In Re: El Paso Pipeline Partners, L.P. Derivative Litigation
90 A.3d 1097
Del. Ch.2014Background
- In March 2010 El Paso Corporation (the sponsor) proposed and, by Special Approval, caused El Paso Pipeline Partners, L.P. (the MLP) to buy a 51% interest in Southern LNG and Elba Express (the Drop-Down) for about $963 million (cash, units, and debt assumption). The transaction closed in March 2010.
- The General Partner (GP) was controlled by El Paso Corporation; a three-member ad hoc Conflicts Committee (outside directors Kuehn, Smith, Reichstetter) was formed to grant “Special Approval” under LPA §7.9(a). The committee engaged Akin Gump (legal) and Tudor (financial advisor).
- Tudor provided fairness analyses and opined the deal was financially fair; the Conflicts Committee unanimously approved the Drop-Down and the GP Board adopted that recommendation.
- Plaintiffs alleged the Drop-Down was self-dealing and approved in bad faith because (a) the Service Agreements that generated most cash flows were at risk (counterparties were thin shells and guarantees were limited), (b) El Paso Parent refused to buy a 30% interest in a comparable Gulf LNG asset at a lower EBITDA multiple (9.1x) the same day it proposed selling these assets to the MLP at a higher multiple (12.2x), and (c) material information (the Gulf LNG deal and pricing) was withheld from the Conflicts Committee.
- Procedural posture: plaintiffs filed derivative suits consolidated into C.A. No. 7141-VCL. After discovery the court considered cross-motions for summary judgment on the March 2010 Drop-Down (this opinion does not address the November 2010 sale).
- Holding: Court grants summary judgment for all defendants as to the March 2010 Drop-Down—no genuine issue that the Conflicts Committee acted with the subjective good-faith belief required by the LPA; implied-covenant disclosure or fraud claims likewise fail.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Conflicts Committee lacked the subjective good-faith belief required for Special Approval (breach of express LPA §7.9(a)) | Committee ignored the real risk that Shell/BG could walk away from long-term Service Agreements and overvalued guaranteed revenue; contemporaneous Gulf LNG pricing shows the sponsor would not pay comparable prices for similar assets, supporting inference of bad faith | Committee and advisors considered market risk, guarantees, counterparty credit, and adviser Tudor reasonably concluded the price was fair; the subjective-standard focuses on committee members' actual beliefs, not hindsight disagreement | Held for defendants: plaintiffs failed to point to evidence from which a reasonable factfinder could infer lack of subjective good faith; summary judgment for defendants on express-LPA claim |
| Whether the sponsor/GP had an implied contractual duty to volunteer material transactional information (e.g., Gulf LNG bid) to the Conflicts Committee | Withholding the Gulf LNG data was material and, had it been disclosed, would have prevented a fairness opinion and would support an implied-covenant breach | LPA eliminated fiduciary duties and is silent about a duty to volunteer such information; sophisticated Conflicts Committee and advisers could obtain needed information; implying a broad duty would undermine the parties' contractual allocations | Held for defendants: gap exists but the implied covenant will not be used to impose a general duty to volunteer information in this LPA structure; no implied disclosure duty where parties eliminated fiduciary duties and could have negotiated express terms |
| Whether the sponsor/GP or advisers provided false or misleading information to the Conflicts Committee (implied covenant / fraud) | Presentations and Tudor’s work overstated the protections/quality of the Service Agreements; this misrepresentation supports an implied-covenant claim | No evidence that GP, sponsor, or Tudor knowingly provided false information; differences are disputes about judgment and weight, not deliberate misrepresentations | Held for defendants: plaintiffs did not present evidence that defendants knowingly supplied false information; implied-covenant claim based on fraud fails |
| Whether secondary claims (aiding-and-abetting breach of contract and tortious interference) survive if primary contract claims fail | Secondary liability should proceed because defendants aided a wrongful Special Approval process | Secondary liability depends on an underlying breach; if no primary breach, secondary claims fail | Held for defendants: because no primary breach of express or implied contract, aiding-and-abetting and tortious-interference claims are dismissed |
Key Cases Cited
- Allen v. Encore Energy P’rs, L.P., 72 A.3d 93 (Del. 2013) (defines subjective "good faith" belief standard for special-approval committees)
- Gerber v. Enter. Prods. Hldgs., LLC, 67 A.3d 400 (Del. 2013) (discusses interplay between contractual good-faith definitions and the implied covenant)
- Nemec v. Shrader, 991 A.2d 1120 (Del. 2010) (implied covenant cannot contradict clear express contractual rights)
- Dunlap v. State Farm Fire & Cas. Co., 878 A.2d 434 (Del. 2005) (the implied covenant is a mandatory but narrow gap-filling tool)
- Cerberus Int’l, Ltd. v. Apollo Mgmt., L.P., 794 A.2d 1141 (Del. 2002) (summary-judgment standards and credibility considerations)