Background
Loews formed Boardwalk in 2005, which Loews controlled through Boardwalk’s general partner (the General Partner). Around this same time, the Federal Energy Regulatory Commission (FERC) announced a change in a regulatory policy that made master limited partnerships (MLPs) an attractive investment vehicle for pipelines. Seizing on this opportunity, Loews took Boardwalk public as an MLP. However, if FERC policies changed in the future, Loews wanted the option to take Boardwalk private again. To achieve that goal, Boardwalk’s partnership agreement (the Partnership Agreement) granted Loews a call right (the Call Right) to acquire the limited partnership interests, which required a legal opinion (the Opinion) that a material adverse event would likely occur (the Opinion Condition).
In 2018, FERC announced proposed policy changes that potentially could have a negative effect on Boardwalk. Industry participants acknowledged that until FERC clarified how it would treat a pipeline’s outstanding balance for accumulated deferred income taxes (the Tax Issue) under the new policy, it was impossible to know whether the policy changes would have a negative, neutral, or positive effect on Boardwalk.
While the Tax Issue remained unsettled, Loews obtained the Opinion from outside counsel and exercised the Call Right. The take-private transaction closed one day before FERC announced the full, final package of policy changes. Based on that final policy, it was clear that there would have been no effect on Boardwalk. Certain former Boardwalk limited partners initiated litigation challenging the transaction, alleging that Loews leveraged the 2018 tax policy guidance from FERC to artificially drive down the price of Boardwalk shares and buy the company’s minority units at a significant discount.
Analysis
In its 196-page post-trial opinion, the court held that the General Partner had breached the Partnership Agreement by exercising the Call Right. The court held that the Opinion failed to satisfy the Opinion Condition, because the Opinion did not reflect a good faith effort on the part of outside counsel to discern the facts and apply professional judgment. The court found that outside counsel was “stretching” to provide the Opinion that Lowes wanted, and that the Opinion included “counterfactual assumptions” to achieve the end result of the take-private transaction. The court held the Opinion was based on a “simple” and “fundamentally flawed” syllogism that produced the desired conclusion. The syllogism reflected that, “because a tax allowance had been part of the cost-of-service calculation [that would determine rates], a policy change eliminating the tax allowance [could be said to] lead ineluctably to a [material and adverse] change in th[e] abstract concept [of maximum applicable rates].” Put simply, the Opinion assumed that FERC policy changes were sufficiently final to assess their effect even though “everyone knew the proposals were not final,” and it was impossible to determine the effect on Boardwalk’s rates until [the Tax Issue was resolved].”
The court further held that an exculpation provision in the Partnership Agreement stating the General Partner would be “conclusively presumed” to have acted in good faith if it relied on opinions, reports, or other statements provided by someone the General Partner reasonably believed to be an expert did not apply to protect the General Partner from liability. The court held that because the General Partner participated knowingly in the efforts to create the “contrived” Opinion and provided the propulsive force that led outside counsel to reach the conclusions that Loews wanted, the safe harbor of the exculpation provision did not apply.
Key takeaways
Legal opinions for Delaware entities must reflect the law firm’s careful, reasoned, and objective judgment. A law firm should not reach conclusions in an opinion based on pressure from its client. When rendering or accepting an opinion during a time of significant uncertainty relating to the facts underlying the conclusions in the opinion, a legal opinion should take into account whether the uncertainty is likely to be resolved or mitigated in the near term.
Client Alert 2022-002
