Paul Morris v. Spectra Energy Partners (DE)
CA 12110-VCG
| Del. Ch. | Jun 27, 2017Background
- Plaintiff Paul Morris brought derivative claims on behalf of Spectra Energy Partners, L.P. (SEP), an MLP whose general partner (SEP GP) is a subsidiary of Spectra Energy Corp. (SE Corp), SEP’s majority owner.
- SE Corp announced a joint contribution to DCP valuing its intended asset contribution (its interests in two pipelines, Sand Hills and Southern Hills) at $1.5 billion, despite SE Corp having previously transferred those interests to SEP in an earlier dropdown.
- SE Corp proposed a reverse-dropdown transaction for SEP to transfer back its one-third interests in those pipelines to SE Corp in exchange for LP unit redemptions, cancellation of certain GP/IDR rights, and other consideration; the actual consideration to SEP totaled roughly $946–$904 million in the fairness analysis (under $1 billion).
- SEP GP formed an independent Conflicts Committee, engaged Simmons as financial advisor, received a fairness presentation, and gave Special Approval under the LPA; the LPA replaces fiduciary duties with contractual standards and supplies a rebuttable good-faith presumption for Special Approval (Section 7.9(a)) and a separate conclusive-presumption clause for reliance on advisors (Section 7.10(b)).
- Plaintiff alleges the Committee approved the transaction despite knowing the market/implied value was $1.5 billion and that Simmons’ fairness analysis omitted or downplayed a $525–$575 million component (“Reduced GP Distributions”), thus creating a roughly $500 million gap and permitting an inference of subjective bad faith.
- Procedurally, defendants moved to dismiss Counts II (breach of LPA), IV (implied covenant, abandoned if contract controls), and VI (tortious interference by SE Corp); Court reviewed whether Section 7.10(b) or Section 7.9(a) governs and whether plaintiff plausibly rebutted the Section 7.9(a) presumption.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Which LPA presumption applies to the conflicted transaction? (Section 7.9(a) rebuttable vs Section 7.10(b) conclusive) | The specific conflicts safe-harbor (Section 7.9(a)) governs; Section 7.10(b) (general provision) should not trump the specific conflicts provision. | Section 7.10(b) supplies a conclusive presumption when the Committee relied on advisors; thus defendants argue plaintiff cannot rebut good faith. | Court held Section 7.9(a)’s rebuttable presumption governs; Section 7.10(b) does not supplant it here. |
| Whether plaintiff plausibly pleaded subjective bad faith to rebut the Section 7.9(a) presumption | Morris: pleadings and public documents show a $1.5B market/implied value while SEP received < $1B, Simmons’ analysis downplayed key value elements, so subjective bad faith is reasonably conceivable. | SEP GP: the assets were burdened by IDR obligations and the valuation gap is illusory; Simmons’ process was reasonable so no bad faith. | Court held plaintiff sufficiently pleaded facts that could support an inference of subjective bad faith at the pleading stage (denied dismissal of breach of LPA claim). |
| Whether the implied covenant claim survives | Morris argued the covenant fills gaps if LPA permits conclusive presumption or otherwise leaves a gap. | Defendants said LPA governs and implied covenant is displaced where contract supplies standards. | Court dismissed implied covenant claim as moot because rebuttable presumption under Section 7.9(a) applies (no gap to fill). |
| Whether SE Corp is liable for tortious interference with the LPA | Morris: SE Corp orchestrated a deal it knew would cause a breach of SEP GP’s contractual duty and therefore tortiously interfered. | SE Corp: making a contractually permitted offer and negotiating under the LPA is not tortious; absent allegations of active interference or direction, no claim. | Court dismissed tortious interference claim for failure to plead SE Corp acted with malice or took actions beyond making and negotiating the permitted offer. |
Key Cases Cited
- Allen v. Encore Energy Partners, L.P., 72 A.3d 93 (Del. 2013) (subjective good-faith standard in LPAs and difficulty of pleading bad faith; analysis of interplay between conflict safe-harbors and advisor-reliance clauses)
- Norton v. K-Sea Transportation Partners L.P., 67 A.3d 354 (Del. 2013) (upholding an irrebuttable presumption of good faith where reliance on advisor was contractually insulated)
- Gerber v. Enterprise Products Holdings, LLC, 67 A.3d 400 (Del. 2013) (discussion of advisor-reliance clauses and limits of contractual presumptions)
- Savor, Inc. v. FMR Corp., 812 A.2d 894 (Del. 2002) (Rule 12(b)(6) standard: accept well-pled facts and draw all reasonable inferences for the nonmoving party)
- Employees’ Retirement System of City of St. Louis v. TC Pipelines GP, Inc., 152 A.3d 1248 (Del. 2016) (enforcing a conclusive-presumption clause when it was explicitly nested within the conflicts-approval provision)