The case of Boardwalk Pipeline Partners, LP v. Bandera Master Fund LP has significant implications for master limited partnerships (MLPs) and other non-corporate entities, particularly concerning fiduciary duties and contractual agreements. In a December 19, 2022 decision, the Delaware Supreme Court overturned a prior Court of Chancery ruling from November 12, 2021. The initial ruling had instructed Boardwalk’s general partner to pay nearly $700 million in damages to former public unitholders related to the $1.56 billion take-private transaction of Boardwalk Pipeline Partners.
It’s crucial to understand that the Supreme Court’s decision did not dispute the lower court’s factual findings. These findings indicated that the General Partner and its affiliates had strategically timed the take-private during a period of regulatory uncertainty and declining unit prices for Boardwalk Pipeline Partners. Furthermore, they had exerted undue pressure on their legal counsel to produce a “contrived” legal opinion to meet the condition for exercising the call right to acquire public units. Despite these findings of opportunistic timing and manipulative behavior, the Supreme Court reversed the Court of Chancery’s legal conclusion that the general partner was liable for willful misconduct.
Instead, the Supreme Court’s perspective was that the general partner was operating within the bounds of the “flexibility” granted to a controller under Delaware law when fiduciary duties are contractually waived and this waiver is transparent to investors. The court emphasized that “The Partnership Agreement allowed Boardwalk Pipeline Partners to exercise the call right to its advantage—and to the disadvantage of the minority unitholders—free from fiduciary duties.” The Supreme Court also determined that the legal opinion obtained by the general partner fulfilled the contractual condition for exercising the call right. The court asserted that the central question wasn’t the validity of the legal opinion itself, but whether the general partner acted reasonably in relying upon it. The Supreme Court concluded that the general partner’s reliance was indeed reasonable, especially considering they had sought and depended on a second legal opinion—which was unchallenged—affirming the reasonableness of relying on the first opinion. Given that the partnership agreement included a conclusive presumption of good faith for the general partner when acting on legal counsel’s advice, the general partner was presumed not to have engaged in willful misconduct and was therefore exempt from damages.
Key Takeaways from the Boardwalk Pipeline Partners Decision
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Contractual Waiver of Fiduciary Duties Grants Broad Latitude: When fiduciary duties are contractually waived, controllers gain substantial freedom to act in their self-interest. Courts are unlikely to broadly interpret agreement provisions to protect minority investors beyond what is explicitly stated in the agreement. This decision extends beyond the MLP context to other non-corporate entities. Sophisticated private fund investors, for instance, are unlikely to receive more protection than public unitholders in cases like Boardwalk. Sponsors of non-corporate entities should prioritize clear disclaimers of fiduciary duties in organizational documents and ensure full disclosure of these waivers. Conversely, potential investors should seek specific protections based on their negotiation power and thoroughly understand the implications of waived fiduciary duties before investing in entities like Boardwalk Pipeline Partners.
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Emergence of “Opinion on an Opinion” Practice: The Boardwalk case might lead to a trend of obtaining a second legal opinion to validate reliance on an initial substantive opinion. The Supreme Court’s ruling hinged on the general partner’s reasonable reliance on the Baker Botts opinion, which was supported by a second opinion from Skadden Arps. This second opinion confirmed it was reasonable to rely on the Baker Botts opinion, even though it didn’t address the substance of the Baker Botts opinion itself. Controllers may now consider seeking such second opinions, especially when facing complex issues related to the interpretation of conditions for obtaining a substantive opinion, the validity of legal reasoning in the first opinion, or the good faith of the law firm providing the initial opinion, as was the situation with Boardwalk Pipeline Partners. A second opinion can also be valuable in confirming the correct entity within a chain of related entities responsible for determining the acceptability of a substantive opinion.
Background of the Boardwalk Pipeline Partners Case
Loews Corporation established Boardwalk Pipeline Partners in 2005 and subsequently took it public as an MLP that same year. This timing coincided with the Federal Energy Regulatory Commission (FERC) introducing policies that made MLPs tax-efficient investment vehicles for pipelines. Boardwalk Pipeline Partners was structured with a general partner (the “General Partner”), controlled by another partnership (the “GPGP”), which in turn was controlled by a limited liability company (the “GPGP Sole Member”), ultimately a subsidiary of Loews. Crucially, Boardwalk Pipeline Partners’ Partnership Agreement explicitly disclaimed fiduciary duties of the General Partner. Furthermore, to maintain future flexibility, the agreement included a Call Right, allowing the General Partner to take Boardwalk Pipeline Partners private again if FERC policies changed unfavorably. The sole condition for exercising this Call Right was obtaining a legal opinion, acceptable to the General Partner, confirming a likely material adverse effect (MAE) on the maximum rates Boardwalk Pipeline Partners could charge due to changes in FERC policies (the “Opinion Condition”).
In 2018, FERC announced new policies that potentially could trigger the MAE condition. Following this announcement, industry stakeholders, including Boardwalk Pipeline Partners, actively lobbied FERC for policy modifications. During this period of regulatory uncertainty, and amidst a decline in MLP unit prices (including Boardwalk Pipeline Partners‘), the General Partner decided to exercise the Call Right.
Image alt text: Aerial view of a section of pipeline infrastructure, representative of Boardwalk Pipeline Partners’ assets.
To proceed, the General Partner obtained a legal opinion from Baker Botts (the “Baker Opinion”), asserting that the new FERC policies were likely to cause the MAE. Given complexities in interpreting the Opinion Condition and uncertainty about which entity within Boardwalk Pipeline Partners’ structure could determine the acceptability of the Baker Opinion, the GPGP Sole Member sought a second opinion from Skadden Arps (the “Skadden Opinion”). The Skadden Opinion focused on the acceptability determination process and advised that the GPGP Sole Member was the appropriate entity for this decision and that it would be reasonable to accept the Baker Opinion. Notably, the Skadden Opinion did not evaluate the substance of the Baker Opinion regarding the MAE likelihood. The day after the take-private was completed, FERC finalized its policy changes, clarifying that they would have no adverse effect on Boardwalk Pipeline Partners. Subsequently, public unitholders of Boardwalk Pipeline Partners challenged the General Partner’s exercise of the Call Right in the Court of Chancery.
The Court of Chancery, after a trial, ruled that the Baker Opinion was fundamentally flawed and that the GPGP Sole Member was the incorrect entity to determine its acceptability. Consequently, the court concluded that the Opinion Condition was not met, and the General Partner had breached the Partnership Agreement by exercising the Call Right. Furthermore, the Court of Chancery found that the General Partner was not entitled to exculpation due to “willful misconduct.” However, the Delaware Supreme Court reversed this decision, ruling that: (i) the GPGP Sole Member was indeed the correct entity for the acceptability determination; (ii) regardless of the Baker Opinion’s potential bad faith, the General Partner reasonably relied on it based on the Skadden Opinion and the Partnership Agreement’s presumption of good faith when relying on counsel’s advice; and (iii) the General Partner’s actions did not constitute willful misconduct, thus entitling it to exculpation.
Discussion of the Delaware Supreme Court’s Findings on Boardwalk Pipeline Partners
Limited Rights of Minority Investors with Waived Fiduciary Duties: The Supreme Court underscored the restricted rights of minority investors when fiduciary duties are contractually eliminated and clearly disclosed. It emphasized that controllers, in such scenarios, have the “right to make self-interested decisions to the economic disadvantage of the [other investors].” The court noted that Boardwalk Pipeline Partners’ public disclosures had extensively detailed the General Partner’s authority, potential conflicts of interest, and the self-interested decision-making permitted by the Partnership Agreement, including the possibility of forced unit sales at unfavorable times or prices via the Call Right. The Supreme Court rejected the Court of Chancery’s attempt to interpret certain Partnership Agreement provisions as implicitly protecting minority stockholders, especially in light of the General Partner’s manipulative conduct. The Supreme Court invoked the doctrine of caveat emptor, highlighting that investors in limited liability entities like Boardwalk Pipeline Partners “willingly invest” knowing they have fewer protections than under traditional corporate fiduciary principles.
Focus Shift to Reasonableness of Reliance, Not Validity of Opinion: The Supreme Court clarified that the “proper focus” was not on the Baker Opinion’s validity but on the reasonableness of the General Partner’s decision to accept it. The Court of Chancery had heavily criticized the Baker Opinion, citing “unrealistic” and “counterfactual” assumptions, “artificial factual predicates,” a focus on abstract legal issues rather than actual MAE on Boardwalk Pipeline Partners’ business, and “goal-oriented” reasoning designed to achieve Loews’ desired outcome. However, the Supreme Court reiterated that the Partnership Agreement only allowed damages for bad faith or willful misconduct. Therefore, the critical question became whether the GPGP Sole Member acted reasonably in finding the Baker Opinion acceptable, based on the Skadden Opinion, rather than whether the Baker Opinion was substantively sound.
Reasonable Reliance on Skadden Opinion Justifies General Partner’s Actions: The Supreme Court concluded that the GPGP Sole Member acted reasonably in accepting the Baker Opinion because they obtained and relied upon the Skadden Opinion, which advised that such reliance was reasonable. The court highlighted several factors:
- The Skadden Opinion’s good faith was unchallenged.
- Skadden’s thoroughness in preparing its opinion, including consultations with FERC and Delaware law experts, review of Boardwalk Pipeline Partners’ documents, a “complete review” of the Baker Opinion, and a comprehensive presentation to the GPGP Sole Member’s board.
- The Partnership Agreement’s “conclusive presumption of good faith” for the General Partner when relying on legal advice.
- Rejection of arguments against the validity of relying on an “opinion on an opinion.”
- Dismissal of concerns raised in Skadden’s internal emails as typical attorney deliberations, not evidence of flawed reasoning.
GPGP Sole Member as Correct Decision-Making Entity: The Supreme Court determined that the GPGP Sole Member, despite being composed entirely of Loews insiders, was the correct entity to decide on the Baker Opinion’s acceptability. The Partnership Agreement was silent on this specific point, leading the Court of Chancery to interpret this ambiguity “in an investor-friendly way,” suggesting the GPGP Board (with independent directors) should have made the decision. However, the Supreme Court emphasized the Partnership Agreement unambiguously placed the acceptability determination with the General Partner. Therefore, the GPGP’s LLC Agreement dictated how the General Partner would make this decision. The Supreme Court criticized the Court of Chancery for analyzing the Partnership Agreement in isolation rather than within Boardwalk Pipeline Partners’ overall governance structure. Reading both agreements together, the Supreme Court concluded that the GPGP Sole Member had “exclusive authority” over the Call Right exercise, and assigning the decision to the GPGP Board would conflict with this authority.
Rejection of Imputed Bad Faith: The Supreme Court rejected the Court of Chancery’s approach of imputing bad faith from various individuals affiliated with the General Partner to the General Partner itself. The Court of Chancery had used an agency theory to “lump together” individuals and attribute their “scienter as management-level officers and agents of Loews, the [GPGP] Sole Member, the GPGP, the General Partner, and Boardwalk Pipeline Partners” to the General Partner. The Supreme Court clarified that the focus should have been on the GPGP Sole Member’s board, “the entity responsible for the call right exercise,” not on “non-decisionmaker agents of the General Partner.”
Concurring Opinion on Baker Opinion’s Good Faith: Two justices issued a concurring opinion arguing that the Supreme Court should have overturned the Court of Chancery’s finding that the Baker Opinion was delivered in bad faith. They argued for judicial deference to opinions of counsel, even if substantively incorrect. While acknowledging facially defective opinions could indicate bad faith, they believed the record supported the Baker Opinion’s good faith. They cited Baker Botts’ significant work, expert testimony supporting some of its interpretations, prior agreement from plaintiffs’ former counsel on triggering events, Delaware counsel agreement on ambiguous terms, and the Skadden Opinion’s support for relying on the Baker Opinion. They also noted that while Loews was an “aggressive client,” lawyers at both firms denied client pressure influenced their advice, and there was no evidence of advice changing due to Loews’ actions.
Practice Points for Stakeholders in Entities Like Boardwalk Pipeline Partners
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Prioritize Clear Waiver of Fiduciary Duties: Sponsors and controllers of non-corporate entities, especially private ones, must ensure organizational documents clearly and effectively eliminate or limit fiduciary duties. Full disclosure of these waivers is essential. Seeking maximum exculpation permissible under Delaware law is also advisable for entities like Boardwalk Pipeline Partners.
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Investors Should Seek Specific Protections: Potential investors, especially in private entities similar to Boardwalk Pipeline Partners, should leverage negotiating power to limit fiduciary duty waivers or secure specific protections. Thorough pre-investment understanding of the implications of waived fiduciary duties is crucial.
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Consider “Opinion on an Opinion” for Complex Transactions: Sponsors and controllers obtaining legal opinions for conflicted transactions should consider a second opinion on the reasonableness of relying on the first. This is particularly relevant in situations with complex legal issues or concerns about the initial opinion’s good faith, as seen in the Boardwalk Pipeline Partners case.
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Maintain Detailed Records for Legal Opinions: Law firms issuing opinions must maintain records demonstrating the care taken in reaching conclusions. Factors supporting reasonable reliance include significant time investment, consultation with experts, and thorough deliberation. Law firms should avoid client-driven outcomes, “counterfactual” assumptions, or “syllogistic” reasoning. Awareness of potential discoverability of internal communications is also important.
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Drafting Considerations for Organizational Documents: Drafters should consider including provisions granting a presumption of good faith to controllers relying on legal or other expert opinions. Clarity on whether such presumptions are conclusive or rebuttable is vital, as highlighted by the impact of a conclusive presumption in the Boardwalk Pipeline Partners case.
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Clarity in Opinion Conditions: Conditions requiring legal opinions must be drafted clearly, specifying the opinion’s required substance, defining ambiguous terms, identifying the decision-making entity within related entities, and clarifying whether acceptability determinations are subjective or objective. Clear language regarding reliance on counsel and associated presumptions of good faith is also essential for agreements involving entities like Boardwalk Pipeline Partners.
