Delaware Supreme Court Finds General Partner Acted in Good Faith Based on Reliance on Legal Opinions as a Condition Precedent for the Exercise of Call Right
Boardwalk Pipeline Partners, LP v. Bandera Master Fund LP, 2022 WL 17750348 (Delaware Supreme Court)
By Tarik J. Haskins, Partner, Morris Nichols Arsht & Tunnell
In a recent opinion, the Delaware Supreme Court reversed a Court of Chancery decision that found that a general partner of a master limited partnership (the “Partnership”) breached the Partnership’s limited partnership agreement (the “Partnership Agreement”) when the general partner exercised its contractual call right, which resulted in a monetary damages award of almost $700 million dollars. Under the terms of the Partnership Agreement the general partner of the Partnership (the “General Partner”) possessed a call right entitling the General Partner to purchase the Partnership’s limited partnerships units that the General Partner and its affiliates did not own if certain conditions precedent were satisfied. The plaintiffs alleged that the following conditions precedent were not satisfied: (i) obtaining a legal opinion that “the Partnership’s status as an association not taxable as a corporation and not otherwise subject to an entity-level tax for federal, state or local income tax purposes 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 “Opinion Condition”) and (ii) a determination by the General Partner that the legal opinion is acceptable to the General Partner. The Court of Chancery agreed with the plaintiffs, finding that the General Partner improperly exercised the call right because the opinion the General Partner received from Baker Botts to satisfy the Opinion Condition was not issued in good faith and the wrong entity determined the acceptability of the opinion. In addition, the Court of Chancery found that the General Partner was not exculpated from damages under the Partnership Agreement.
On appeal, the Partnership, the General Partner, and other defendants (collectively, the “Boardwalk Parties”) argued that the Court of Chancery erred when it determined that (i) the sole member of the limited liability company General Partner was not the correct decision-maker to determine the acceptability of the opinion, and (ii) that the General Partner was not entitled to exculpation from damages under the terms of the Partnership Agreement.
The majority opinion agreed with the Boardwalk Parties, finding that the sole member of the General Partner was the correct decision-maker to determine the acceptability of the opinion. The majority opinion reasoned that based upon the express terms of the Partnership Agreement and the General Partner’s limited liability company agreement, the authority to determine the acceptability of the opinion was vested in the sole member of the General Partner.
The majority opinion also found that a contractual conclusive presumption set forth in the Partnership Agreement protected the General Partner from liability. The Partnership Agreement included a provision that provided that the General Partner will be conclusively presumed to have acted in good faith if it relies on advice of counsel. The majority opinion found that the conclusive presumption applied based on the General Partner’s reliance on an opinion it received from Skadden Arps. The Skadden Arps opinion determined that (i) the sole member of the General Partner was the correct decision-maker to determine the acceptability of the opinion and (ii) it was reasonable for the sole member of the General Partner to find that the Baker Botts opinion was acceptable, as such term was used in the Partnership Agreement. Based on the conclusive presumption set forth in the Partnership Agreement, the majority opinion concluded that the General Partner is presumed to have acted in good faith and is therefore immune from damages. The majority opinion did not address other arguments made by the Boardwalk Parties, including whether the Baker Botts opinion was issued in bad faith. The Delaware Supreme Court remanded the case for further proceedings consistent with its opinion.
In a concurring opinion, the concurring judges agreed with the majority opinion’s judgment but determined that the record supports the conclusion that the Baker Botts opinion was issued in good faith and, at a minimum, was not rendered in bad faith. The concurring opinion noted that the trial court’s determination that the Baker Botts opinion was not rendered in good faith “has the potential to fundamentally alter the legal environment in which opinions of counsel are prepared.” The concurring opinion stated that the trial court misapplied existing law with respect to the standard of review of legal opinions. The concurring opinion urged that the existing standard stated in Williams Cos. Inc. v. Energy Transfer Equity LP, 2016 WL 3576682 (Del. Ch. June 24, 2016), provided the correct standard of review, which required a reviewing court to apply a deferential standard that focused on the good faith of counsel as opposed to the legal opinion itself. Thus, the concurring opinion is instructive for practitioners who deliver legal opinions.