Bandera involved a legal opinion letter given by Baker Botts LLP (“Baker Botts”) to its client (the “Opinion”). A legal opinion letter to a client is a different kettle of fish than a legal opinion letter of the type that usually is the subject of this newsletter and other opinion publications. A legal opinion letter in our usual context is given not to a client but to the other side, a “third-party.” Also known as a closing opinion, it is “delivered at the closing of a business transaction by counsel for one party (the ‘opinion giver’) to another party (the ‘opinion recipient’) to satisfy a condition to the opinion recipient’s obligation to close.”
Still, the original decision of the Court of Chancery of Delaware got a good deal of attention from the (third-party) opinion bar. The Court of Chancery extensively cited publications about third-party opinion letters. By my count, the Court of Chancery cited Glazer & FitzGibbon 12 times, the TriBar Report 7 times, and even the ABA Accord Report once. The Court of Chancery cited these third-party opinion publications as authority for the court’s conclusion that the Opinion fell far short of opinion standards. The Court of Chancery explained its reference to these third-party opinion authorities:
[T]his decision regards the principles it articulates as self-evident manifestations of what it means for an opinion giver to act in subjective good faith. This decision cites the authorities as providing illustrative support for those principles.
The Court of Chancery found that that the Opinion was mere “window dressing” meant to enable the client/opinion recipient to act. The Court of Chancery held that the client/opinion recipient could not properly rely on the Opinion because its representatives not only knew that the Opinion was “contrived,” they “participated actively in the manufacturing” of the Opinion.
The Supreme Court of Delaware reversed, focusing much less on the Opinion than on exculpatory language in the governing documents and on disclosures that had been made to investors. A concurring opinion in the Supreme Court of Delaware returned the focus to the Opinion, offering some support for the Opinion.
Here’s what happened.
The Opinion was addressed to Boardwalk GP, LP (the “General Partner”), the general partner of Boardwalk Pipeline Partners, LP (“Boardwalk”). The Opinion included a provision allowing reliance by affiliated entities up the chain: (i) Boardwalk GP, LLC (“GPGP”), the general partner of the General Partner, (ii) Boardwalk Pipelines Holding Corp. (“Sole Member”), the sole member of GPGP, and (iii) Loews Corporation (“Loews”), the sole stockholder of Sole Member. See the Organizational Chart at the end of this article.
Boardwalk (through subsidiaries) owned interstate natural gas pipelines regulated by the Federal Energy Regulatory Commission (“FERC”). In 2005, Loews took Boardwalk public as a master limited partnership governed by an agreement of limited partnership (“Partnership Agreement”).
In 2018, Loews bought out the public limited partners under a right in the Partnership Agreement (“Call Right”). The Call Right was conditioned on receipt of an opinion of counsel acceptable to the General Partner that the status of Boardwalk,
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 [of the pipelines].
The Opinion advised that a then-proposed change in FERC policy had or would reasonably likely have such a material adverse effect. With that, the General Partner exercised the Call Right.
In addition to the Opinion from Baker Botts, the Loews side obtained advice from two other law firms, each with a sizable Delaware presence, Richards, Layton & Finger, P.A. (“RLF”) and Skadden, Arps, Slate, Meagher & Flom LLP (“Skadden”). The Supreme Court noted extensive consultations among Baker Botts, RLF, and Skadden.
The question is, did the General Partner properly exercise the Call Right?
The Court of Chancery did not think so. The decision, by Vice Chancellor Laster, awarded almost $700 million against the Loews side. The Court of Chancery found that the Baker Botts opinion was “contrived” under pressure from the client and failed to reflect a good faith effort to apply professional judgment:
Loews achieved this remarkable result because its in-house legal team and outside counsel worked hard to generate a contrived Opinion. The Opinion that outside counsel provided did not satisfy the Opinion Condition because outside counsel did not render it in good faith. Outside counsel knowingly made unrealistic and counterfactual assumptions, knowingly relied on an artificial factual predicate, and consistently engaged in goal-directed reasoning to get to the result that Loews wanted.
The Supreme Court of Delaware disagreed, reversing the Court of Chancery.
In the majority opinion, by Chief Justice Seitz, the Supreme Court of Delaware held, despite the Court of Chancery finding that the Opinion was “compromised,” that the “proper focus” was on Sole Member and the opinion it received from Skadden.
One initial issue was who should decide for the General Partner whether the Opinion was acceptable. The immediate general partner of the General Partner, GPGP, had a board of directors (“GPGP Board”) comprised of four Loews insiders and four independent directors. GPGP’s parent, Sole Member, had a board (“Sole Member Board”) controlled by Loews insiders. Loews had relied on Sole Member Board.
Skadden provided an “opinion” to Sole Member Board that it would be reasonable for Sole Member to determine for the General Partner the acceptability of the opinion of counsel. The Supreme Court of Delaware agreed.
Skadden’s opinion also supported the decision of Sole Member Board to find the Opinion “acceptable” for exercise of the Call Right as provided in the Partnership Agreement. The Supreme Court of Delaware again agreed, saying that Sole Member, “as the ultimate decisionmaker who caused the general partner to exercise the call right, reasonably relied on Skadden’s opinion.”
Further, noting that the Partnership Agreement included a conclusive presumption of good faith when relying on advice of counsel, the Supreme Court of Delaware found Sole Member and General Partner not liable, concluding:
Skadden found the Baker Botts Opinion reasonable and advised that the Sole Member Board would be acting reasonably if it accepted the Baker Botts Opinion. The Sole Member Board followed Skadden’s advice and caused the call right exercise. Having reasonably relied on Skadden’s advice, the General Partner, through the Sole Member, is conclusively presumed to have acted in good faith and is exculpated from damages.
Game over. But there’s one more thing.
A concurrence by Justice Valihura, joined by Judge Legrow (sitting by designation), returned the focus to the Opinion, providing something of a defense of the Opinion. The concurrence did not agree with the Court of Chancery that the Opinion in Bandera was rendered in bad faith. The concurrence said that the Court of Chancery’s holding that the Opinion was not rendered in good faith has the potential to “fundamentally alter” the opinion environment.
The concurrence criticized the departure of the Court of Chancery from Williams, which required deference to counsel on its judgment reached in good faith regarding a legal opinion. In Williams, Latham & Watkins LLP (“Latham”) had determined that it could not issue a legal opinion and the court said it was “inappropriate” to substitute its judgment for that of Latham, saying instead it was the role of the court to determine whether the refusal to issue an opinion was in good faith.
The concurrence said that basing a finding of bad faith, as the Court of Chancery had done, on the “sausage-making” that goes into a legal opinion “could potentially chill the free exchange of ideas, analysis, and discussion needed to undertake such complicated tasks.”
The concurrence noted that the Court of Chancery finding that Baker Botts acted in Loews’s interests was based in part on Baker Botts acting “as if it was rendering a third-party closing opinion on a routine issue, which it plainly was not.” The concurrence instead said that the record does not suggest “blind obedience” by Baker Botts to its client demands.
The concurrence concluded:
In sum, I believe that the trial court erred in holding that the Opinion was rendered in bad faith. Under existing Delaware law, opinions of counsel are entitled to deference. It is not the place of a trial court, or this Court, to substitute our own judgment for that of the lawyers who are asked to render legal opinions. Although lawyers should always strive to reach the legally correct answer, the law does not require that opinions of counsel be substantively correct. What the law requires is that lawyers undertake a good faith effort. Such good faith effort is entitled to deference. Although there are, for sure, outer limits to this deference, this case does not push beyond that boundary in my view.
That may be some comfort to opinion givers but, as I note at the outset, Bandera was not a third-party opinion case. Its application to third-party opinion letter practice is yet to be decided.
