In re El Paso Pipeline Partners, L.P. Derivative Litig.
| Decision Date | 02 December 2015 |
| Docket Number | C.A. No. 7141–VCL |
| Parties | In re: El Paso Pipeline Partners, L.P.Derivative Litigation |
| Court | Court of Chancery of Delaware |
Jessica Zeldin, Rosenthal, Monhait & Goddess, P.A., Wilmington, Delaware; Jeffrey H. Squire, Lawrence P. Eagel, Bragar Eagel & Squire, PC, New York, New York; Attorneys for Plaintiff.
Peter J. Walsh, Jr., Brian C. Ralston, Berton W. Ashman, Jr., Matthew F. Davis, Potter Anderson & Corroon LLP, Wilmington, Delaware; Attorneys for Defendants El Paso Pipeline GP Company, L.L.C., El Paso Corporation, Douglas L. Foshee, John R. Sult, Ronald L. Kuehn, Jr., D. Mark Leland, Arthur C. Reichstetter, William A. Smith, and James C. Yardley.
Lewis H. Lazarus, Thomas E. Hanson, Jr., Courtney R. Hamilton, Brett M. McCartney, Morris James LLP, Wilmington, Delaware; Attorneys for Nominal Defendant El Paso Pipeline Partners, L.P.
LASTER, Vice Chancellor.
In November 2010, El Paso Corporation ("El Paso Parent") sold member interests in three limited liability companies to El Paso Pipeline Partners, L.P. (the "Partnership" or "El Paso MLP"). At the time of the sale, El Paso Parent controlled El Paso MLP through its ownership of El Paso Pipeline GP Company, L.L.C., the sole general partner of El Paso MLP (the "General Partner" or "El Paso GP"). On April 20, 2015, this court issued a post-trial decision which held that by causing El Paso MLP to buy the member interests, the General Partner breached the limited partnership agreement governing El Paso MLP (the "LP Agreement" or "LPA"). See In re El Paso Pipeline P'rs, L.P. Deriv. Litig., 2015 WL 1815846 (Del. Ch. Apr. 20, 2015)(the "Post–Trial Opinion"). The Post–Trial Opinion referred to the transaction as the "Fall Dropdown," so this decision uses the same term. The Post–Trial Opinion held that the General Partner was liable for $171 million, plus pre- and post-judgment interest from the date of the transaction (the "Liability Award").
While the litigation was pending, Kinder Morgan, Inc. acquired El Paso Parent. After that transaction, Kinder Morgan owned 100% of the equity of El Paso Parent and therefore indirectly owned and controlled the General Partner. The acquisition did not affect the outstanding common units of El Paso MLP, which remained publicly traded. Kinder Morgan's acquisition of El Paso Parent therefore did not have any implications for the plaintiff's ability to pursue this litigation.
Shortly after trial, however, Kinder Morgan, El Paso Parent, El Paso MLP, and the General Partner consummated a related-party merger that brought an end to El Paso MLP's separate existence as a publicly traded entity (the "Merger"). The General Partner moved to dismiss this litigation, contending that because the plaintiff styled his claim as derivative, the closing of the Merger meant that this case must be dismissed.
Granting the motion to dismiss would generate a windfall for the General Partner at the expense of the unaffiliated limited partners for whose indirect benefit this suit originally was brought. Kinder Morgan, El Paso Parent, El Paso MLP, and the General Partner disclosed in the proxy statement issued in connection with the Merger that the consideration paid for the common units did not attribute any value to this litigation. Assuming for purposes of analysis that the consideration fairly valued El Paso MLP's operating business, it did not provide any value for the non-operating asset that the Liability Award represented. If the General Partner is correct about how the law operates, then the limited partners never will receive any benefit from the Liability Award, and the General Partner will evade accountability for breaching the LP Agreement.
To the extent that Delaware law requires this court to choose between construing the cause of action that led to the Liability Award as either exclusively derivative or exclusively direct, then the breach of contract claim that supported the Liability Award is properly viewed as direct. The Merger therefore did not extinguish the plaintiff's standing to pursue the claim. This court can implement the Liability Award by permitting the limited partners at the time of the Merger who were not affiliated with the General Partner to receive their proportionate share of the $171 million.
The more appropriate way to view the cause of action that led to the Liability Award is as a dual-natured claim with aspects that are both derivative and direct. In my view, Delaware law can and should treat a dual-natured claim as derivative for purposes of Rule 23.1 and the doctrine of demand, but as direct for purposes of determining whether sell-side investors can continue to pursue the claim after a merger. Treating a dual-natured claim as derivative for purposes of claim initiation achieves the important goals of screening out weak claims and providing an efficient and centralized mechanism for conducting the litigation. Treating a dual-natured claim as direct for purposes of claim continuation preserves the ability of investors to pursue legitimate claims, promotes accountability, and provides a superior mechanism for doing so than secondary litigation challenging the transaction that eliminated the plaintiff's standing to sue derivatively. In this case, the plaintiff's claim is best viewed as having a dual nature, so the plaintiff can continue to pursue it, and this court can implement the Liability Award through a pro rata recovery in favor of the limited partners at the time of the Merger who were not affiliated with the General Partner.
Contrary to the General Partner's arguments, the plaintiff is not estopped from enforcing the Liability Award through a pro rata recovery. It is true that the plaintiff described his claims as derivative until the Merger loomed on the horizon, but a plaintiff's description of his claims is not binding on the court. The General Partner therefore did not have any reliance interest in the plaintiff's description. Nor is the General Partner prejudiced by a characterization that permits pro rata recovery. Even if the claim supporting the Liability Award was derivative, substantial authority supports a court's ability to grant a pro rata recovery on a derivative claim. Such a recovery is the exception, not the rule, but it is possible. The General Partner therefore cannot claim prejudice from a form of relief that it could have faced in any event. And estoppel would be inequitable on these facts. The General Partner and its affiliates triggered the need for a different characterization by engaging in the related-party merger. The General Partner cannot legitimately complain about a response to action that Kinder Morgan took.
The General Partner's motion to dismiss is therefore denied.
The Post–Trial Opinion made findings of fact on which this decision relies. This decision also relies on a limited number of publicly available documents relating to the Merger that the parties submitted. No one has disputed the accuracy of the documents for purposes of the issues raised by the motion.
At the time of the Fall Dropdown, El Paso Parent was a Delaware corporation whose shares of common stock traded on the New York Stock Exchange under the symbol "EPC." Headquartered in Houston, El Paso Parent focused on the exploration, production, and transmission of natural gas.
At the time of the Fall Dropdown, El Paso MLP was a Delaware limited partnership controlled by El Paso Parent. El Paso MLP's limited partner interest was divided into common units that traded on the New York Stock Exchange under the symbol "EPB." Through the General Partner, El Paso Parent owned all of El Paso MLP's general partner interest, representing a 2% economic interest in El Paso MLP. El Paso Parent also owned approximately 52% of El Paso MLP's common units and all of its incentive distribution rights ("IDRs"). The IDRs were a class of non-voting units authorized by the LP Agreement that gave El Paso Parent a preferential claim to El Paso MLP's cash flows.
At the time of the Fall Dropdown, El Paso Parent exercised de jure control over El Paso MLP through the General Partner. El Paso Parent also exercised de facto control over El Paso MLP because the Partnership had no employees of its own. Employees of El Paso Parent managed and operated its business.
The composition of the General Partner's board of directors (the "GP Board") reflected El Paso Parent's control. At the time of the Fall Dropdown, the members of the GP Board were Douglas L. Foshee, D. Mark Leland, James C. Yardley, John R. Sult, Ronald L. Kuehn, Jr., William A. Smith, and Arthur C. Reichstetter. Foshee, Leland, Yardley, and Sult held senior management positions with El Paso Parent. Yardley served as the General Partner's President and CEO. Sult served as its CFO. Kuehn, Smith, and Reichstetter were outside directors who, as required by the LP Agreement, met the independence standards for service on the audit committee of a NYSE-listed corporation.
In October 2010, El Paso Parent proposed the Fall Dropdown. Because El Paso Parent controlled El Paso MLP through its ownership of the General Partner and also owned the interests that El Paso MLP would acquire, the Fall Dropdown created a conflict of interest for the General Partner. The LP Agreement established contractual requirements for such a transaction.
As authorized by the Delaware Revised Uniform Limited Partnership Act (the "LP Act"), the LP Agreement eliminated all common law duties, including fiduciary duties, that the General Partner, El Paso Parent, or the members of the GP Board otherwise might owe to El Paso MLP and its limited partners. LPA § 7.9(e). In place of common law duties, the LP Agreement substituted contractual commitments.
Section 7.9(a) of the LP Agreement established contractual requirements for any...
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