Submitted March 28, 2014
Jessica Zeldin, ROSENTHAL, MONHAIT & GODDESS, P.A., Wilmington, Delaware; Samuel H. Rudman, Mark S. Reich, Michael G. Capeci, ROBBINS GELLER RUDMAN & DOWD LLP, Melville, New York; Randall J. Baron, ROBBINS GELLER RUDMAN & DOWD LLP, San Diego, California; Ethan D. Wohl, WOHL & FRUCHTER LLP, New York, New York; Attorneys for Plaintiff.
Peter J. Walsh, Jr., Brian C. Ralston, Berton W. Ashman, Jr., Gerard M. Clodomir, Matthew R. Dreyfuss, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Attorneys for Defendants El Paso Pipeline GP Company, L.L.C. Douglas L. Foshee, Ronald L. Kuehn, Jr., D. Mark Leland, Arthur C. Reichstetter, William A. Smith, John R. Sult, and James C. Yardley.
Lewis H. Lazarus, Thomas E. Hanson, Jr., MORRIS JAMES LLP, Wilmington, Delaware; Attorneys for Defendant and Nominal Defendant El Paso Pipeline Partners, L.P.
LASTER, Vice Chancellor.
On March 4, 2011, El Paso Pipeline Partners, L.P. (the " Partnership" or " El Paso MLP" ) acquired a 25% interest in Southern Natural Gas Co. (" Southern" ) from El Paso Corporation (" El Paso Parent" ), the parent company of the Partnership's general partner, El Paso Pipeline GP Company, L.L.C. (the " General Partner" ). The plaintiff has challenged the transaction, claiming that the defendants violated both their express contractual obligations and the implied covenant of good faith and fair dealing, or alternatively aided and abetted those wrongful acts. Counts I and III of the complaint assert those theories as direct claims, and the plaintiff has moved to certify a class consisting of all holders of El Paso MLP common units as of March 4, 2011, together with their successors and assigns, excepting the defendants and their affiliates (the " Class" ). The defendants oppose the motion, arguing that the plaintiff's claims
are exclusively derivative. This decision grants the motion for class certification.
I. FACTUAL BACKGROUND
The facts are drawn from the materials presented in support of the motion for class certification. Also currently pending is a motion for summary judgment filed by the defendants. The parties have briefed that motion fully, and portions of the factual background are drawn from the more extensive submissions that accompanied it.
A. The Partnership
El Paso MLP is a Delaware limited partnership headquartered in Houston, Texas. El Paso MLP operates as a master limited partnership (" MLP" ), which is a short-hand term for a publicly traded limited partnership that is taxed as a pass-through entity for federal income tax purposes. El Paso MLP owns interests in companies that operate natural gas pipelines and storage facilities throughout the United States. Its common units trade on the New York Stock Exchange under the symbol " EPB."
MLPs that focus on transporting and storing oil and natural gas, like El Paso MLP, are commonly referred to as midstream MLPs. Midstream MLPs are typically " sponsored" by a corporation with MLP-qualifying assets that generate stable cash flows. The sponsor seeks to maximize the market valuation of those assets by transferring them to an MLP that can issue publicly traded securities on the strength of the cash flows and distribute the cash periodically to investors in a tax efficient manner. In the typical structure, the sponsor owns 100% of the general partner of the MLP, giving the sponsor control over the MLP. The sponsor contributes an initial block of assets to the MLP and, over time, sells additional assets to the MLP. Because the assets move from the sponsor level down to the MLP level, the sales are referred to colloquially as " drop-downs."
In August 2007, El Paso Parent formed El Paso MLP and contributed to El Paso MLP a number of properties. On November 15, El Paso MLP announced its initial public offering of 25,000,000 common units. The IPO prospectus cautioned that El Paso Parent would have no obligation to drop down additional assets into El Paso MLP. Despite this disclosure, El Paso Parent was plainly creating a sponsored MLP, implying that El Paso MLP over time would acquire assets that El Paso Parent owned.
Consistent with the typical MLP structure, El Paso Parent owned and continues to own 100% of the General Partner. The General Partner in turn owned and continues to own a 2% general partner interest in El Paso MLP. The general partner interest provides the General Partner with a 2% economic interest in El Paso MLP, but more importantly gives the General Partner control over El Paso MLP. At the time of the transaction challenged in this litigation, El Paso Parent also owned, either through the General Partner or its affiliates, approximately 48.9% of El Paso MLP's outstanding common units plus all of its incentive distribution rights (" IDRs" ).
At the time of the transaction, defendants Douglas L. Foshee, James C. Yardley, John R. Sult, D. Mark Leland, Ronald L. Kuehn, Jr., William A. Smith, and Arthur C. Reichstetter (together, the " Individual Defendants" ) constituted the board of directors of the General Partner (the " GP Board" ). Four of the Individual Defendants also held management positions with El Paso Parent or the General Partner. Foshee was the President and CEO of El Paso Parent. Yardley served as an Executive Vice President of El Paso Parent
and as President and CEO of the General Partner. Sult served as CFO of El Paso Parent and the General Partner. Leland served as an Executive Vice President of El Paso Parent and president of El Paso Midstream Group, Inc., having previously served as the CFO of El Paso Parent and the General Partner. Each of the management directors beneficially owned equity stakes in El Paso Parent that dwarfed their equity stakes in El Paso MLP.
The other three members of the GP Board were outside directors, although two had past ties to El Paso Parent. Kuehn was Interim Chief Executive Officer of El Paso Parent in 2003 and served as Chairman of the Board of El Paso Parent from 2003 until 2009, two years before the challenged transaction took place. Smith was an Executive Vice President of El Paso Parent and Chairman of El Paso Merchant Energy's Global Gas Group until 2002. Reichstetter was the only director without past ties to El Paso Parent.
B. The Southern Transaction
On February 8, 2011, El Paso Parent proposed to sell to El Paso MLP a 22% general partner interest in Southern for a purchase price of $587 million, excluding debt. Southern is a natural gas pipeline and storage company with a network of approximately 8,000 miles of pipelines extending across the southeastern United States.
At the time of the proposal, El Paso MLP already owned a 60% general partner interest in Southern that it had acquired from El Paso Parent through a series of prior drop-downs, including 10% transferred to El Paso MLP upon its formation, 15% acquired in September 2008, 20% acquired in June 2010, and 15% acquired in November 2010. El Paso Parent's proposal contemplated that El Paso MLP would finance the purchase with the proceeds from the public issuance of up to 12 million common units, a draw on the Partnership's revolving credit facility, and a cash contribution from El Paso Parent to maintain its 2% general partner interest in El Paso MLP. El Paso MLP had used the same financing structure for prior drop-downs. The proposal gave El Paso MLP the option to purchase an additional 3% interest in Southern on the same terms, depending on the success of El Paso MLP's unit issuance. If El Paso MLP exercised the option, it would acquire in total an additional 25% general partner interest in Southern, for aggregate ownership of 85%.
C. The Contractual Approval Framework
Because El Paso Parent controlled El Paso MLP through its ownership of the General Partner and also owned the interest in Southern that El Paso MLP would acquire, the proposed transaction created a conflict of interest for the General Partner. The First Amended and Restated Agreement of Limited Partnership for El Paso MLP (the " LP Agreement" or " LPA" ) establishes contractual requirements for such a transaction.
As authorized by the Delaware Limited Partnership Act, the LP Agreement eliminates all common law duties, including fiduciary duties, that the General Partner, El Paso Parent, or the Individual Defendants might otherwise owe to El Paso MLP and its limited partners. Section 7.9(e) states:
Except as expressly set forth in this Agreement, neither the General Partner nor any other Indemnitee shall have any duties or liabilities, including fiduciary duties, to the Partnership or any Limited Partner or Assignee and the provisions of this Agreement, to the extent
that they restrict, eliminate or otherwise modify the duties and liabilities, including fiduciary duties, of the General Partner or any other Indemnitee otherwise existing at law or in equity, are agreed by the Partners to replace such other duties and liabilities of the General Partner or such other Indemnitee.
LPA § 7.9(e). The LP Agreement defines the term " Indemnitee" to include the General Partner, " any Person who is or was an Affiliate of the General Partner," and " any Person who is or was a . . . director . . . of . . . the General Partner . . . ." Id. § 1.1. Consequently, the General Partner, El Paso Parent, and the Individual Defendants are Indemnitees for purposes of the LP Agreement, and they do not owe any common law duties, including fiduciary duties, to El Paso MLP or its limited partners.
In place of common law duties, the LP Agreement substitutes contractual commitments. Viewed from 20,000 feet, the LP Agreement divides the decisions that the General Partner might make into three broad categories: decisions made by the General Partner in its individual capacity, decisions made by the General Partner in its capacity as the General Partner that do not involve any conflict of interest, and decisions made by the General Partner in its capacity as the General Partner that involve a conflict of interest.
For decisions that the General Partner makes in its individual capacity, the LP Agreement states that the General Partner does not owe any duty to El Paso MLP or any of the limited partners, can act in its own interest, and does not have to believe in good faith that its actions are in the best ...