Morris v. Spectra Energy Partners (DE) GP, LP, 012221 DESC, 489, 2019

Docket Nº489, 2019
Opinion JudgeSEITZ, CHIEF JUSTICE
Party NamePAUL MORRIS, on behalf of all similarly situated unitholders of SPECTRA ENERGY PARTNERS, L.P., Plaintiff Below, Appellant, v. SPECTRA ENERGY PARTNERS (DE) GP, LP, Defendant Below, Appellee.
AttorneyMichael J. Barry, Esquire (argued) and Rebecca A. Musarra, Esquire, GRANT & EISENHOFFER P.A., Wilmington, Delaware; Peter B. Andrews, Esquire, Craig J. Springer, Esquire, and David M. Sborz, Esquire, ANDREWS & SPRINGER LLC, Wilmington, Delaware; and Jeremy S. Friedman, Esquire, Spencer Oster, Esq...
Judge PanelBefore SEITZ, Chief Justice; VALIHURA, VAUGHN, TRAYNOR, and MONTGOMERY-REEVES, Justices, constituting the Court en Banc.
Case DateJanuary 22, 2021
CourtSupreme Court of Delaware

PAUL MORRIS, on behalf of all similarly situated unitholders of SPECTRA ENERGY PARTNERS, L.P., Plaintiff Below, Appellant,

v.

SPECTRA ENERGY PARTNERS (DE) GP, LP, Defendant Below, Appellee.

No. 489, 2019

Supreme Court of Delaware

January 22, 2021

Submitted: October 28, 2020

Court Below - Court of Chancery of the State of Delaware C. A. No. 2019-0097

Upon appeal from the Court of Chancery. REVERSED and REMANDED.

Michael J. Barry, Esquire (argued) and Rebecca A. Musarra, Esquire, GRANT & EISENHOFFER P.A., Wilmington, Delaware; Peter B. Andrews, Esquire, Craig J. Springer, Esquire, and David M. Sborz, Esquire, ANDREWS & SPRINGER LLC, Wilmington, Delaware; and Jeremy S. Friedman, Esquire, Spencer Oster, Esquire, and David F.E. Tejtel, Esquire, FRIEDMAN OSTER & TEJTEL PLLC, Bedford Hills, New York; Attorneys for Plaintiff-Appellant Paul Morris and all similarly situated unitholders of Spectra Energy Partners, L.P.

Robert S. Saunders, Esquire, Ronald N. Brown, III, Esquire, Ryan M. Linsay, Esquire, SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, Wilmington, Delaware; Noelle M. Reed, Esquire (argued) and Daniel S. Mayerfeld, Esquire, SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, Houston, Texas; Attorneys for Defendant-Appellee Spectra Energy Partners (DE) GP, LP.

Before SEITZ, Chief Justice; VALIHURA, VAUGHN, TRAYNOR, and MONTGOMERY-REEVES, Justices, constituting the Court en Banc.

SEITZ, CHIEF JUSTICE

With limited exceptions, a merger extinguishes an equity owner's standing to pursue a derivative claim against the target entity's directors or controller. But the same plaintiff has standing to pursue a post-closing suit if they challenge the validity of the merger itself as unfair because the controller failed to secure the value of a material asset-like derivative claims that pass to the acquirer in the merger. Given the difficulties of pursuing such claims, not the least of which is proof that the equity owner received an unfair merger price for their ownership interest, the plaintiff might not prevail on the merits, but they have sufficiently alleged a direct claim to survive a motion to dismiss for lack of standing.

After a $3.3 billion "roll up" of minority-held units involving a merger between Enbridge, Inc. ("Enbridge") and Spectra Energy Partners L.P. ("SEP"), Paul Morris, a former SEP minority unitholder, lost standing to litigate an alleged $661 million derivative suit on behalf of SEP against its general partner, Spectra Energy Partners (DE) GP, LP ("SEP GP"). Morris reprised the derivative claim dismissal by filing a new class action complaint that alleged the Enbridge/SEP merger exchange ratio was unfair because SEP GP agreed to a merger that did not reflect the material value of his derivative claims.

The Court of Chancery granted SEP GP's motion to dismiss the new complaint for lack of standing. The court held that, to have standing to bring a post-merger claim, Morris had to allege a viable and material derivative claim that the buyer would not assert and provided no value for in the merger. Focusing on the materiality requirement, the court first discounted the $661 million recovery to $112 million to reflect the public unitholders' beneficial interest in the derivative litigation recovery. Then, the court discounted the $112 million further to $28 million to reflect what the court estimated was a one in four chance of success in the litigation. After the discounting, the $28 million-less than 1% of the merger consideration-was immaterial to a $3.3 billion merger.

On appeal, Morris argues that the court should not have dismissed the plaintiff's direct claims for lack of standing. We agree with Morris and find that, on a motion to dismiss for lack of standing, he has sufficiently pled a direct claim attacking the fairness of the merger itself for SEP GP's failure to secure value for his pending derivative claims. Thus, we reverse the Court of Chancery's judgment and remand for further proceedings.

I.

The plaintiff, Paul Morris, owned common units of SEP, a master limited partnership that traded on the New York Stock Exchange.1 Enbridge owned 83% of SEP's outstanding units through a series of wholly-owned subsidiaries, including SEP GP.2 Spectra Energy Corp ("SE Corp") was Enbridge's predecessor-in-interest.

Prior to selling to Enbridge, SE Corp agreed to a 50-50 joint venture with Phillips 66 whereby Phillips would contribute $1.5 billion and SE Corp would contribute a one-third interest in two long haul natural gas pipelines, implying a $1.5 billion valuation of the contributed assets. Because SEP owned the assets, the parties proposed a "reverse dropdown" to sell the assets from SEP to SE Corp. To purchase the assets from SEP, SE Corp offered to "(i) surrender 20 million SEP limited partner units to SEP for redemption . . . and (ii) waive its right to receive up to $4 million in incentive distribution rights [] for twelve consecutive quarters . . . ."3 SEP GP authorized a conflicts committee to evaluate the reverse dropdown.

SEP's limited partnership agreement required the general partner's conflicts committee to act in "subjective good faith."4 According to the complaint's allegations, a financial advisor identified three ways the transaction would provide value to SEP: the redeemed units, the waived distribution rights, and other reduced cash flow due to the loss of assets. Later, however, the adviser included only the first two components as consideration-valued at $946 million-and issued a fairness opinion. The conflicts committee recommended approval, and SEP GP's board approved the reverse dropdown.

After reviewing SEP's books and records, the plaintiff filed a class action derivative complaint on behalf of all owners of SEP public units against SEP GP and SE Corp. The complaint alleged that SEP only received $946 million in the reverse dropdown when SE Corp valued the assets at $1.5 billion. Morris pleaded three derivative claims, including a claim for breach of the limited partnership agreement's "good faith" obligation in approving the reverse dropdown.5 The court dismissed two of the claims for failure to state a claim, but declined to dismiss the breach of the "good faith" obligation claim. The court found, after drawing all reasonable inferences in Morris's favor, that the complaint "made adequate allegations showing that under reasonably conceivable circumstances a facially unreasonable gap in consideration exists sufficient to infer subjective bad faith."6According to the court, "it was 'reasonably conceivable that the General Partner acted in subjective bad faith.'"7 The parties conducted discovery and SEP GP moved for summary judgment. During the litigation, and with the motion summary judgment pending, Enbridge acquired SE Corp in a stock-for-stock merger, becoming SEP GP's ultimate parent and controller of SEP.

In March 2018, SEP's stock price declined by twenty percent in reaction to announcements from the Federal Energy Regulatory Commission ("FERC"). SEP recognized in its filings with the U.S. Securities and Exchange Commission that "[t]he change in FERC's policy has had a negative impact on the MLP sector" and that SEP "would attempt to mitigate the impact of the policy change."8 In May, Enbridge offered a stock-for-stock exchange to buyout SEP's public unitholders. SEP's public unitholders would receive 1.0123 common shares of Enbridge in exchange for each publicly held common unit of SEP based on the SEP common units' and Enbridge common shares' closing price on the NYSE as of May 16, 2018. SEP closed at a unit price of $33.10 and Enbridge common shares closed at $32.70. According to the plaintiff, this was an opportunistic offer to squeeze out the public unitholders due to an artificially depressed trading price. Another three-member SEP GP conflicts committee went to work, two of whom were on the committee that reviewed the reverse dropdown transaction.

Morris's counsel sent a letter to the conflicts committee and told them that the derivative claim was worth more than $500 million and must be taken into account when negotiating the merger exchange ratio. Counsel also noted that the proposed offer was "woefully inadequate" and "fail[ed] to provide SEP and its public unitholders with any value associated with" the derivative claim.[9] After Morris's counsel met with the conflicts committee's legal and financial advisors, the conflicts committee ultimately determined that the value of the derivative claim, net of defense costs, "was less than $0."10 The conflicts committee also found the value of the reverse dropdown to SEP to be about $1.5 billion after adding back the reduced distributions its advisor previously excluded.

As the parties negotiated the buyout, the conflicts committee decided to give no value to the derivative claim but attributed $4 million in saved litigation costs. They also agreed to an exchange ratio "whereby Enbridge would acquire all publicly held SEP units at an exchange ratio of 1.111 shares of Enbridge stock for each publicly held unit of SEP."11 On August 24, 2018, SEP announced a definitive merger agreement with Enbridge and its wholly-owned subsidiaries where Enbridge would acquire all publicly held SEP units at an exchange ratio of 1.111 shares of Enbridge stock for each publicly held unit of SEP. The transaction was not subject to approval by a majority of the minority unitholders. The transaction was approved on December 13, 2018. At that time, Enbridge affiliates held about 83% of the outstanding units. About 39% of publicly held units voted in favor of the transaction. After the deal closed, the court dismissed the derivative claim by stipulation of the parties.12

After another books and records request, Morris...

To continue reading

FREE SIGN UP