On March 20, 2017, the Supreme Court of Delaware reversed the Court of Chancery’s dismissal of a lawsuit challenging a transaction between affiliated entities. Brinckerhoff v. Enbridge Energy Co., No. 273, 2016 (Del. Mar. 20, 2017). Plaintiff, a common unitholder of a Delaware master limited partnership, Enbridge Energy Partners, L.P. (the “MLP”), brought suit against several defendants, including the general partner Enbridge Energy Co. (“EEP GP”); its controlling parent, Enbridge, Inc. (“Enbridge”); another affiliate of each; and certain directors and officers of these entities. Plaintiff alleged that defendants approved a transaction involving conflicts of interest in bad faith and in violation of certain provisions of the MLP’s Limited Partnership Agreement (“LPA”). In reversing the dismissal, the Court held that (1) “good faith” and other provisions in the LPA exculpating the general partner from monetary damages can replace default fiduciary duties with a contractual good faith standard, but do not preclude equitable relief or alter the affirmative obligations under the LPA; and (2) bad faith was sufficiently alleged under the LPA “if the plaintiff pleads facts supporting an inference that [the general partner] did not reasonably believe it was acting in the best interest of the [MLP].”
In 2009, the MLP entered into a joint venture with Enbridge by selling a 66.7% interest in an oil pipeline project to Enbridge for $800 million and agreeing to divide profits and costs in that same proportion. Section 6.6(e) of the LPA requires contracts with affiliates to be “fair and reasonable to the [MLP].” But certain other sections displace traditional fiduciary duties and exculpate defendants from monetary damages if they act in “good faith.” When plaintiff challenged this joint venture transaction, the Delaware Supreme Court affirmed a dismissal of plaintiff’s claims, holding that, to plead bad faith, plaintiff must allege an act “so far beyond the bounds of reasonable judgment that it seems essentially inexplicable on any ground other than bad faith.” Brinckerhoff v. Enbridge Energy Co., 67 A.3d 369 (Del. 2013) (“Brinckerhoff III”).
In 2015, the MLP entered into a transaction to repurchase the 66.7% interest from Enbridge for $1 billion, even though the project had substantially declined in value (since the $800 million sale). As part of the transaction, Enbridge would retain certain valuable expansion rights and certain tax benefits would be shifted to Enbridge. Plaintiff claimed that defendants violated Section 6.6(e) of the LPA (and certain other provisions) and seeks monetary damages, as well as equitable relief, including the rescission or reformation of the repurchase transaction. Relying in part on the Delaware Supreme Court’s earlier decision, the Chancery Court dismissed the claims finding that plaintiff had not adequately pleaded bad faith (as discussed in our post regarding that Chancery Court decision).
On appeal, the Delaware Supreme Court reversed: “In this appeal, we change course from the earlier pleading standard announced in Brinckerhoff III to which the [Chancery Court] was bound, and apply the definition of bad faith that is commonly used in our entity law and incorporated into the Enbridge LPA. We also hold that the LPA’s general good faith standards do not displace specific affirmative obligations contained in other provisions of the LPA.”
Explaining its reasoning, the Court noted that Delaware law permits an LPA to disclaim fiduciary duties and to replace them with contractual duties, but that means that the limited partners must be able to rely on the provisions of the contract “to understand their rights and remedies.” In other words, “[a]lthough [the general partner] must act in good faith under the LPA, and is not subject to fiduciary standards of care, it still must comply with the specific requirements of the LPA.” Defendants were thus affirmatively obligated to comply with LPA Section 6.6(e) and its “fair and reasonable” requirement. Here, the Court found that plaintiff “pled sufficient facts leading to an inference” that the transaction was not “fair and reasonable to the [MLP].” The Court also held that the LPA provision exculpating defendants from monetary damages for actions taken in “good faith” does not preclude claims for equitable remedies.
Additionally, contrary to its prior decision, the Court held that the “good faith” provision in the LPA should not be read to import extra-contractual notions of “waste and a heightened pleading burden to plead bad faith.” Instead, to plead a claim that defendants did not act in good faith, plaintiff “must plead facts supporting an inference that [the general partner] did not reasonably believe that the [transaction] was in the best interests of the [MLP].” Here, the Court found plaintiff sufficiently pleaded such facts.