide post-closing financial support to Talen Montana. Accordingly, the Court granted defendants’ motion to dismiss the implied covenant claim.
Finally, in addressing plaintiffs’ claim for tortious interference, the Court considered Riverstone’s “affiliate privilege” defense, which protects the capacity of a parent company to engage in legitimate business ventures with its subsidiaries. The Court observed that, to overcome an affiliate privilege defense, a plaintiff must plead that the interfering party acted in bad faith, a stringent standard requiring more than a parent merely causing or advising its subsidiary to participate in an efficient breach of contract. The Court found that plaintiffs’ allegations that Riverstone intentionally caused its subsidiaries to render Talen Montana insolvent and to file the Montana litigation were sufficient to allege bad faith and overcome the privilege. The Court also found that plaintiffs sufficiently pled that Riverstone purposefully damaged Talen Montana in its efforts to arrange the litigation as a means to achieve a cash recovery from plaintiffs and used its control to divert value to itself from the subsidiary in a bad-faith manner. Thus, the Court denied Riverstone’s motion to dismiss the tortious interference claim.