December 20, 2022

Del. Supreme Court Reverses Chancery’s $700 Million Bandera Decision

Yesterday, the Delaware Supreme Court issued its decision in Boardwalk Pipeline Partners v. Bandera Master Fund, (Del. 12/22). The Court reversed a 2021 Chancery Court decision which found that the general partner of a Master Limited Partnership (“MLP”) was liable for nearly $700 million in damages as a result of a breach of the partnership agreement involving willful misconduct that left the general partner exposed to unexculpated claims under the terms of that agreement.

The Supreme Court’s decision is likely to be an important one, both as a result of its deferential approach to a partnership agreement’s language conveying broad discretionary authority to the general partner, and because of a concurring opinion addressing the standard of review that Delaware courts should apply to a law firm’s legal opinion.

The case involved the permissibility of a general partner’s decision to exercise a contractual call right on the limited partners ownership interests provided under the terms of a MLP partnership agreement. The exercise of that right was conditioned upon the general partner’s receipt of a legal opinion concerning the impact of pending regulatory action by the Federal Energy Regulatory Commission on the company’s oil & gas pipeline business. Under the terms of the partnership agreement, exercise of the call right was also conditioned upon the general partner’s determination that the opinion of its counsel was acceptable. In order to assist in that determination, the general partner retained another law firm to shadow that counsel’s work and provide its own opinion on the reasonableness of relying on the first counsel’s opinion.

The plaintiffs alleged, among other things, that the general partner breached its obligations under the partnership agreement when it exercised the call right.  After surviving a motion to dismiss, the case went to trial., and Vice Chancellor Laster ultimately held that the general partner breached the agreement because it did not satisfy the opinion-related conditions to the exercise of the call right. He held that the legal opinion did not reflect a good faith effort on the part of counsel to discern the relevant facts and apply professional judgment. Furthermore, because the determination that the opinion was acceptable was made by the general partner and not the MLP’s board, he concluded that it did not comply with the terms of the agreement.

The Vice Chancellor also found that general partner engaged in willful misconduct when it exercised the call right, and that the exculpatory provisions in the partnership agreement didn’t protect the general partner from liability for its actions.

The Supreme Court disagreed.  The majority focused on the terms of the MLP agreement, and in particular the broad discretionary authority provided to the general partner.  After rejecting the Chancery Court’s conclusion that the opinion should have been directed to the MLP board, it addressed the general partner’s right to rely on that opinion.

In particular, the Supreme Court noted that Section 7.10(b) of the agreement provided that the general partner was “conclusively presumed” to have acted in good faith when it relies on advice of counsel “as to matters that the General Partner reasonably believes to be within [counsel’s] professional or expert confidence.”  The Court held that in the context of the broad powers given to an MLP’s sponsor under the Delaware Revised Uniform Limited Partnership Act and the clear disclosure provided to investors in the MLP concerning the authority of the general partner, that language meant exactly what it said:

Unlike a rebuttable presumption, Section 7.10(b)’s conclusive good faith presumption is, as its name denotes, conclusive. Interpreting a nearly identical provision in Gerber, this Court explained that “Section 7.10(b) is a contractual provision that establishes a procedure the general partner may use to conclusively establish that it met its contractual fiduciary duty.” In other words, once Section 7.10(b) is validly triggered through reliance on expert advice, good faith is “conclusively establish[ed]” and no longer subject to challenge.

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. The conclusive presumption was triggered and therefore required a finding of good faith by the Sole Member Board. In turn, the Sole Member Board’s good faith actions on behalf of the General Partner exculpate the General Partner from damages.

Earlier in what’s become an alarmingly lengthy blog, I mentioned that the concurring opinion addressed the Chancery Court approach to the legal opinion provided to the general partner. I can feel your eyes glazing over, so I think I’ll save that part of the decision for tomorrow.

John Jenkins