Delaware Court Of Chancery Denies Motion To Dismiss LPA Breach Claims, Including Aiding And Abetting Claim Against Financial Advisor
09/05/2018On August 29, 2018, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery denied defendants’ motions to dismiss an amended complaint in a long-running lawsuit arising from a sale of an interest in a pipeline by a general partner to a master limited partnership in which it held a controlling interest. Mesirov v. Enbridge Energy Co. Inc., C.A. No. 11314 (Del. Ch. Aug. 29, 2018). Plaintiff, a common unitholder of a Delaware master limited partnership (the “MLP”), brought claims for breach of the MLP’s Limited Partnership Agreement (“LPA”) against the general partner (the “GP”), its parent, and other affiliates. Plaintiff alleged that the GP acted in bad faith by purportedly selling the interest for $1 billion even though it had previously acquired the same interest from the MLP five years earlier for $800 million and earnings metrics had declined over the period by 20%. As discussed in our previous post, Vice Chancellor Slights originally dismissed this suit in April 2016, but the Delaware Supreme Court reversed and remanded in March 2017, holding that bad faith was sufficiently pleaded. Here, Vice Chancellor Slights denied the GP’s motion to dismiss claims for breach of the LPA, finding them to be duplicative of the claims in the motion rejected by the Delaware Supreme Court in 2017. Vice Chancellor Slights also declined to dismiss new claims for aiding and abetting against the GP’s financial advisor, which had delivered a fairness opinion regarding the transaction.
Section 6.6(e) of the LPA required contracts with affiliates to be “fair and reasonable to the [MLP].” Certain other sections replaced traditional fiduciary duties with contractual standards and exculpated defendants from monetary damages for actions taken in “good faith.” The Delaware Supreme Court found that plaintiff adequately pleaded LPA breach claims. Rejecting the GP’s motion to dismiss the same claims in the amended complaint, Vice Chancellor Slights found that the arguments in support of dismissal “have already been addressed, and rejected, by the Supreme Court” and “will not be revisited.”
As to the claims against the financial advisor, the Court explained that, although Delaware typically does not recognize claims for aiding and abetting a breach of contract, when the contract “embraces a fiduciary standard of conduct,” as here, a claim for aiding and abetting a breach of a “contractual fiduciary duty” may be viable. The Court further noted that a claim for aiding and abetting such a breach must plead that the aider and abettor participated in the breach knowingly, intentionally or with reckless indifference. The Court emphasized that this “scienter pleading requirement is among the most difficult in our law to satisfy.”
Denying the motion to dismiss the claim, the Court pointed to several allegations in support of the claim that the financial advisor knew it had delivered the fairness opinion and that it would be used by the board to breach its contractual fiduciary duties under the LPA. For example, the GP had initially proposed a sale of the interest at a lower price, of $915 million, but later revised its projected earnings and increased the proposed sale price. Separately, the financial advisor was alleged to have known that there was an internal memo from the GP’s management to its board that used a discounted cash flow to value the interest at $478 million. Additionally, part of the compensation to the GP was to be in new Class E preferred units, which were valued the same as Class A common units, even though they came with a unique tax benefit and liquidation preference. There were also allegations that the financial advisor had provided several fairness opinions to the GP and its affiliates and was motivated to preserve its longstanding relationship. The Court, however, seemed to focus primarily on the allegation that the comparable previous purchase of the same interest by the GP from the MLP at a significantly lower price was allegedly “inexplicably” and “completely ignored.”
Although the Court noted that this was not a case involving “the kind of transactional conflicts” that have supported successful aiding and abetting claims against financial advisors, the pleadings here were sufficient on the particular facts alleged. Even so, the Court emphasized that its upholding of the claim at the pleading stage, was a “far cry from predicting” that the plaintiff would prevail.