In Boardwalk Pipeline Partners, LP v. Bandera Master Fund LP (Dec. 19, 2022), the Delaware Supreme Court reversed a Court of Chancery decision (Nov. 12, 2021) that had ordered the general partner of Boardwalk (a master limited partnership) to pay the former public unitholders almost $700 million in damages in connection with the general partner’s $1.56 billion take-private of Boardwalk.
Notably, the Supreme Court did not overturn the Court of Chancery’s factual findings that the General Partner and its affiliates had (i) opportunistically timed the take-private to occur during a temporary period of regulatory uncertainty and declining prices for Boardwalk’s units, and (ii) manipulatively pressured their law firm to deliver a “contrived,” “sham” opinion to satisfy the sole condition to the general partner’s exercise of its call right to acquire the public units. Nonetheless, the Supreme Court overturned the Court of Chancery’s legal holding that the general partner was liable for willful misconduct.
Instead, the Supreme Court viewed the general partner as simply having made “full use” of the broad “flexibility” a controller is permitted under Delaware law when its fiduciary duties have been contractually eliminated and the absence of those duties has been fully disclosed to investors. “The Partnership Agreement allowed Boardwalk to exercise the call right to its advantage—and to the disadvantage of the minority unitholders—free from fiduciary duties,” the Supreme Court wrote. The Supreme Court also held that the opinion of counsel the general partner obtained satisfied the contractual condition to exercise of the call right. The Supreme Court stated that the “proper focus” for the court was not on the validity of the legal opinion but on whether the general partner had acted reasonably in relying on it. The general partner had acted reasonably in relying on it, the Supreme Court concluded, based on its having obtained and relied on a second opinion from another law firm—which was not challenged—that opined that it would be within the general partner’s reasonable judgment to decide to rely on the first opinion. As the partnership agreement provided a conclusive presumption of good faith for the general partner when relying on advice of counsel, the general partner was presumed not to have engaged in willful misconduct and was entitled to exculpation from damages.
- When fiduciary duties have been contractually waived, a controller has broad flexibility to act in its own interest—and the court may not be likely to interpret agreement provisions broadly to afford protection to the other investors that is not explicitly provided for in the agreement. We note that the decision is likely to have wide applicability, beyond the MLP context, to other non-corporate entities. Private fund investors, for example, generally have more sophistication and greater bargaining leverage than public investors, and thus are not likely to be viewed by the courts as entitled to more protection than was accorded to the public unitholders in Boardwalk. Sponsors of non-corporate entities should seek to ensure that the entity’s organizational documents include an effective disclaimer of fiduciary duties and that the absence (or limitation, as the case may be) of fiduciary duties is fully disclosed. Potential investors, depending on their negotiating leverage, may wish to seek to provide specific protections; and should ensure, before they invest, that they fully understand the effects of any waiver or limitation of fiduciary duties.
- Based on Boardwalk, a practice may develop, under certain circumstances, of obtaining an “opinion on an opinion.” Given the Supreme Court’s holding that the general partner’s reliance on the substantive opinion it obtained was reasonable based on the general partner also having obtained a second opinion from another law firm opining that it was reasonable to accept and rely on the substantive opinion, controllers (and others), depending on the circumstances, may more often turn to seeking a second opinion confirming the reasonableness of relying on a previously received substantive opinion. Consideration should be given to seeking such a second opinion when (as was the case in Boardwalk) there are difficult issues relating to: interpretation of the condition the substantive opinion was obtained to satisfy; the validity of the legal reasoning or conclusions reached in the substantive opinion; or the good faith of the law firm delivering the substantive opinion. A second opinion may also be helpful (as highlighted in Boardwalk) to confirm a controller’s view as to which is the correct entity in a chain of related entities to make any required determination as to acceptability of a substantive opinion that was obtained.
In 2005, Loews Corporation formed Boardwalk. That same year, Loews took Boardwalk public as an MLP when the Federal Energy Regulatory Commission (FERC) announced new policies that made MLPs a tax-advantaged investment vehicle for pipelines. Boardwalk was controlled by its general partner (the “General Partner”); the General Partner, which itself was a partnership, was controlled by its general partner (the “GPGP”); the GPGP, which was a limited liability company, was controlled by its sole member (the “GPGP Sole Member”), which was a wholly-owned subsidiary of and controlled by Loews. Boardwalk’s Partnership Agreement disclaimed fiduciary duties of the General Partner. In addition, as Loews wanted to be able to take Boardwalk private again in the future if FERC policies changed such that the MLP structure was no longer advantageous, the Partnership Agreement provided the General Partner with a right to call the public units (the “Call Right”). The only condition to exercise of the Call Right was that the General Partner obtain an opinion of legal counsel, acceptable to it, that a change in FERC policies occurred that likely would have a material adverse effect (“MAE”) on the maximum applicable rate that Boardwalk could charge its customers in the future (the “Opinion Condition”).
In 2018, the FERC announced certain new policies that potentially could have the MAE described in the Opinion Condition. As is typical, industry participants aggressively lobbied the FERC to make various changes to the new policies. It was generally acknowledged that, until the FERC had, at a minimum, clarified a certain tax issue, it was impossible to know whether the effect of the new policies on Boardwalk was likely to be negative, neutral or positive. During this period of uncertainty (and a resulting significant decline in the prices of MLP public units, including Boardwalk’s), the General Partner decided to exercise the Call Right.
The General Partner obtained a legal opinion from the Baker Botts law firm (the “Baker Opinion”), which concluded that the new FERC policies likely would have the MAE described in the Opinion Condition. In light of extensive issues relating to interpretation of the Opinion Condition, as well as uncertainty as to which entity could make the determination on behalf of the General Partner as to acceptability of the Baker Opinion, the GPGP Sole Member obtained an opinion from another law firm (the “Skadden Opinion”) regarding the acceptability determination. The Skadden Opinion did not address the substance of the Baker Opinion (with respect to whether the MAE was likely), but advised that the GPGP Sole Member was an appropriate entity to make the acceptability determination and that it would be within the GPGP Sole Member’s reasonable judgment to find the Baker Opinion acceptable. The day after the take-private closed, the FERC announced the full, final package of its policy changes (including with respect to the critical tax issue)—which made it clear that the new FERC policies would have no effect on Boardwalk. Certain Boardwalk public unitholders brought suit in the Court of Chancery challenging the General Partner’s exercise of the Call Right as improper.
After a four-day trial, the Court of Chancery found that the Baker Opinion was fatally flawed and that the wrong Boardwalk entity made the decision on behalf of the General Partner as to the acceptability of the Baker Opinion. As a result, the Court of Chancery held that the Opinion Condition was not satisfied and that the General Partner thus had breached the Partnership Agreement when it exercised the Call Right. The Court of Chancery also held that, under the Partnership Agreement, the General Partner was not entitled to exculpation from liability for the breach as its actions constituted “willful misconduct.” The Delaware Supreme Court reversed the Court of Chancery’s decision, holding that: (i) the correct Boardwalk entity made the acceptability determination; (ii) whether or not the Baker Opinion had been delivered in bad faith, the General Partner had been reasonable in accepting it, based on its reliance on the Skadden Opinion, and the Partnership Agreement’s conclusive presumption of good faith for the General Partner when relying on advice of counsel; and (iii) the General Partner was entitled to exculpation as its actions did not rise to the level of willful misconduct.
The Supreme Court emphasized the very limited nature of minority investors’ rights when fiduciary duties have been contractually eliminated and their absence has been fully disclosed. The Supreme Court stressed that, when fiduciary duties have been explicitly disclaimed and their absence has been clearly disclosed, a controller has “[a] right to make self-interested decisions to the economic disadvantage of the [other investors].” The Supreme Court noted that Boardwalk’s public disclosures, over several years, had “explained in great detail the General Partner’s authority and conflicts, and the self-interested decision-making permitted by the Partnership Agreement,” including that, based on the Call Right, they could be forced to sell their units at an undesirable time or price. The Supreme Court rejected the Court of Chancery’s interpretation of certain provisions in the Partnership Agreement, in the context of manipulative and opportunistic conduct by the General Partner, as implicitly providing some protection to the minority stockholders. The Supreme Court noted the applicability of the doctrine of caveat emptor (buyer beware) for investors in limited liability entities (who are “willingly investing” in entities that provide fewer protections than those provided under corporate fiduciary principles).
The Supreme Court emphasized that the “proper focus” for the court was not on the validity of the Baker Opinion but on whether the General Partner was reasonable in finding it acceptable. The Court of Chancery, in a post-trial opinion, had found that the Baker Opinion was seriously flawed as, among other things, the assumptions created were “unrealistic” and “counterfactual”; “artificial factual predicate[s]” were knowingly relied upon; the focus was only on hypothetical, abstract legal-regulatory issues rather than whether there would be an actual MAE on Boardwalk’s business (which was the issue the Opinion Condition was designed to address); and the conclusions were based on “syllogistic” and “goal-oriented” reasoning to reach the result Loews wanted. The Supreme Court, however, stressed that the Partnership Agreement specifically provided that damages could be recovered from the General Partner only if the General Partner acted in bad faith or engaged in willful misconduct. Therefore, the Supreme Court held, the “proper focus” was not on whether the Baker Opinion was a “compromised opinion,” but on whether the GPGP Sole Member, acting on behalf of the General Partner, had acted reasonably in finding the Baker Opinion acceptable.
The Supreme Court concluded that the GPGP Sole Member had acted reasonably in finding, on the General Partner’s behalf, that the Baker Opinion was acceptable. The Supreme Court focused on the fact that the GPGP Sole Member obtained and relied on the Skadden Opinion, which opined that it would be within the GPGP Sole Member’s reasonable judgment to find that the Baker Opinion was acceptable. The Supreme Court:
- noted that the Skadden Opinion had not been challenged by the plaintiffs nor found by the Court of Chancery to have been delivered in bad faith;
- noted the time and care that Skadden had taken in producing the Skadden Opinion—including consultations with FERC and Delaware law experts; analysis of Boardwalk’s governing documents; a “complete review” of the Baker Opinion; and a “comprehensive written presentation” delivered to the board of the GPGP Sole Member;
- emphasized that the Partnership Agreement provided the General Partner with a conclusive presumption of good faith when relying on advice of counsel—a conclusive presumption “is, as its names denotes, conclusive,” the Supreme Court wrote;
- rejected the contention that reliance on an “opinion on an opinion” was problematic; and
- rejected the argument that concerns Skadden had raised in internal emails about the Baker Opinion during the course of its deliberations confirmed the Court of Chancery’s view that the Partnership Agreement was ambiguous with respect to the correct entity to make the acceptability determination (“It is what attorneys do—explore arguments as part of their professional advice,” the Supreme Court wrote).
The Supreme Court held that the GPGP Sole Member (even though its board was comprised entirely of Loews insiders) was the correct entity to make the determination, on the General Partner’s behalf, as to acceptability of the Baker Opinion. The Partnership Agreement was silent as to which specific entity could make the acceptability determination on behalf of the General Partner. The Court of Chancery had held that the board of the GPGP (the “GPGP Board”), rather than the GPGP Sole Member, should have made the acceptability determination. The Court of Chancery had reasoned that the Partnership Agreement’s silence on this point led to ambiguity that the court should interpret “in an investor-friendly way.” An acceptability determination by the GPGP Sole Member, which was comprised entirely of Loews insiders, meant that the determination was made by the very entity wanting to exercise the Call Right; whereas, if the board of the GPGP Sole Member, half of which was comprised of independent directors, made the determination, the determination would serve as an appropriate “protective check” on exercise of the Call Right, the Court of Chancery had reasoned. The Supreme Court, however, stressed that the Partnership Agreement was unambiguous in leaving the acceptability determination in the hands of the General Partner—and therefore, given the MLP Agreement’s silence on the point, it was the GPGP’s LLC Agreement that dictated how the General Partner was to make the acceptability determination. The Supreme Court explained that the Court of Chancery’s analysis went “off track” when it “read the Partnership Agreement in isolation and not as part of the [MLP]’s overall governance structure.” Read together, the Supreme Court concluded, the Partnership Agreement and the LLC Agreement were clear that the GPGP Sole Member (and not the GPGP Board) had “exclusive authority” to cause the General Partner’s exercise of the Call Right. Allowing the GPGP Board to make the acceptability determination would have conflicted with that grant of authority, the Supreme Court reasoned.
The Supreme Court rejected the Court of Chancery’s approach that bad faith by various actors affiliated with the General Partner could be imputed to the General Partner. The Court of Chancery had held that the General Partner was not entitled to exculpation under the Partnership Agreement as its actions constituted willful misconduct. The Supreme Court disagreed and described the Court of Chancery as having, under an agency theory, “lumped together a number of individuals and found that their scienter as management-level officers and agents of Loews, the [GPGP] Sole Member, the GPGP, the General Partner, and Boardwalk could be imputed to the General Partner.” The Supreme Court stressed that it was the GPGP Sole Member’s board—as “the entity responsible for the call right exercise”—that should have been the focus of the court’s review, “and not non-decisionmaker agents of the General Partner.”
A concurring opinion by two justices argued that the Supreme Court should have overturned the Court of Chancery’s finding that the Baker Opinion was delivered in bad faith. The concurring justices posited that an opinion of counsel, “whether substantively correct or not,” generally is entitled to judicial deference—that is, Delaware courts should not substitute their own judgment for that of the counsel providing the opinions. While the concurring justices acknowledged that an opinion could be so defective on its face that the court could find it to have been delivered in bad faith, in this case, in their view, “[i]n the aggregate, the record rather support[ed] the conclusion that [the Baker Opinion] was rendered in good faith and, at a minimum, was not rendered in bad faith.” They observed that Baker Botts had spent significant time on its opinion; many of the firm’s interpretations and assumptions that the lower court found fatally flawed were supported by a FERC expert’s testimony at trial; two law firms previously engaged by the plaintiffs had agreed with the firm’s conclusion that the circumstances triggering the Call Right had occurred; the firm’s Delaware counsel had agreed with its interpretation of a key ambiguous term in the Opinion Condition; and the Skadden Opinion (while not opining on the substantive issue whether the required MAE had occurred) concluded that it would be reasonable to accept the Baker Opinion. The concurring justices also emphasized that, while Loews appeared to have been an “aggressive client” that pressured Baker Botts and Skadden, the lawyers at these firms testified that their advice was not affected by any such behavior, and there was “no record evidence” that their advice had “changed course due to Loews’ actions.”
- Sponsor-controllers of non-corporate entities (especially private entities) should seek to ensure that the organizational documents clearly and effectively eliminate (or limit, as the case may be) their fiduciary duties. They also should seek to ensure that there is full disclosure as to the absence of or any limitation on fiduciary duties. Further, they should seek to ensure that they are exculpated to the maximum extent permissible under Delaware law.
- A potential investor in a non-corporate entity (especially a private entity), depending on its negotiating leverage, may wish to seek to limit the waiver of fiduciary duties or to specify specific protections in light of a general elimination or limitation of fiduciary duties. In any event, before investing, a potential investor should ensure that it fully understands the effects of any absence of or limitation on fiduciary duties.
- Sponsor-controllers (or others) obtaining an opinion to satisfy a condition to effecting a conflicted transaction (or otherwise) should, under some circumstances, consider also obtaining a second opinion, from another law firm, as to the reasonableness of relying on the first opinion. Obtaining such an “opinion on an opinion” may be advantageous where there is unusual complexity or difficulty relating to the legal issues addressed in, or the good faith of the law firm delivering, the first opinion. While a second opinion on the substance of the first opinion could be even more helpful, in many cases it may be more feasible to obtain an opinion simply that it is reasonable to rely on the first opinion.
- A law firm issuing an opinion should maintain an appropriate record of the care taken in reaching its conclusions in the opinion. In evaluating the reasonableness of reliance on an opinion of counsel, positive factors would include the law firm having spent considerable time in carefully considering the issues and, where appropriate, having sought the views of other law firms and experts (such as Delaware counsel or regulatory experts). A law firm should keep a record of its deliberations and the reasoning underlying its conclusions. In all events, a law firm’s advice should not be determined by its client’s desire to reach a certain result, and should not rely on “counterfactual” assumptions or “syllogistic” reasoning. Also, law firms should keep in mind that their emails (including internal emails) in the course of their deliberations over an opinion may become discoverable in litigation.
- Drafters of organization documents should consider whether to include a provision granting a presumption of good faith to a controller when it relies on a legal opinion (and/or other type of opinion, such as a fairness or valuation opinion). Any such provision should be explicit as to whether the presumption is conclusive or rebuttable. Boardwalk highlights the impact of providing for a conclusive presumption of good faith.
- Conditions requiring that a legal opinion be obtained and deemed acceptable should be drafted clearly—including with respect to: the required substance of the opinion; the meaning of any potentially ambiguous terms used; which entity (within a chain of related entities) would make any required determination as to acceptability of the opinion; and whether any acceptability determination would be subjective or based on an objective standard. Further, Boardwalk highlights the importance of clear language providing that reliance on advice of counsel creates a presumption of good faith, and whether the presumption is conclusive or rebuttable.