In Boardwalk Pipeline Partners, LP v. Bandera Master Fund LP, C.A. No. 2018-0372 (Del. Dec. 19, 2022) (hereinafter, Boardwalk), the Delaware Supreme Court reversed a nearly $700 million judgment from the Court of Chancery where the Court of Chancery held that a general partner of a limited partnership exercised its rights pursuant to a “contrived” opinion of counsel.
The issue before the Court was whether the general partner (the GP) of Boardwalk Pipeline Partners, LP, a Delaware master limited partnership (Boardwalk), properly exercised a call right to take Boardwalk private. The Boardwalk limited partnership agreement (the LPA) disclaimed the GP’s fiduciary duties. The LPA also exculpated the GP under certain circumstances, and it provided a conclusive presumption of good faith where the GP relied on the advice of counsel.
In 2018, in response to changes in Federal Energy Regulation Commission(FERC) regulations, the GP considered exercising a call right of public units under the LPA. Under the LPA, the GP could effect the call right if the GP received an opinion of counsel acceptable to the GP that a change in FERC regulations “has or will reasonably likely in the future have a material adverse effect on the maximum applicable rate that can be charged to customers.” The GP hired Baker Botts, a Texas-based law firm, to provide an opinion that the change in FERC regulations met the LPA requirements for the GP to exercise the call rights. After Baker Botts provided the GP with an opinion stating that the LPA conditions were met, the sole member of the GP’s general partner (the Sole Member) hired Skadden, a New York-based law firm, to opine on the acceptability of the Baker Botts opinion. Skadden opined that the Baker Botts opinion was reasonable and that it would be reasonable for the Sole Member to accept the Baker Botts opinion on behalf of the GP’s general partner, who would accept the opinion on behalf of the GP. The GP then exercised the call right to acquire all public units of Boardwalk.
The Boardwalk public unitholders brought a suit against the GP, claiming that it had improperly exercised the call right. The Court of Chancery held that the GP had improperly exercised the call right because the Baker Botts opinion was not given in good faith and because the Sole Member, rather than the GP, determined whether the Baker Botts opinion was acceptable. According to the Court of Chancery, the Baker Botts opinion “did not reflect a good faith effort to discern the actual facts and apply professional judgment,” due, in part, to the opinion’s reliance on “unsupported counterfactual assumptions and a misleading Rate Model Analysis.” The Court of Chancery concluded that the Baker Botts opinion was “a contrived effort to reach the result that the General Partner wanted” and that the GP could not rely on the Baker Botts opinion because of its knowing participation in securing the “contrived opinion.” The Court of Chancery ultimately awarded over $689 million in damages to the public unitholders.
The Delaware Supreme Court reversed the Court of Chancery’s judgment. It reiterated that Delaware courts respect the terms of limited partnership agreements in order to preserve the “maximum flexibility” of contracts, and that the courts’ strict interpretation and enforcement of agreements “puts investors on notice” that they should be “careful to read partnership agreements before buying units.” The Court noted that the LPA provided that plaintiffs cannot recover damages unless the GP acted in bad faith or engaged in fraud or willful misconduct, and that the GP is “conclusively presumed” to have acted in good faith when it relies on the advice of counsel. The Court also observed that the GP, through the Sole Member, obtained an opinion from Skadden that the Baker Botts opinion was reasonable. The Court held that since the Sole Member controlled the GP’s general partner, the only reasonable inference was that if the Sole Member relied on Skadden’s opinion, then so did the GP. The Court also held that a contractual provision that provides a conclusive presumption of good faith is not rebuttable.
The Boardwalk case is another affirmation that Delaware courts will interpret partnership agreements to provide for the maximum flexibility of contracts. Investors should read any limited partnership agreement carefully for modifications to or the elimination of fiduciary duties. Sponsors should also take note that receiving an opinion of counsel about the reasonableness of another firm’s legal opinion may provide added protection to the sponsors and the limited partnership’s general partner.