In 2005, Boardwalk Pipeline Partners, LP (Boardwalk) went public as a Delaware Master Limited Partnership (MLP). Boardwalk’s subsidiaries operated interstate natural gas pipeline systems; it formed the MLP, in part, to take advantage of tax benefits from Federal Energy Regulatory Commission (FERC) regulations. In 2018, a FERC policy change prompted Boardwalk to explore opportunities to exercise its “call right” to take the MLP private through acquisition of all public units at a purchase price that was based on a trailing market average.
At issue in the appeal was whether Boardwalk’s General Partner properly exercised that call right. Plaintiffs (minority unitholders) claimed that Boardwalk, the General Partner, and other defendants breached the Partnership Agreement by not meeting the “opinion of counsel” requirement and by paying a deflated price per unit upon exercise of the call right. Plaintiffs also brought other causes of action against defendants, such as unjust enrichment and tortious interference.
The structure of the MLP was a key part of the Delaware Supreme Court’s decision. Boardwalk was controlled by its General Partner, Boardwalk GP, LP (General Partner or GP). The General Partner had its own general partner, Boardwalk GP, LLC (GPGP). The GPGP, in turn, had both a board of directors (GPGP Board) and a sole member, Boardwalk Pipelines Holding Corp. (Sole Member). Under the GPGP’s LLC Agreement, the Sole Member had “exclusive authority” to cause the LLC to “exercise the rights” of the LLC and those of the General Partner.
Exercise of the call right required that the General Partner receive 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 . . . .” As defined in the Partnership Agreement, an “Opinion of Counsel” must be “acceptable to the General Partner.” The Partnership Agreement did not address which entity would act on behalf of the General Partner in determining the “acceptability” of the opinion, though (as discussed below) the Delaware Supreme Court concluded that the LLC Agreement did provide such detail. Pursuant to the Partnership Agreement, the General Partner was conclusively presumed to act in good faith if it acted in reliance on the advice or opinion of legal counsel.
The General Partner received an opinion of counsel from Baker Botts that the FERC policy change met the requirements for exercise of the call right (Baker Botts Opinion), including the “material adverse effect” requirement. Baker Botts also concluded that the Sole Member was responsible for the second step of determining whether the Baker Botts Opinion was “acceptable.”
The Sole Member then retained Skadden, Arps, Slate, Meagher & Flom LLP to assess “acceptability” of the Baker Opinion. Skadden concluded that it would be reasonable for the Sole Member’s Board to find that the Baker Botts Opinion was “acceptable,” as that term is used in the Partnership Agreement (Skadden Opinion).
The General Partner thus acted through the Sole Member in obtaining advice from Skadden that it would be reasonable to accept the Baker Botts Opinion. This resulted in the General Partner exercising its call right.
In November 2021, the Court of Chancery held a four day trial. The court found that the General Partner had not received a “bona fide” opinion of counsel, characterizing the Baker Botts Opinion as “a contrived effort to reach the result that the General Partner wanted.” As a result, the General Partner could not rely on the Baker Botts Opinion to escape liability. The Court of Chancery then determined that the Partnership Agreement was ambiguous as to whether the Sole Member or the GPGP Board should make the decision to find the Baker Botts Opinion “acceptable.” Ultimately, the court found that the GPGP Board (with four independent members) should have determined whether the Baker Botts Opinion was acceptable, so as to serve as a “protective check” on the General Partner and to protect the partnership more broadly. The Court of Chancery also concluded that, because the General Partner had pushed Baker Botts to provide the opinion it wanted, Baker’s scienter could be imputed to the General Partner. Plaintiffs did not contend (and the Court of Chancery did not find) that the Skadden Opinion was the product of bad faith or willful misconduct.
The Court of Chancery awarded US$689,827,343.38 in damages, pre and post-judgment interest on that amount, and an award of fees.
The Delaware Supreme Court reversed, emphasizing that Delaware law affords limited partnerships the “maximum flexibility over investments and operations,” including disclaiming the general partner’s fiduciary duties. The Supreme Court sought to harmonize different parts of the MLP’s organizational agreements, explaining that the Court of Chancery’s analysis “went off track when the court read the Partnership Agreement in isolation and not as part of the MLP’s overall governance structure.”
According to the Supreme Court, when the LLC Agreement and Partnership Agreement were read together, they “unambiguously” gave the Sole Member the exclusive authority to cause the exercise of the call right, since the Sole Member had the power to determine the acceptability of the Baker Opinion for the General Partner. Further, because there was no allegation that the Skadden Opinion was the product of bad faith, the conclusive presumption of good faith applied to the Sole Member’s reliance on the Skadden Opinion. As a result, the Sole Member Board’s good faith actions on behalf of the General Partner exculpated the General Partner from damages.
Regarding scienter issues, the Supreme Court cited Dieckman v. Regency GP LP, 2021 WL 537325 (Del. Ch. Feb. 15, 2021), aff’d, 264 A.3d 641 (Del. 2021) for the point that agency law should not displace the Sole Member Board and the MLP’s contractual terms as set forth in the Partnership Agreement and LLC Agreement. Pursuant to such documents, the Sole Member Board was the decisionmaker with respect to determining “acceptability” of the Baker Opinion, so it was inappropriate to impute any scienter by the Baker Botts law firm to the General Partner under agency principles.
In a concurrence, two Justices criticized the Court of Chancery’s second-guessing of the Baker Botts Opinion, noting the Court should have applied a more deferential standard of review pursuant to Williams Cos., Inc. v. Energy Transfer Equity, L.P., 2016 WL 3576682 (Del. Ch. June 24, 2016), aff’d, 159 A.3d 264 (Del. 2017). The concurrence states that Delaware law “does not permit a trial court to substitute its legal interpretation for one reached by counsel in good faith.” The concurrence concluded that “the law does not require that opinions of counsel be substantively correct. What the law requires is that lawyers undertake a good faith effort. Such good faith effort is entitled to deference.”
Authored by Ryan M. Philp, Allison M. Wuertz, Jordan Teti, and Jason Chohonis