Shearman & Sterling LLP | M&A Litigation Blog | Delaware Supreme Court Affirms Court Of Chancery, Finding That General Partner Complied With Obligations Under Limited Partnership Agreement
M&A Litigation
This links to the home page
  • Delaware Supreme Court Affirms Court Of Chancery, Finding That General Partner Complied With Obligations Under Limited Partnership Agreement
    On June 8, 2018, the Delaware Supreme Court affirmed the Delaware Court of Chancery’s dismissal of a putative class action challenging the merger of El Paso Pipeline Partners, L.P. (the “MLP”) with a subsidiary of its general partner, El Paso Pipeline GP Company, L.L.C. (the “GP”), all of which were controlled by defendant Kinder Morgan, Inc. Brinckerhoff v. Kinder Morgan, Inc., No. 2017-0313-JTL (Del. June 8, 2018). Plaintiff alleged that, in connection with the merger, the GP was conflicted and, therefore, breached its obligations under the MLP’s Limited Partnership Agreement (“LP Agreement”), which governed its internal affairs. The Delaware Court of Chancery dismissed the complaint, finding that the deal ultimately complied with one of four contractual approval options under the LP Agreement for a potential conflict transaction, notwithstanding that the GP had sought to proceed with an alternative approval option. Brinckerhoff v. Kinder Morgan, Inc., 2017 WL 5483730 (Del. Ch. Nov. 14, 2017). Sitting en Banc, the Delaware Supreme Court affirmed the judgment on the basis of the Court of Chancery’s order without further comment.

    According to the complaint, because Kinder Morgan controlled the MLP through the GP and would also be acquiring 100% ownership of the MLP through the merger, the transaction created a conflict of interest for the GP. The LP Agreement provided for four potential paths by which the GP could proceed with a conflict of interest transaction. One such path was “Special Approval,” which involved approval of a majority of the members of a Conflicts Committee, acting in good faith. Another was approval by the vote of a majority of the Outstanding Common Units (excluding Common Units owned by the GP and its affiliates). The GP sought to proceed with the transaction by Special Approval. But the deal was also approved by a vote of the MLP’s unitholders, in which a majority of the unitholders unaffiliated with the GP voted in favor.

    Asserting a claim for breach of the LP Agreement, plaintiff alleged that the Conflicts Committee acted in bad faith and never believed the merger was in the best interests of the MLP. Plaintiff also argued that the GP could not rely on the unaffiliated unitholder approval because the GP “specifically declined to agree to have a vote of a majority of the public unitholders determine the vote for the Merger.” The complaint also alleged that the GP breached the implied covenant of good faith and fair dealing because the proxy for the vote on the merger contained material misrepresentations and omissions.

    The Court of Chancery, affirmed by the Delaware Supreme Court, dismissed both claims. Regarding the alleged breach of the LP Agreement, the Court held the GP “is not prevented from relying on the applicability of another [approval] path simply because the [GP] opted to follow the Special Approval path.” The Court also found that the requirement that a majority of unaffiliated unitholders approve the merger did not require a separate vote for that purpose; rather, their approval in the context of a vote by all unitholders was sufficient. The Court did not reach the question of the adequacy of the Special Approval. As to plaintiff’s implied covenant claim, the Court held that the implied covenant does not give rise to a generalized duty to disclose all material information where the limited partnership agreement eliminates all fiduciary duties. Instead, it serves to prohibit intentional deception and fraud, which were not alleged here.