Chancery Court finds that Language of Limited Partnership Agreement Governs which Claims Survive Summary Judgment in Master Limited Partnership's Related Party Transaction
In Mesirov v. Enbridge Company, Inc., et al. C.A. No. 11314-VCS (Del. Ch. Aug.29, 2018), the Delaware Chancery Court dismissed five of eight counts alleged with respect to a transaction where Enbridge Energy Company (EEP) repurchased for $1 billion a two-thirds interest in Alberta Clipper Pipelines (AC interest), despite the fact that EEP had sold that same interest years prior for $800 million and the business had steadily declined since such sale. The dismissals were based primarily upon the language and obligations included in EEP’s limited partnership agreement.
This case was initially brought to the Court of Chancery in 2016 but was dismissed for failure to state a claim. However, the claims were revived when, on appeal, the Delaware Supreme Court provided guidance on how to construe the language of limited partnership agreement (LPA). Generally, the Court of Chancery has stated that Delaware’s partnership laws offer more freedom than traditional corporate governance laws. However, the Delaware Supreme Court made it clear that this freedom has its limits. Although traditional fiduciary duties may be contracted away in a limited partnership, contractual fiduciary duties may still exist. The Delaware Supreme Court found that those contractual fiduciary duties existed in this LPA and remanded with instructions to construe the LPA as such.
Judy Mesirov, a unitholder of EEP, represented a class of Class A common limited partnership units. Mesirov claimed that EEP and its unitholders were harmed by not only the inflated purchase price of the AC interest but also the special tax allocation included in the deal. As part of the purchase price, EEP would issue new Class E units that come with special tax benefits and a liquidation preference that Class A units do not share. To make matters worse, the tax burden for the special tax allocation would fall on the public unitholders who do not receive the benefit. In the complaint, EEP brought both direct and derivative claims against: 1) the partnership’s general partner, EEP GP, 2) the LLC that manages EEP’s business and affairs, EEP Management, 3) the Canadian company that owns and controls EEP GP, Enbridge, 4) parties to the AC interest transaction, Enbridge Pipelines (Alberta Clipper) L.L.C. and Enbridge Energy, LP, and 5) the entity that provided financial advice, Simmons & Company International (Simmons). The complaint questions the fairness opinion issued by Simmons regarding the spike in the asset’s price despite the downturn in the oil market.
The eight counts in the complaint include: 1) derivative breach of contracts claims against EEP GP and Enbridge Management, 2) aiding and abetting breach of contractual fiduciary against Enbridge and the Director Defendants, 3) tortious interference with EEP GP’s performance of the limited partnership agreement against Enbridge and the Director Defendants, 4) breach of residual fiduciary duties against Enbridge and the Director Defendants, 5) aiding and abetting breach of contractual fiduciary duties against Enbridge Management, 6) equitable remedies of reformation or rescission, 7) aiding and abetting breach of fiduciary duty against Simmons, and 8) tortious interference with LPA against Simmons.
The Court summarily dismissed what it referred to as “secondary liability claims”, which included counts two through five. Based on the language of the LPA, the claims failed as a matter of law. Because the LPA imposed express duties upon EEP, it cannot be held liable for aiding and abetting a breach of that provision. Further, Delaware law requires a defendant to a tortious interference claim to “be a stranger to the contract and the business relationship giving rise to” the contract. Here, Enbridge, Enbridge Management, and Director Defendant could not be classified as strangers to the LPA or the AC interest transaction. Thus, as a matter of law the tortious interference claims against them could not stand. Finally, Enbridge and the Director Defendants are EEP GP Affiliates. As affiliates, they are bound by the LPA Agreement. As such, those defendants have a contractual fiduciary duty under the LPA that supplants any residual fiduciary duties associated with the AC transaction.
With four counts dismissed, the Court turned to the last two counts against the financial advisor, Simmons. The Defendants pointed to the Simmons’s fairness review to demonstrate that they upheld their fiduciary duty. However, the court found the fairness review process deficient in several ways: 1) it did not consider the most relevant comparable transaction, the 2009 sale of the AC interest, 2) it did not account for the special tax allocation and the value of the Class E units EEP GP stood to gain through the transaction, and 3) it did not take into account that the AC interest had become riskier since 2009 as reflect in the 20% decrease in projected EBITDA.
All this considered, the court found a viable claim against Simmons for aiding and abetting a breach of fiduciary duty. In reaching this conclusion, the court noted that Delaware law requires “knowing participation” by the defendant in the fiduciary’s breach. Here, the complaint’s allegation that Simmons performed a perfunctory valuation to preserve its longstanding relationship with Enbridge was sufficient to demonstrate the required scienter. On the other hand, the court dismissed the tortious interference with contract claim against Simmons. The court recognized the advisor’s privilege in the Restatement (Second) of Torts § 772 which allows a financial advisor to provide guidance to a client which may interfere with or induce the client to breach a contract without fear of tort liability so long as the advisor’s actions are within the scope of his employment and taken with intent to further the best interests of their client. Here, the court found that privilege attached to Simmons because there was no allegation of bad faith on their part.
Adrienne Wimberly contributed to this post.