246 A.3d 121
Del.2021Background
- Enbridge (through affiliates) controlled ~83% of Spectra Energy Partners, L.P. (SEP). SEP previously sold pipeline assets to Spectra Energy Corp. in a “reverse dropdown”; SEP received $946M in consideration while the assets were valued at $1.5B, leading Morris to sue derivatively for breach of the limited partnership’s good-faith requirement.
- Morris’s derivative complaint survived a motion to dismiss; while summary judgment was pending, Enbridge acquired Spectra Energy Corp. and later offered a roll-up merger to buy SEP public unitholders (1.111 Enbridge shares per SEP unit) when SEP’s market price was depressed.
- Morris notified the conflicts committee that the pending derivative claim was worth >$660M and should be reflected in the merger consideration; the conflicts committee valued the derivative claim at < $0 and gave no merger value to it.
- After the merger closed (Enbridge already held ~83%), the derivative suit was dismissed by stipulation; Morris then filed a post-closing class action alleging the merger was unfair because SEP GP failed to secure value for the derivative claim.
- The Court of Chancery applied the Primedia three-part test for post-merger direct standing, discounted Morris’s alleged $661M recovery to a $112M pro rata public unitholder share and further to ~$28M for litigation risk, and dismissed for lack of standing as immaterial to the $3.3B merger.
- The Delaware Supreme Court reversed: on a motion to dismiss for lack of standing the court must accept pleaded facts and not apply a litigation-risk percentage discount; Morris sufficiently alleged a direct challenge to the merger under Primedia/Parnes and thus had standing.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| 1) Standing to press a post‑merger direct claim challenging merger fairness for failure to secure value for derivative claims | Morris: Primedia/Parnes direct‑claim route satisfied—derivative claim viable, acquirer won’t pursue it, merger provided no value | SEP GP: Derivative claim passed to acquirer; plaintiff lacks standing because claim is immaterial to merger | Held: Morris has standing; Primedia framework applies and dismissal was erroneous |
| 2) May court apply a litigation‑risk discount at pleading stage when assessing materiality | Morris: No—court must accept pleaded damages and reasonable inferences at motion‑to‑dismiss stage | SEP GP: Yes—discount for probability of success and minority share is appropriate | Held: No for Rule 12-stage—risk discounts are improper at pleading stage where allegations are reasonably conceivable |
| 3) Proper comparators for materiality: how to compare litigation recovery to merger consideration | Morris: Compare minority unitholders’ pro rata share of litigation recovery to minority’s pro rata share of merger proceeds (apples‑to‑apples) | SEP GP: Compare risk‑adjusted minority recovery to total merger value | Held: Court should use pro rata comparison; Chancery erred by comparing a risk‑discounted pro rata recovery to the total merger value |
| 4) Applicability and application of Primedia three‑part test | Morris: Primedia governs and all three prongs are pleaded (viable derivative claim, materiality, acquirer won’t pursue/provided no value) | SEP GP: Primedia misapplied; other doctrines (fraud exception to continuous‑ownership) or discounts control | Held: Primedia is the correct framework; Chancery misapplied it by making factual discounts at pleading stage |
Key Cases Cited
- Parnes v. Bally Entm’t Corp., 722 A.2d 1243 (Del. 1999) (recognizes a post‑closing direct challenge to a merger where unfair dealing or price is alleged)
- El Paso Pipeline GP Co. v. Brinckerhoff, 152 A.3d 1248 (Del. 2016) (clarifies standing after merger and acknowledges direct‑claim avenue when buyer acquires derivative claims)
- In re Primedia, Inc. Shareholders Litig., 67 A.3d 455 (Del. Ch. 2013) (articulates three‑part test for post‑merger standing when derivative claims are at issue)
- Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004) (two‑part test to determine whether claim is direct or derivative)
- Lewis v. Anderson, 477 A.2d 1040 (Del. 1984) (continuous‑ownership rule: derivative plaintiffs lose standing after a merger absent narrow exceptions)
- Kramer v. Western Pac. Indus., 546 A.2d 348 (Del. 1988) (distinguishes transactional wrongs that do not amount to a direct challenge to the merger price)
- In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959 (Del. Ch. 1996) (frames director oversight/Caremark claim difficulty and standards)