Maxwell and Frank Discuss the Delaware Supreme Court's Resounding Reversal of Chancery Court Ruling in 'Boardwalk Pipeline Partners'
‘Twas the week before Christmas, and the Delaware Supreme Court delivered an early present to Loews Corp.: a resounding reversal of a 2021 Delaware Court of Chancery ruling excoriating the entire process through which Boardwalk Pipeline Partners’ general partner took the company private and awarding the plaintiff investors with nearly $700 million in damages, plus interest. The decision, Boardwalk Pipeline Partners v. Bandera Master Fund, 2022 WL 17750348 (Del. Dec. 19, 2022), can be accessed here.
The Supreme Court’s decision reversed the Chancery Court’s November 2021 decision in favor of plaintiff investors of Boardwalk who had successfully challenged Boardwalk’s 2018 exercise of a contractual call right to purchase minority units in the publicly traded master limited partnership (MLP). The call right was exercised in response to pending regulatory action by the Federal Energy Regulatory Commission (FERC). In order to exercise the call right, Boardwalk’s partnership agreement required that its general partner (the general partner) obtain a legal opinion acceptable to the general partner to the effect that the potential impact of the FERC action on Boardwalk’s oil and gas pipeline business was sufficient to trigger the general partner’s right to cause Boardwalk to purchase minority limited partners’ equity interests in Boardwalk (the primary opinion).
In particular, the partnership agreement’s call right provision required the general partner to receive “an opinion of counsel that [Boardwalk’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 partnership agreement defined “opinion of counsel” as “a written opinion of counsel … acceptable to the general partner.” Boardwalk’s partnership agreement also disclaimed fiduciary duties of the general partner.
Loews Corp., Boardwalk’s ultimate controller by virtue of its control of the single-member limited liability company that was the general partner’s general partner (the GPGP), spearheaded the legal opinion process. Law firm Baker Botts provided the primary opinion with the conclusion required by Boardwalk’s partnership agreement as a condition to exercising the call right. To fulfill the condition precedent’s acceptability component, the GPGP obtained a secondary legal opinion (the “acceptability opinion”) from Skadden Arps Slate Meagher & Flom as to whether the primary opinion was reasonable, and whether it was reasonable to accept the primary opinion and cause the general partner to exercise the call right.
In Bandera Master Fund v. Boardwalk Pipeline Partners, 2021 WL 5267734 (Del. Ch. Nov. 12, 2021) (Laster, V.C.), the Chancery Court ruled that Boardwalk’s general partner improperly exercised the call right because the legal opinion that was a pre-condition to such exercise was not issued in good faith; the wrong party on behalf of the GPGP determined that the legal opinion was acceptable; and as a result, the general partner was not exculpated from damages under the partnership agreement. As part of its decision, the Chancery Court found that the buyout of the limited partners’ interest undervalued the units, resulting in the hefty damages judgment. The Chancery Court severed and stayed four of the plaintiffs’ claims for tortious interference and unjust enrichment, pending appeal.
Reversed and Remanded
A majority of the Delaware Supreme Court found that the primary opinion obtained by the general partner was accepted by the correct party—the GPGP’s sole member, rather than its board. The Supreme Court found that the partnership agreement’s silence on the mechanics of determining acceptability to the general partner was not ambiguous because it stated that the general partner’s organizational documents—which included the GPGP’s operating agreement—would provide for certain determinations. In turn, the GPGP’s operating agreement clearly dictated the terms of the acceptability determination. The Supreme Court read Boardwalk’s partnership agreement and the GPGP’s operating agreement together in light of the MLP’s overall governance structure, which included Boardwalk, Boardwalk’s general partner (another limited partnership), and the general partner’s general partner (i.e., the GPGP), a limited liability company. The Supreme Court noted that Boardwalk’s partnership agreement and the GPGP’s operating agreement were both disclosed to investors. The Supreme Court found that the GPGP’s sole member reasonably relied on the acceptability opinion, which created a conclusive presumption that the GPGP’s sole member and the General Partner acted in good faith in accepting the primary opinion and thereafter exercising the call right. As a result, the general partner was exculpated from damages under Boardwalk’s partnership agreement.
The Delaware Supreme Court’s majority decision can be summed up with two words to MLP investors: caveat emptor (or, for those disinclined to utilize dead languages, buyer beware). Less concisely, the Supreme Court highlighted that Boardwalk’s public offering documents and subsequent filings disclosed to investors the general partner’s call right and ability to exercise it free of fiduciary duty restrictions, and warned that such exercise might negatively impact investors’ investment in Boardwalk. The decision also emphasized Delaware courts’ policy of respecting the terms of Delaware alternative entities’ governing agreements to preserve the “maximum flexibility” of contract afforded to such entities under Delaware law.
The Boardwalk decision provides a number of practice points for Delaware attorneys in addition to public policy reinforcements:
Contract Is King
The majority opinion once again highlighted Delaware courts’ strict approach to contract interpretation and enforceability. Boardwalk’s partnership agreement limited fiduciary duties and consolidated governing power in its general partner. The Boardwalk decision reaffirms the ability of parties to structure Delaware alternative entities to eliminate fiduciary duties and incorporate contractual standards of conduct that will be given effect by Delaware courts. For example, the Supreme Court gave effect to a safe harbor in the Boardwalk partnership agreement that supplanted fiduciary duties by providing that action taken in reliance on expert advice created a conclusive presumption of good faith. The Supreme Court also applied the partnership agreement’s provisions shielding the General Partner from monetary liability so long as it met the contractual standard for exculpation (i.e., absent fraud, bad faith, or willful misconduct).
The Supreme Court majority noted the Chancery Court’s belief that interpretation of the partnership agreement required an investor-friendly approach, including application of the contra proferentum rule. However, the Supreme Court disagreed with this approach in light of Boardwalk’s offering documents, which put investors on notice as to the risk of the investment by fully disclosing Boardwalk’s governance structure and relevant operating agreements, the availability of the call right, and the risk of the general partner exercising the call at an unfavorable price to investors. Where the limitation or elimination of fiduciary duties was clearly disclosed, the Supreme Court enforced the MLP controller’s “right to make self-interested decisions to the economic disadvantage of the [other] investors.”
Reaffirmation of Reliance on Experts
Under Boardwalk’s partnership agreement, action taken in reliance on expert advice gave rise to a conclusive presumption of good faith. The Chancery Court found that the Primary Opinion was not rendered in good faith and the wrong decisionmaker acted on behalf of the GPGP to accept the primary opinion, which precluded the General Partner from validly relying on the acceptability opinion. In doing so, the Chancery Court arguably diminished Delaware’s public policy encouraging reliance on experts.
In its reversal, the Supreme Court’s majority looked to the general partner’s ultimate controller and found that the board of the sole member of the GPGP reasonably relied on the acceptability opinion with respect to the primary opinion. This reasonable reliance then was attributed downstream to the general partner. The Supreme Court found that the GPGP’s sole member’s board reasonably relied on the acceptability opinion issued by qualified expert counsel and followed its advice that it would be acting reasonably if it accepted the primary opinion. In doing so, the general partner, as ultimately controlled through the GPGP’s sole member’s board, was conclusively presumed to have acted in good faith in accepting the primary opinion and thereafter exercising the call right. In other words, because the GPGP’s sole member’s (and therefore, the general partner’s) reliance on the acceptability opinion was reasonable, the Supreme Court held that this triggered the conclusive presumption of acting in good faith under the partnership agreement, without needing to reach the merits of the primary opinion. Such reasonable reliance and presumption of good faith in turn qualified the general partner for exculpation.
Standard of Judicial Review for Legal Opinions; Opinion Giving
In her concurrence to the Supreme Court’s majority opinion, Justice Valihura disagreed with the Chancery Court’s finding that the primary opinion rendered to the general partner was issued in bad faith. The Chancery Court took issue with certain opinion assumptions and highlighted client pressure in concluding that the primary opinion was a contrived effort to generate the client’s desired result. The concurrence reiterates the standard of review for a trial court’s review of a legal opinion set forth in Williams Cos. v. Energy Transfer Equity, 2016 WL 3576682 (Del. Ch. June 24, 2016), aff’d, 159 A.3d 264 (Del. 2017). The concurrence emphasizes Delaware law’s deferential standard for opinions of counsel, noting that “the law does not require that opinions be substantively correct,” but rather looks for a good faith effort that is entitled to judicial deference.
In light of this standard, when rendering a legal opinion, especially of a nonstandard variety, it is important to establish a record to support the opinion’s analysis and conclusions. Both the Supreme Court’s majority opinion and the concurrence referenced Baker Botts’ lengthy memorandum explaining the basis for its opinion. As an additional consideration, whether or not a governing agreement includes an acceptability component, thought should be given to the correct process for opinion acceptance, including the proper opinion recipient and what kind of approval, if any, is required in order for the opinion to be accepted.
The Chancery Court’s decision did not address certain claims that would be mooted by payment of the nearly $700 million judgment. With the judgment overturned, the case has been remanded to the Chancery Court for further proceedings consistent with the Delaware Supreme Court’s ruling. It remains to be seen whether Justice Karen Valihura’s concurrence, which questions whether the partnership agreement’s preconditions for triggering the call right were met due to the Delaware Supreme Court majority leaving in place the Chancery Court’s bad faith findings regarding the primary opinion, will serve as fodder for Vice Chancellor J. Travis Laster to provide Boardwalk investors with any relief.
Reprinted with permission from the February 1, 2023 edition of the Delaware Business Court Insider © 2023 ALM Media Properties, LLC. All rights reserved.