Gail Weinstein is Senior Counsel, Steven J. Steinman and Brian T. Mangino are Partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Steinman, Mr. Mangino, Steven Epstein, Randi Lally and Mark H. Lucas, and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Independent Directors and Controlling Shareholders (discussed on the Forum here) by Lucian Bebchuk and Assaf Hamdani.
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.
