On December 19, 2022, the Delaware Supreme Court in Boardwalk Pipeline Partners, LP v. Bandera Master Fund LP, 2022 WL 17750348 (Del. Dec. 19, 2022), unanimously reversed the decision of the Court of Chancery in Bandera Master Fund LP v. Boardwalk Pipeline Partners, LP, 2021 WL 5267734 (Del. Ch. Nov. 12, 2021). The Court of Chancery had found that the General Partner of a Master Limited Partnership breached its obligations under the partnership agreement when it exercised its right to call the publicly-held limited partnership interests because the condition for a legal opinion specified in the partnership agreement to call the interests was not satisfied. The Court of Chancery found that the opinion that was given was not given in good faith and was not relied upon by the General Partner in good faith. In reaching that conclusion, the Court of Chancery examined customary practice for giving third-party closing opinions, including the use of assumptions that are counter-factual and assumptions and factual representations that effectively establish the legal conclusions being.
A majority of the Delaware Supreme Court found it unnecessary to reach the question whether the opinion was given in good faith but instead relied upon the broad discretionary authority given in the partnership agreement to the General Partner, acting through its sole member as the proper party under the General Partner’s governing agreement, to determine in good faith if the condition to exercise the call right had been satisfied. In particular, the majority noted that the partnership agreement provided that the General Partner was “conclusively presumed” to have acted in good faith when it relies on the advice of counsel, and here it had obtained the advice of another law firm that it was reasonable for it to accept the legal opinion given in connection with exercising the call right.
The two remaining judges, in a concurring opinion, agreed with the reversal but stated that they thought it was necessary to consider whether the legal opinion upon which the exercise of the call right was based was rendered in good faith.
The concurrence then indicated that the Court of Chancery had applied the wrong standard in evaluating the opinion by not according it the deference that prior Delaware decisions required be given to opinions of counsel and instead substituted its own judgment about the subject matter of the. Based on this deferential standard, the concurrence found sufficient support for concluding that the opinion “was rendered in good faith and, at a minimum, was not rendered in bad faith.” The concurring opinion described Delaware law as not requiring an opinion to be substantively correct so long as the lawyers undertook a good faith effort in rendering it. Since the majority did not address this issue, it is not clear the extent to which the concurring opinion’s statement represents Delaware law. Even if it does, and as previously noted there is support for this in Williams, the deferential standard for review of legal opinions may be limited to situations, like Bandera, where the opinion was provided to satisfy a stated condition for action by a party under an agreement and the recipient of the opinion is not the party questioning it. This may not, however, be the standard to be applied in the more typical negligent misrepresentation action by the recipient of a third-party closing opinion.
Neither the majority opinion nor the concurring opinion saw a need to address the Court of Chancery’s observations regarding customary opinion practice. Accordingly, the value of those observations and the lessons from the Court of Chancery’s Bandera decision for legal opinion practice that are not inconsistent with the Delaware Supreme Court’s ruling are still relevant.
This article was prepared by the Business Law Section's Legal Opinions Committee.