On February 9, 2022, in a putative class action captioned Walter E. Ryan Jr. v. Buckeye Partners L.P. et al., the Court of Chancery dismissed claims for breach of a limited partnership agreement (LPA), finding that the complaint failed to provide sufficient notice of the legal theories and facts underlying the claims in violation of Court of Chancery Rule 8. The Court also dismissed claims for breach of fiduciary duty because the LPA disclaimed traditional fiduciary duties and because they were otherwise foreclosed by a fully informed vote under the Corwin doctrine, which provides for application of the business judgment rule when a transaction is approved by a majority of fully informed unit- or stockholders.
The claims related to the acquisition of Buckeye Partners L.P. (Buckeye) by a subsidiary of defendant IFM Global Infrastructure Fund (IFM). In the transaction, Buckeye’s unitholders received $41.50 in cash for each of their units, which were at the time publicly traded, representing a 27.5 percent premium to Buckeye’s closing unit price the day before the transaction was announced. The transaction closed after receiving fully informed approval from 96 percent of Buckeye’s voting unitholders. The plaintiff, a former unitholder in Buckeye, brought breach of contract, breach of the implied covenant of good faith and fair dealing, and breach of fiduciary duty claims against Buckeye, as well as aiding and abetting and tortious interference claims against IFM. The complaint generally claimed the transaction was unfairly structured to result in financial and tax benefits to IFM while depriving the unitholders of distributions.
Both Buckeye and IFM moved to dismiss all claims under Court of Chancery Rule 12(b)(6) for failure to state a claim. The Court found that plaintiff’s breach of contract claim failed because plaintiff did not cite a single provision of the LPA that Buckeye allegedly breached, thereby failing to meet the notice pleading requirement of Court of Chancery Rule 8. In any event, the Court found that the claim for breach was belied by the express terms of the LPA. The Court likewise dismissed the plaintiff’s claim for breach of the implied covenant of good faith and fair dealing, finding that the plaintiff failed to plead a gap in the terms of the LPA that could be filled by the implied covenant.
Finally, the Court held that the language in the LPA eliminated traditional fiduciary duties in favor of a contractual good faith standard, as permitted under Delaware law, thereby precluding plaintiff’s claim for breach of those traditional duties. Even if the LPA had not displaced traditional duties, the Court also reasoned that the transaction was protected by the business judgment rule, as extended under the Corwin doctrine, given that 96 percent of the fully informed unitholders had approved the transaction. The Court rejected in dicta the plaintiff’s suggestion that the transaction should be subject to a heightened standard of review based on the fact that board members received accelerated equity awards and preexisting severance payments that were triggered by the deal. The Court noted that, under Delaware law, “the possibility of receiving change-in-control benefits pursuant to pre-existing employment agreements does not create a disqualifying interest as a matter of law,” particularly where the compensation is not alleged to be material to the fiduciary.
The Court further ruled that the plaintiff’s claims against IFM for aiding and abetting Buckeye’s alleged breaches of contract and the implied covenant of good faith and fair dealing were not legally cognizable under Delaware law, and that all of the claims for aiding and abetting generally failed for lack of any predicate breaches in any event. The claim against IFM for tortious interference was dismissed for failure to allege that IFM acted “without justification”—“the IFM Defendants thought the Transaction was in their best interests and pursued it accordingly.”
The Court of Chancery’s ruling followed dismissal by US District Judge Richard Andrews of the plaintiff’s federal lawsuit challenging the merger in May 2021. In the plaintiff’s briefing in opposition to the motions to dismiss, the plaintiff asked “that he be given leave to amend his Complaint.” The court declined, noting that the plaintiff “chose to brief the motion to dismiss instead of filing an amended complaint, as permitted by Chancery Rule 15(a). The consequence of this choice under our rules is that if ‘the Court . . . concludes that the Complaint should be dismissed . . . such dismissal shall be with prejudice.’”
This opinion is a strong reminder that Delaware is a “notice pleading” state. Though the standard is relatively easy to satisfy, Court of Chancery Rule 8 requires that pleadings give defendants sufficient notice of the claims asserted against them. Plaintiffs—and their counsel—should take care to articulate their theories of liability at the outset to avoid dismissal. Likewise, the case is a good reminder that parties cannot look to the implied covenant of good faith and fair dealing where the terms of a contract expressly address the situation at issue, and that contractual removal of fiduciary duties is permissible under Delaware law. Finally, the opinion reconfirms that fiduciaries will not be rendered conflicted through the receipt of accelerated compensation or change-in-control benefits awarded in preexisting employment agreements.