Lessons Learned From In re: El Paso Pipeline Partners, L.P. Derivative Litigation

 
Practitioners do not need to throw out the carefully crafted partnership agreements used by master limited partnerships because of the recent decision by Vice Chancellor Laster in In re: El Paso Pipeline Partners, L.P. Derivative Litigation, C.A. No. 7141-VCL, 2015 WL 1815846 (Del. Ch. Apr. 20, 2015). In El Paso, Vice Chancellor Laster concluded that the general partner of the relevant master limited partnership breached its limited partnership agreement by authorizing and causing the master limited partnership to enter into a transaction with the general partner’s affiliate. The opinion is driven by a unique set of facts and therefore does not require practitioners to make drastic changes to master limited partnership agreements. The decision, however, does offer practical lessons for those advising master limited partnerships, or other alternative entities and their sponsors. This article will first describe the El Paso opinion and then provide three practical lessons to take away from the decision.
Facts
The Transaction
El Paso Pipelines Partners, L.P. (MLP) was a publicly owned master limited partnership that owned interests in companies that operate natural gas pipelines, liquid natural gas terminals, and storage facilities throughout the United States. The plaintiffs were limited partners in MLP. In El Paso, the plaintiffs challenged MLP’s acquisition of interests in two subsidiaries of El Paso Corporation, Inc. (Parent). At the time that the challenged transaction was consummated, Parent controlled both MLP and El Paso Pipeline GP Company, L.L.C. (the General Partner), the sole general partner of MLP.
The challenged transaction in El Paso was one of three transactions consummated by MLP with Parent in 2010. In March 2010, MLP acquired a 51 percent interest in each of Southern LNG Company, LLC and Elba Express, LLC (collectively referred to as “Elba”) for approximately $963 million (the Spring Dropdown). In November 2010, MLP acquired the remaining 49 percent interest in Elba and a 15 percent interest in another subsidiary of Parent, Southern Natural Gas, L.L.C. (Southern) for approximately $1,412 million (the Fall Dropdown). The plaintiffs challenged both the Spring Dropdown and the Fall Dropdown. In a previous opinion, the court granted defendant’s motion for summary judgment regarding the Spring Dropdown but denied the motion for summary judgment regarding the Fall Dropdown. El Paso is the court’s decision regarding the Fall Dropdown.
Contractual Framework
In order to understand the court’s decision, it is necessary to understand the contractual framework that governed decision-making under the MLP partnership agreement. The MLP partnership agreement eliminated all fiduciary duties and permitted interested transactions between MLP and Parent or its affiliates so long as such transaction was approved by one of four permissible methods under the MLP partnership agreement. One permissible approval method was “Special Approval,” which was defined as approval by a majority of an ad hoc committee made up of independent members of the board of directors of the General Partner (the Committee). The only contractual requirement for “Special Approval” was that the Committee members believe in good faith that the transaction was in the best interests of MLP. The Delaware Supreme Court has interpreted similar language as setting forth a “subjective belief” standard. See Allen v. Encore Energy P’rs LP, 72 A.3d 93, 104 (Del. 2013). Thus, under MLP’s contractual framework, in order to challenge the Fall Dropdown successfully the plaintiffs were required to prove, by a preponderance of the evidence, that the Committee did not subjectively believe the Fall Dropdown was in the best interests of MLP. The court reasoned that a plaintiff could meet this burden by providing “persuasive evidence that the [Committee] members intentionally fail[ed] to act in the face of a known duty, demonstrating a conscious disregard for [their] duties.”
The Committee’s Work
The court reviewed the Committee’s work based on the contractual framework of the MLP partnership agreement described above. In order to assess the Committee’s work on the Fall Dropdown, the court also reviewed the Committee’s work on the Spring Dropdown and a transaction consummated in the summer of 2010. The court also noted that for each transaction, the Committee was made up of the same members, and the Committee engaged the same financial advisor and law firm.
Spring dropdown. With respect to the Spring Dropdown, Parent initially suggested that MLP acquire 51 percent of Elba for total consideration of $1,053 million. Subsequently, Parent revised the proposal to suggest that MLP acquire a 49 percent interest of Elba for $865 million after the Committee objected to acquiring a majority stake in Elba. Ultimately, Parent’s proposal was revised back to an acquisition of 51 percent of Elba. In assessing the Committee’s work, the court noted that in spite of the back and forth on the proposals, the pricing did not change significantly based on the acquisition of a control or a non-control position in Elba. 
Further, the court found that