Boardwalk Pipeline Partners (Boardwalk) is a master limited partnership (MLP) formed under Delaware law by Loews Corporation (Loews). Loews owned a majority of Boardwalk’s units through Boardwalk’s general partner, Boardwalk GP, LP (the General Partner). Itself a Delaware limited partnership, the General Partner had its own general partner, Boardwalk GP, LLC (the GPGP). The GPGP, in turn, had a board of directors, as well as a sole member, Boardwalk Pipelines Holding Corp. (the Sole Member). The Sole Member was a wholly-owned subsidiary of Loews, and the Sole Member’s board, as the Supreme Court observed in its opinion, “was controlled by Loews insiders.” The terms governing the management of the GPGP ‒ an issue that was central to both courts’ opinions ‒ were set forth in the GPGP LLC Agreement.
The plaintiffs, former minority unitholders of Boardwalk (collectively, Plaintiffs), initiated the underlying action in the Court of Chancery after their interests were repurchased in connection with the General Partner’s exercise of a call right prescribed in Boardwalk’s limited partnership agreement (the Partnership Agreement). Plaintiffs’ operative complaint named each of the above-described entities as defendants ‒ i.e., Boardwalk, the General Partner, the GPGP, the Sole Member, and Loews (collectively, Defendants).
For purposes of understanding the impact of the Supreme Court’s opinion, an in-depth understanding of the underlying regulatory backdrop is not strictly necessary. By way of background, however, it should be noted that Boardwalk was initially organized as a Delaware MLP in order “to take advantage of tax benefits from Federal Energy Regulatory Commission (FERC) regulations.” Relevantly, since 2005, FERC had “allowed pipeline owners organized as limited partnerships to claim an income tax allowance for all partners, regardless of a partner’s corporate status (the 2005 Policy).” As a result of the 2005 Policy (in addition to, among other things, federal tax provisions allowing pipeline owners to utilize accelerated depreciation for purposes of accumulated deferred income taxes), pipeline owners organized as MLPs enjoyed significant tax benefits. These tax benefits permitted MLPs like Boardwalk to secure favorable recourse rates ‒ i.e., the maximum rates, set by FERC, “that oil and gas pipeline owners can charge shippers that send oil and gas through pipelines.”
One of the call-right triggers set forth in the Partnership Agreement (discussed below) was intended to operate as a safety valve to guard against disadvantageous changes to the regulatory backdrop that motivated the decision by Loews to organize Boardwalk in the first place (in response to the 2005 Policy).
Relevant provisions of the Partnership Agreement
Section 15 of the Partnership Agreement provides two alternative circumstances that would trigger the General Partner’s ability to exercise the call right. First, the General Partner would have the right to exercise the call right if the General Partner and its affiliates owned “at least 80% of Boardwalk’s total outstanding units.” Second, the General Partner could exercise the call right if the General Partner and its affiliates held the majority (i.e., more than 50%) of Boardwalk’s outstanding units and the following condition was met:
The General Partner receive[s] 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 a “written opinion of counsel” that was “acceptable to the General Partner.” “The Partnership Agreement did not address which entity would act on behalf of the General Partner in accepting the opinion, the Sole Member or the GPGP Board.”
The Partnership Agreement also contained “[t]wo other Partnership Agreement provisions … relevant to the call right exercise.” The first was an exculpatory provision that insulated the General Partner “from monetary liability absent bad faith, fraud, willful misconduct, or criminality.” And the second was a contractual safe harbor “that provided a conclusive good faith presumption for any action taken in reliance on expert advice, including that of legal counsel.”
The General Partner ‒ through the Sole Member ‒ exercises the call right
The General Partner received an opinion of counsel from Texas-based law firm Baker Botts LLP (the Baker Botts Opinion) that a change in FERC policy was sufficient to trigger the condition set forth in section 15 of the Partnership Agreement. Thereafter, the General Partner obtained a second opinion of counsel, this time from Skadden, Arps, Slate, Meagher & Flom (the Skadden Opinion), that it would be reasonable for the Sole Member “to determine the acceptability” of the Baker Botts Opinion and, thereafter, to accept the opinion on behalf of the General Partner.” Relying on these opinions, the Sole Member caused the General Partner to exercise the call right and acquire all the Boardwalk interests held by minority unitholders (at a trailing average price determined consistent with a formula in the Partnership Agreement).
The Court of Chancery awards nearly $700 million in damages
After their interests were called, Plaintiffs challenged the exercise of the call right as improper. After a four-day trial, the Court of Chancery awarded “almost $700 million in damages to the public unitholders for what it found were improperly redeemed units.” As summarized in the Supreme Court’s opinion, the Court of Chancery ruled that:
[The General Partner] improperly exercised the call right because the Baker Botts Opinion had not been issued in good faith; the wrong entity in the MLP business structure determined the acceptability of the opinion; and the [General Partner] was not exculpated from damages under the Partnership Agreement.
The Supreme Court’s opinion
The Supreme Court reversed and remanded the Court of Chancery’s opinion. As explained in Chief Justice Seitz’s majority opinion, (i) the Sole Member was the “correct entity to determine the acceptability” of the Baker Botts Opinion; (ii) in determining the acceptability of the Baker Botts Opinion, the Sole Member reasonably relied on the Skadden Opinion; and (iii) as a result of the Sole Member’s reasonable reliance, both the Sole Member and the General Partner were, by operation of the contractual safe-harbor, “conclusively presumed to have acted in good faith in exercising the call right.”
Standard of review
In considering the arguments on appeal, the Supreme Court “review[s] questions of law and contractual interpretation … de novo” and defers “to the Court of Chancery’s factual findings supported by the record,” unless there is some clear error in those factual findings. For purposes of its opinion in Boardwalk, the Supreme Court’s reversal was motivated largely by its differing interpretation of the Partnership Agreement.
The Sole Member properly determined the “acceptability” of the Baker Botts Opinion
On appeal, the Supreme Court held that the Sole Member was the proper entity to determine whether the Baker Botts Opinion was acceptable for purposes of section 15.1 of the Partnership Agreement ‒ i.e., whether the Baker Botts Opinion was sufficient to trigger the General Partner’s right to exercise the call right. The Supreme Court took issue with the Court of Chancery’s reasoning as unsupported by the language of the GPGP LLC Agreement ‒ which, in the absence of specific language in the Partnership Agreement, controlled the inquiry. Looking to the GPGP LLC Agreement, it was clear that (i) the Sole Member had “exclusive authority to cause the [GPGP] to exercise the rights of the … General Partner, as general partner” of Boardwalk; and (ii) the call right constituted an individual right that the General Partner held by virtue of its status as the general partner of the Partnership. Accordingly, the Sole Member was the proper entity to exercise the call right ‒ not the GPGP’s board of directors.
The Sole Member reasonably relied on the Skadden Opinion
The Supreme Court further held that the Sole Member reasonably relied on the Skadden Opinion in accepting the Baker Botts Opinion. Below, the Court of Chancery was harshly critical of the Skadden Opinion, describing it as a “whitewash” of the Baker Botts Opinion (which the Court of Chancery regarded as a contrived opinion that was not rendered in good faith). But the Supreme Court explained that there was “nothing disqualifying about Skadden giving [what the Court of Chancery termed] ‘an opinion about an opinion.’” All that mattered, for purposes of examining the General Partner’s actions (through the Sole Member), was the fact that the Skadden Opinion concluded that “it would be reasonable for the Sole Member Board to accept the Baker Botts Opinion.” Because there was no finding (nor any argument) that the Skadden Opinion was itself rendered in bad faith, the Sole Member was reasonable in relying on the Skadden Opinion.
The Sole Member and General Partner were entitled to a conclusive presumption of good faith
Because the Sole Member reasonably relied on the Skadden Opinion, both the Sole Member and the General Partner were entitled to the conclusive presumption of good faith set forth in the Partnership Agreement: “Here, the Sole Member Board received the Skadden Opinion, followed its advice that it would be reasonable to accept the Baker Botts Opinion, and caused the call right exercise.” As a result, “[t]he conclusive presumption” of good faith set forth in section 7.10(b) “was triggered and therefore required a finding of good faith by the Sole Member Board. In turn, the Sole Member’s Board’s good faith actions on behalf of the General Partner exculpate the General Partner from damages.” Because this presumption was conclusive (rather than rebuttable), it was “no longer subject to [any] challenge” by Plaintiffs.
- Delaware courts continue to respect the terms of limited partnership agreements to preserve the “maximum flexibility” of contracts.
- MLP sponsors remain able to leverage contractual flexibility to concentrate power in general partners, waive fiduciary duties, and curtail limited partners’ ability to challenge management decisions.
- Investors should be careful to read partnership agreements before buying units.
- Safe harbors prescribing conclusive presumptions of good faith for actions taken in reasonable reliance on the advice of counsel can insulate decisions by general partners.
- Securing an “opinion about an opinion” might provide added protection for actions taken in an attempt to invoke reliance-based contractual safe harbors.