In a significant ruling for master limited partnerships (MLPs) and private equity deal structures, the Delaware Supreme Court’s decision in Boardwalk Pipeline Partners, LP v. Bandera Master Fund LP provides crucial insights into the limitations of investor protections when fiduciary duties are contractually waived. The December 19, 2022, reversal of the Court of Chancery’s decision favored Boardwalk Pipeline Partners Lp’s general partner, effectively exonerating them from a nearly $700 million damage claim related to the $1.56 billion take-private transaction. This case underscores the critical importance of clearly defined contractual rights and the broad latitude afforded to controllers when traditional fiduciary obligations are disclaimed in partnership agreements, particularly relevant for entities like Boardwalk Pipeline Partners LP.
While the Supreme Court did not dispute the lower court’s findings regarding the opportunistic timing and manipulative tactics employed by the General Partner and its affiliates during the Boardwalk Pipeline Partners LP take-private process, it ultimately prioritized the explicit terms of the partnership agreement. The agreement, notably, waived fiduciary duties, a factor that heavily influenced the Supreme Court’s legal interpretation. The court determined that the General Partner was within its rights to leverage the “flexibility” permitted under Delaware law when fiduciary duties are contractually absent and fully disclosed to investors of Boardwalk Pipeline Partners LP.
“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 stated, highlighting the contractual framework that governed the relationship. Furthermore, the court validated the legal opinion obtained by the general partner as satisfying the contractual condition for exercising the call right. The Supreme Court shifted the focus from the opinion’s substantive validity to the reasonableness of the general partner’s reliance on it, particularly in light of a second confirming opinion. Because the partnership agreement included a conclusive presumption of good faith for the general partner relying on counsel advice, the court concluded that the general partner was presumed not to have engaged in willful misconduct and was therefore shielded from damages related to the Boardwalk Pipeline Partners LP transaction.
Key Takeaways from the Boardwalk Pipeline Partners LP Decision
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Contractual Waiver of Fiduciary Duties Grants Broad Latitude: When fiduciary duties are explicitly waived in organizational documents and such waivers are clearly disclosed, controllers of entities like Boardwalk Pipeline Partners LP possess significant discretion to act in their self-interest, even if it disadvantages minority investors. Courts are unlikely to broadly interpret agreement provisions to imply protections not explicitly stated within the agreement. This principle extends beyond the MLP context and has implications for private funds and other non-corporate entities. Investors in such entities, including those considering Boardwalk Pipeline Partners LP or similar structures, must understand the ramifications of these waivers. Sponsors should prioritize clear disclaimers in organizational documents, while investors should seek specific protections based on their negotiating power and thoroughly assess the implications of waived fiduciary duties before investing in entities like Boardwalk Pipeline Partners LP.
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The Emergence of “Opinion on an Opinion” Practice: The Boardwalk Pipeline Partners LP case may lead to a trend of obtaining a second legal opinion to validate the reasonableness of relying on an initial substantive opinion. Given the Supreme Court’s emphasis on the General Partner’s reliance on a second opinion (the Skadden Opinion) to justify their reliance on the first opinion (the Baker Opinion), controllers might increasingly seek such corroborating opinions. This practice could be particularly relevant in situations involving complex interpretations of contractual conditions, doubts regarding the validity of a substantive opinion, or concerns about the good faith of the initial legal counsel, as seen in the Boardwalk Pipeline Partners LP case. Factors such as the interpretation of the opinion condition, the substantive validity of the legal reasoning, and the law firm’s good faith warrant consideration for obtaining a second opinion in similar transactions involving Boardwalk Pipeline Partners LP or other entities.
Background to the Boardwalk Pipeline Partners LP Case
Boardwalk Pipeline Partners LP was established by Loews Corporation in 2005 and taken public as an MLP the same year, capitalizing on FERC policies that favored MLPs as tax-efficient investment vehicles for pipelines. The structure of Boardwalk Pipeline Partners LP involved a general partner (the “General Partner”) controlled by a general partner of the general partner (the “GPGP”), which in turn was controlled by its sole member (the “GPGP Sole Member”), a wholly-owned subsidiary of Loews. Critically, Boardwalk Pipeline Partners LP’s Partnership Agreement explicitly disclaimed fiduciary duties of the General Partner.
Anticipating potential shifts in FERC policies that could diminish the advantages of the MLP structure, the Partnership Agreement included a Call Right, allowing the General Partner to take Boardwalk Pipeline Partners LP private again. The sole condition for exercising this Call Right was obtaining a legal opinion, acceptable to the General Partner, confirming a change in FERC policies likely to cause a material adverse effect (“MAE”) on Boardwalk Pipeline Partners LP’s future maximum applicable rates (the “Opinion Condition”).
In 2018, FERC announced policy changes that presented a potential MAE. Industry stakeholders, including Boardwalk Pipeline Partners LP, actively lobbied FERC for policy adjustments. During this period of regulatory uncertainty and declining MLP unit prices, including those of Boardwalk Pipeline Partners LP, the General Partner decided to exercise the Call Right.
Baker Botts provided the Baker Opinion, asserting that the new FERC policies likely constituted an MAE as per the Opinion Condition. However, given complexities in interpreting the Opinion Condition and uncertainties about which Boardwalk Pipeline Partners LP entity could determine the Baker Opinion’s acceptability, the GPGP Sole Member sought a second opinion from Skadden, Arps, Slate, Meagher & Flom LLP (the “Skadden Opinion”). The Skadden Opinion focused on the acceptability determination process, affirming that the GPGP Sole Member was the appropriate entity and that it was reasonable for them to deem the Baker Opinion acceptable. Notably, the Skadden Opinion did not evaluate the Baker Opinion’s substantive conclusion regarding the MAE.
The day following the completion of the take-private transaction of Boardwalk Pipeline Partners LP, FERC finalized its policy changes, clarifying that they would have no adverse effect on Boardwalk Pipeline Partners LP. Subsequently, public unitholders of Boardwalk Pipeline Partners LP challenged the General Partner’s exercise of the Call Right in the Court of Chancery.
The Court of Chancery ruled against the General Partner, finding the Baker Opinion flawed and the acceptability determination made by the wrong Boardwalk Pipeline Partners LP entity. Consequently, the court concluded that the Opinion Condition was not met, the Call Right exercise breached the Partnership Agreement, and the General Partner was not entitled to exculpation due to “willful misconduct.” However, the Delaware Supreme Court reversed this decision, affirming that the correct entity made the acceptability determination, the General Partner reasonably relied on the Baker Opinion based on the Skadden Opinion, and the General Partner’s actions did not constitute willful misconduct, thus entitling them to exculpation in the Boardwalk Pipeline Partners LP case.
Discussion of the Supreme Court’s Ruling on Boardwalk Pipeline Partners LP
Limited Rights of Minority Investors with Contractually Waived Fiduciary Duties: The Supreme Court emphasized the constrained rights of minority investors when fiduciary duties are contractually eliminated and openly disclosed, as was the case with Boardwalk Pipeline Partners LP. The court underscored that in such scenarios, controllers are entitled to make self-serving decisions that economically disadvantage other investors. Boardwalk Pipeline Partners LP’s 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 risk of a forced sale of units via the Call Right at an unfavorable time or price. The Supreme Court rejected the Court of Chancery’s attempt to interpret certain Partnership Agreement provisions as implicitly offering protections to minority stockholders amidst the General Partner’s manipulative conduct. Referencing caveat emptor, the court highlighted that investors in limited liability entities like Boardwalk Pipeline Partners LP willingly accept reduced protections compared to corporate fiduciary principles.
Focus on Reasonableness of Reliance, Not Validity of Opinion: The Supreme Court shifted the judicial focus from scrutinizing the Baker Opinion’s validity to assessing the reasonableness of the General Partner’s decision to find it acceptable for Boardwalk Pipeline Partners LP. The Court of Chancery had heavily criticized the Baker Opinion post-trial, citing unrealistic and counterfactual assumptions, artificial factual predicates, and a focus on hypothetical legal issues rather than actual MAE on Boardwalk Pipeline Partners LP’s business. However, the Supreme Court reiterated that the Partnership Agreement limited damage recovery to instances of bad faith or willful misconduct by the General Partner. Therefore, the central question was not the Baker Opinion’s quality but whether the GPGP Sole Member, acting for the General Partner of Boardwalk Pipeline Partners LP, reasonably deemed it acceptable.
Reasonable Reliance on Skadden Opinion Justified Acceptability Determination: The Supreme Court determined that the GPGP Sole Member acted reasonably in accepting the Baker Opinion on behalf of the General Partner of Boardwalk Pipeline Partners LP, primarily due to their reliance on the Skadden Opinion. The court highlighted several factors supporting this conclusion:
- The Skadden Opinion’s unchallenged good faith and the Court of Chancery’s lack of findings to the contrary.
- Skadden’s thorough process in developing their opinion, including consultations with FERC and Delaware law experts, document reviews, Baker Opinion analysis, and a comprehensive presentation to the GPGP Sole Member’s board.
- The Partnership Agreement’s provision of a conclusive presumption of good faith for the General Partner when relying on counsel advice, which the Supreme Court emphasized as definitively conclusive.
- Rejection of the argument against “opinion on an opinion” reliance.
- Dismissal of concerns based on Skadden’s internal email discussions about the Baker Opinion, characterizing these as typical attorney deliberations.
GPGP Sole Member as Correct Entity for Acceptability Determination: The Supreme Court held that the GPGP Sole Member, despite being composed entirely of Loews insiders, was the appropriate entity to determine the Baker Opinion’s acceptability for Boardwalk Pipeline Partners LP. The Partnership Agreement was silent on the specific entity responsible for this determination within the General Partner structure. The Court of Chancery had argued that the GPGP Board, with independent directors, should have made the decision, interpreting the Partnership Agreement’s silence in an “investor-friendly way” to create a “protective check” on the Call Right. However, the Supreme Court found the Partnership Agreement unambiguous in vesting the acceptability determination with the General Partner. Therefore, the GPGP’s LLC Agreement dictated that the GPGP Sole Member, not the GPGP Board, held “exclusive authority” for the General Partner’s actions, including exercising the Call Right for Boardwalk Pipeline Partners LP. The Supreme Court criticized the Court of Chancery for analyzing the Partnership Agreement in isolation rather than within Boardwalk Pipeline Partners LP’s overall governance framework.
Rejection of Imputed Bad Faith: The Supreme Court rejected the Court of Chancery’s approach of imputing bad faith from various actors affiliated with the General Partner to the General Partner itself. The Court of Chancery had attributed “willful misconduct” to the General Partner based on an agency theory, aggregating the scienter of management-level officers and agents across Loews, the GPGP Sole Member, the GPGP, the General Partner, and Boardwalk Pipeline Partners LP. 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—rather than on non-decision-making agents of the General Partner of Boardwalk Pipeline Partners LP.
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, whether substantively correct or not, suggesting that courts should not substitute their judgment for that of legal counsel. While acknowledging that an opinion could be so facially deficient as to indicate bad faith, they contended that the record in the Boardwalk Pipeline Partners LP case supported the Baker Opinion’s good faith, or at least the absence of bad faith. They cited Baker Botts’ extensive work on the opinion, expert testimony supporting some of their interpretations, prior agreement from plaintiffs’ counsel on the trigger event, Delaware counsel’s agreement on ambiguous term interpretation, and the Skadden Opinion’s validation of reliance on the Baker Opinion. They also noted that while Loews was an “aggressive client,” Baker Botts and Skadden lawyers affirmed that their advice remained unaffected by client pressure, and no evidence indicated advice alteration due to Loews’ actions regarding Boardwalk Pipeline Partners LP.
Practice Points Arising from the Boardwalk Pipeline Partners LP Case
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Prioritize Clear Elimination of Fiduciary Duties in Organizational Documents: Sponsors controlling non-corporate entities, particularly private entities and those resembling Boardwalk Pipeline Partners LP, should ensure organizational documents explicitly and effectively eliminate or limit fiduciary duties. Full disclosure of the absence or limitation of these duties is crucial. Maximum permissible exculpation under Delaware law should also be pursued.
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Investors Should Seek Specific Protections and Understand Waiver Implications: Potential investors in non-corporate entities, especially private ones like Boardwalk Pipeline Partners LP, should, based on their negotiating leverage, seek to limit fiduciary duty waivers or include specific protective provisions. Thorough pre-investment understanding of the effects of waived or limited fiduciary duties is paramount.
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Consider “Opinion on an Opinion” for Complex Transactions: Sponsors or controllers obtaining legal opinions for conflicted transactions or other critical conditions, especially in cases similar to the Boardwalk Pipeline Partners LP scenario, should consider seeking a second opinion on the reasonableness of relying on the first. This is advisable in situations with complex legal issues or doubts about the initial opinion’s integrity. While a substantive second opinion is ideal, obtaining an opinion on the reasonableness of reliance may be more practical.
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Maintain Detailed Records for Legal Opinions: Law firms issuing opinions should meticulously document their diligence in reaching conclusions. Factors supporting reasonable reliance include significant time investment, consultation with experts, and thorough deliberation. Law firms should maintain records of deliberations and reasoning. Client desires should not dictate legal advice, and opinions should avoid counterfactual assumptions or syllogistic reasoning. Law firms must also be aware that internal communications, including emails, may be discoverable in litigation, especially in cases concerning entities like Boardwalk Pipeline Partners LP.
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Include Good Faith Presumption for Reliance on Opinions: Drafters of organizational documents should consider including provisions that grant controllers a presumption of good faith when relying on legal or other expert opinions, such as fairness or valuation opinions. Clarity on whether such presumptions are conclusive or rebuttable is essential, as highlighted by the impact of the conclusive presumption in the Boardwalk Pipeline Partners LP case.
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Draft Opinion Conditions with Precision: Conditions requiring legal opinions must be drafted with clarity, particularly regarding the required opinion substance, potentially ambiguous terms, the entity responsible for acceptability determination within related entity chains (like Boardwalk Pipeline Partners LP’s structure), and whether acceptability is subjective or objective. Clear language establishing a presumption of good faith for reliance on counsel advice, and whether it is conclusive or rebuttable, is also critical.
