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Bandera Master Fund LP v. Boardwalk Pipeline Partners, LP

Court of Chancery of Delaware

October 7, 2019

BANDERA MASTER FUND LP, BANDERA VALUE FUND LLC, BANDERA OFFSHORE VALUE FUND LTD., LEE-WAY FINANCIAL SERVICES, INC., and JAMES R. MCBRIDE, on behalf of themselves and similarly situated BOARDWALK PIPELINE PARTNERS, LP UNITHOLDERS, Plaintiffs,
v.
BOARDWALK PIPELINE PARTNERS, LP, BOARDWALK PIPELINES HOLDING CORP., BOARDWALK GP, LP, BOARDWALK GP, LLC, and LOEWS CORP., Defendants.

          Submitted Date: July 2, 2019

          A. Thompson Bayliss, J. Peter Shindel, Jr., ABRAMS & BAYLISS LLP, Wilmington, Delaware; Attorneys for Plaintiffs.

          Srinivas M. Raju, Blake Rohrbacher, Matthew D. Perri, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Rolin P. Bissell, YOUNG CONAWAY STARGATT & TAYLOR LLP, Wilmington, Delaware; Daniel A. Mason, PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP, Wilmington, Delaware; Lawrence Portnoy, Charles S. Duggan, Gina Cora, DAVIS POLK & WARDWELL LLP, New York, New York; Stephen P. Lamb, Andrew G. Gordon, PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP, New York, New York; Attorneys for Defendants.

          MEMORANDUM OPINION

          LASTER, V.C.

         In April 2018, Boardwalk Pipeline Partners, LP (the "Partnership" or "Boardwalk") announced that its general partner was seriously considering whether to exercise an option to purchase all the Partnership's publicly traded common units (the "Call Right"). The announcement caused the trading price of the common units to plummet. In July, the general partner exercised the Call Right and purchased the common units at what the plaintiffs contend was an artificially depressed price.

         The plaintiffs are former holders of common units who seek to hold the defendants accountable for the allegedly wrongful exercise of the Call Right. The plaintiffs contend that the defendants should be held primarily liable for breaching their fiduciary duties, their express contractual obligations, and their implied contractual obligations. The plaintiffs contend that the defendants who are not primarily liable should be secondarily liable for aiding and abetting the other defendants' breaches of fiduciary duty and for tortious interference with contract.

         The defendants moved to dismiss the complaint under Rule 12(b)(6) for failing to state a claim on which relief can be granted. This decision grants the motion as to the claims premised on breaches of fiduciary duty. It also grants the motion as to certain claims that sound in contract. It denies the motion as to other contract-based claims.

         I. FACTUAL BACKGROUND

         The facts are drawn from the currently operative complaint, the documents integral to it, and the documents that it incorporates by reference. At this procedural stage, the complaint's allegations are assumed to be true, and the plaintiffs receive the benefit of all reasonable inferences. Citations in the form "Ex. - at -" refer to exhibits to the complaint.

         A. The Partnership

         The Partnership is a Delaware limited partnership engaged in the business of storing and transporting natural gas products. The Partnership's general partner is defendant Boardwalk GP, LP (the "General Partner"), which owns a 2% general partner interest in the Partnership. The General Partner is itself a Delaware limited partnership, and the general partner of the General Partner is defendant Boardwalk GP, LLC ("GPGP"). Defendant Loews Corporation ("Loews") owns and controls GPGP through defendant Boardwalk Pipelines Holding Corp. ("Holdings"), which is the sole member of GPGP. Loews thus controls both the General Partner and the Partnership.

         Before the events giving rise to this litigation, the Partnership's common units traded on the New York Stock Exchange under the symbol BWP. Through Holdings, Loews owned common units representing a 51.2% limited partner interest in the Partnership.

         The Partnership's internal affairs were governed by its Third Amended and Restated Agreement of Limited Partnership (the "Partnership Agreement" or "Agr."). Section 15.1 of the Partnership Agreement set out the Call Right, which gave the General Partner the option under specified circumstances to acquire all of the common units that the General Partner or its affiliates did not already own.

         Two conditions had to be met before the General Partner could exercise the Call Right. First, the General Partner and its affiliates had to own more than 50% of the Partnership's limited partner interests. Second, the General Partner had to receive an "Opinion of Counsel" that its pass-through tax status "has or will reasonably likely in the future have a material adverse effect on the maximum applicable rate that can be charged to customers." Agr. § 15.1(b). The Partnership Agreement defined the term "Opinion of Counsel" as "a written opinion of counsel . . . acceptable to the General Partner." Id. § 1.1 at 17.

         Section 15.1(c) of the Partnership Agreement required the Partnership to mail a notice to the record holders of common units informing them about the exercise of the Call Right. The pricing formula for the Call Right used a date three days before the mailing of the notice as the end date for a measurement period. Under the formula, the purchase price per common unit would be the average of the daily closing prices for the common units during the 180 consecutive trading days immediately before the end date. Through this mechanism, the purchase price would be set before the holders of common units received notice that the General Partner had exercised the Call Right, resulting in a purchase price that was not affected by the exercise of the Call Right.

         B. FERC Changes Its Rate-Setting Policies.

         The Partnership earns money by charging customers for natural gas transportation and storage services. In pipeline parlance, the customers are sometimes called shippers, and the rates that the pipeline charges its shippers are sometimes called tariffs.

         The Federal Energy Regulatory Commission ("FERC") establishes a schedule of approved rates for each interstate pipeline. The approved rates are not mandatory rates. The pipeline and its shippers can contract for services at negotiated rates, which can be higher or lower than the FERC-approved rates. When negotiating the terms of the contract, however, the shipper can always reject the pipeline's terms and choose to ship at the FERC-approved rates. Because the shipper has recourse to the FERC-approved rates, the latter are called "recourse rates." The pipeline can also choose to charge shippers discounted rates, which must be less than the recourse rates.

         When setting recourse rates, FERC calculates an amount sufficient to enable the pipeline to recover all of its costs of service plus earn a profit that will compensate its investors. One component of a pipeline's cost of service is the income taxes that it pays. The level of profit reflects the pipeline's cost of capital based on the components of its capital structure.

         Historically, FERC allowed pipeline owners to recover an income tax allowance based on the assumption that the pipeline would pay federal corporate income taxes at the longstanding headline rate of 35%. FERC even allowed pipelines organized as master limited partnerships ("MLP pipelines") to recover this income tax allowance, despite the fact that MLP pipelines are pass-through entities for tax purposes and thus do not pay tax at the entity level.

         On March 15, 2018, FERC announced a major change in its treatment of MLP pipelines for purposes of setting tariff rates. Ex. 4 (the "Revised Policy Statement"). Under the new policy, MLP pipelines would no longer be permitted to recover an income tax allowance when calculating their costs of service. The Revised Policy Statement became effective when it was published in the Federal Register on March 21, 2018.

         At the same time it announced the Revised Policy Statement, FERC issued a notice of inquiry that solicited comment on the implications of the Revised Policy Statement for a separate aspect of pipeline tax treatment. See Inquiry Regarding the Effect of the Tax Cuts and Jobs Act on Commission-Jurisdictional Rates, 83 Fed. Reg. 12, 371 (Mar. 21, 2018) (the "Notice of Inquiry"). Various tax regulations permit pipelines to depreciate their assets on an accelerated basis. When calculating tariff rates, however, FERC uses straight-line depreciation. Because a pipeline can claim depreciation more quickly than FERC's method anticipates, the pipeline pays lower taxes in the early years, resulting in greater cash flows than FERC's projections contemplate. The value of the increased cash flows builds up as an asset on the pipeline's balance sheet called "Accumulated Deferred Income Tax" or "ADIT." Once the accelerated depreciation ends, the pipeline pays higher taxes than FERC's projections contemplate, and the increased tax payments reduce the ADIT balance.

         By accelerating depreciation and deferring taxes, the pipeline benefits from the time-value of money. FERC therefore historically treated the value of the pipeline's ADIT balance as cost-free capital when determining the rate of return that a pipeline needed to earn from its tariff rates. All else equal, a pipeline with an ADIT balance would have lower recourse rates than a pipeline without an ADIT balance, because the pipeline with an ADIT balance would not need to earn a return on that portion of its capital structure. The same principle would hold for a relatively higher ADIT balance versus a lower ADIT balance.

         In the Notice of Inquiry, FERC asked for comments regarding the implications of the Revised Policy Statement for the rules governing ADIT balances. One possible implication would be the elimination of ADIT balances for MLP pipelines. Eliminating their ADIT balances would benefit those entities by removing a block of cost-free capital from their asset bases, thereby increasing the value of the assets on which MLP pipelines needed to earn a return. Viewed in isolation, the elimination of ADIT balances would enable MLP pipelines to ask FERC to approve higher recourse rates. The implications of removing the ADIT balances were not entirely clear, however, because it could be argued that any benefits from removing the ADIT balances should be shared with shippers, creating near-term liabilities for the MLP pipelines that could offset the benefits.

         The Notice of Inquiry also addressed the implications of the Tax Cuts and Jobs Act of 2017 (the "Tax Act"), which reduced the headline corporate income tax rate from 35% to 21%. Viewed in isolation, a reduction in the tax rate would reduce the value of accelerated depreciation and hence the value of the ADIT balances. The implementation of the Tax Act thus had the same potential implications as the elimination of ADIT balances, albeit to a lesser degree because the ADIT balances would be reduced rather than eliminated. The Tax Act also affected all pipelines, not just MLP pipelines.

         In addition to the Revised Policy Statement and Notice of Inquiry, FERC issued a notice of proposed rulemaking that set out a process for addressing the implications of the Revised Policy Statement and the Tax Act for pipeline recourse rates (the "Notice of Rulemaking"). The proposed rulemaking contemplated that each pipeline would submit a new form to FERC in which the pipeline owner would report information and select one of four options for its rates.

         C. The Partnership Responds To The Revised Policy Statement.

         The day after FERC issued the Revised Policy Statement, the Notice of Inquiry, and the Notice of Rulemaking, the Partnership addressed the implications of the regulatory changes. In a press release dated March 16, 2018, the Partnership stated: "Based on a preliminary assessment, Boardwalk does not expect FERC's proposed policy revisions to have a material impact on the company's revenues." Ex. 9. The press release explained that for two of the Partnership's four operating subsidiaries, "[a]ll of the firm contracts are negotiated or discounted rate agreements, which are not ordinarily affected by FERC's policy revisions." Id. For its other two operating subsidiaries, a rate moratorium remained in place until 2023, so the Revised Policy Statement would not affect the rates those subsidiaries could charge.

         Approximately one month later, on April 25, 2018, the Partnership responded to the Notice of Inquiry by submitting comments to FERC. The Partnership essentially asked FERC to reverse the Revised Policy Statement and provide instead "that all pipelines, including, [sic] MLP pipelines, are permitted to propose a tax allowance in future rate proceedings . . . ." Ex. 10 at 5. The Partnership also asked FERC to clarify how it planned to treat ADIT balances and confirm that the revised policy would not affect negotiated rate agreements.

         D. The Partnership Announces The Potential Exercise Of The Call Right.

         On April 30, 2018, the Partnership filed its Form 10-Q. In a section discussing FERC's recent regulatory actions, the Partnership stated:

While we are continuing to review FERC's Revised Policy Statement, [Notice of Inquiry, ] and [Notice of Rulemaking], based on a preliminary assessment, we do not expect them to have a material impact on our revenues in the near term. All of the firm contracts on Gulf Crossing and the majority of contracts on Texas Gas Transmission, LLC are negotiated or discounted rate agreements, which are not ordinarily affected by FERC's policy revisions. Gulf South currently has a rate moratorium in place with its customers until 2023, which we believe will be unaffected by these actions.

Ex. 11 at 28. The Partnership thus generally maintained the position taken in its initial press release, while clarifying that FERC's regulatory actions were unlikely to have a material impact on revenues in the near term. The Partnership's initial press release had not limited the absence of a material impact to the near term.

         Despite this relatively anodyne disclosure, the Partnership's Form 10-Q went on to disclose that in light of FERC's actions, the Partnership was evaluating whether to remain a publicly traded entity, citing the potential exercise of the Call Right by the General Partner (the "Potential-Exercise Disclosure"). See id. at 28-29, 34. The Form 10-Q stated flatly: "[O]ur general partner has a call right that may become exercisable because of recent FERC action. Any such transaction or exercise may require you to dispose of your common units at an undesirable time or price, and may be taxable to you." Id. at 34 (emphasis in original). Continuing, the Form 10-Q explained:

[A]s has been described in our SEC filings since our initial public offering, our general partner has the right under our partnership agreement to call and purchase all of our common units if (i) it and its affiliates own more than 50% in the aggregate of our outstanding common units and (ii) it receives an opinion of legal counsel to the effect that our being a pass-through entity for tax purposes has or will reasonably likely in the future have a material adverse effect on the maximum applicable rate that can be charged to customers by our subsidiaries that are regulated interstate natural gas pipelines. Because our general partner and its affiliates hold more than 50% of our outstanding common units, this call right would become exercisable if our general partner receives the specified opinion of legal counsel.
The magnitude of the effect of the FERC's Revised Policy Statement may result in our general partner being able to exercise this call right. Any exercise by our general partner of its call right is permitted to be made in our general partner's individual, rather than representative, capacity; meaning that under the terms of our partnership agreement our general partner is entitled to exercise such right free of any fiduciary duty or obligation to any limited partner and it is not required to act in good faith or pursuant to any other standard imposed by our partnership agreement. Any decision by our general partner to exercise such call right will be made by [Holdings], the sole member of [GPGP], rather than by our Board. . . . We have been informed by [Holdings] that it is analyzing the FERC's recent actions and seriously considering its purchase right under our partnership agreement in connection therewith.

Id. at 34 (emphasis added).

         On the same day, the Partnership held an earnings call. During the call, the Partnership reiterated its clarification that the policy was unlikely to have a material impact on revenues in the near term. See Ex. 12 at 5. The Partnership also reiterated that Loews was "seriously considering" whether to cause the General Partner to exercise the Call Right. Id. The Partnership declined to take questions concerning "the decision making process or the possible timing of any such decision," instead referring investors to its public filings. Id.; see id. at 8.

         Later that day, Loews made a similar announcement during its earnings call. Loews stated that it was "exploring all [its] options" and that "no decisions ha[d] yet been made." Ex. 13 at 3. Loews likewise declined to answer questions about the Call Right, instead referring investors to its public filings. See id. at 3, 6, 7.

         During the week after the Potential-Exercise Disclosure, the market price of the Partnership's common units fell from $11.04 to $9.26, reflecting a decline of 16%. Numerous investors and research analysts objected to Lowes and the General Partner relying on FERC's regulatory actions as a basis for exercising the Call Right. They also objected that the Potential-Exercise Disclosure enabled the Partnership and Loews to undermine the contractually specified mechanism for determining the call price.

         E. The Original Plaintiffs File Suit And Reach A Settlement.

         On May 24, 2018, two holders of common units (the "Original Plaintiffs") filed this action and moved for expedited proceedings. The Original Plaintiffs wanted to prevent the General Partner from exercising the Call Right using a 180-day measurement window that included trading days that had been affected by the Potential-Exercise Disclosure. The defendants opposed the motion, arguing that the dispute was not ripe because the General Partner had not yet elected to exercise the Call Right. The court agreed with the defendants and denied the motion to expedite.

         After defeating the motion to expedite on the theory that the claims were not yet ripe, defense counsel contacted the lawyers for the Original Plaintiffs to explore settling the not-yet-ripe claims. Ex. 35 at 14-17. On May 30, 2018, the Original Plaintiffs offered to settle if the defendants agreed to exercise the Call Right using June 1, 2018, as the end date for the 180-day measurement period, which would have included twenty-four affected trading days in the calculation. The defendants countered with an end date of September 1, 2018, which would have included sixty-four affected days in the calculation. After further back and forth, the parties agreed to an end date of June 29, 2018, which included forty- four affected days in the calculation. Using that end date, the pricing formula yielded a purchase price for the Call Right of $12.06 per unit.

         The parties spent two weeks drafting settlement documents. On June 22, 2018, they informed the court by email that they had reached an agreement in principle and asked the court to review the settlement papers in camera. The court rejected that request as seeking a non-public advisory opinion.

         Later that night, the parties signed and filed their proposed settlement, which contemplated the certification of a class and provided the defendants with a broad release of all claims. After the settlement was announced, several unitholders objected to its terms. See Exs. 41 & 42.

         F. The Call-Right Exercise

         On June 29, 2018, the Partnership announced that the General Partner would exercise the Call Right on July 18 at a price of $12.06 per unit (the "Call-Right Exercise"). The Partnership reported that Baker Botts LLP had provided the General Partner with the opinion of counsel required by the Partnership Agreement (the "Tax Opinion").

         A few hours later, FERC announced a final rule that addressed several open issues about its rate-setting policies for MLP pipelines, including two of the issues that the Partnership had raised in its comments. Ex. 2 (the "Final Rule"). First, FERC announced that because the Revised Policy had eliminated the income tax allowance for MLP pipelines, those entities could eliminate their accumulated ADIT balances. Going forward, a pipeline owner like the Partnership would not need to need subtract an ADIT balance from the pipeline's asset base when seeking approval for a tariff rate and thus could seek a competitive rate of return on its entire rate base. The practical effect of the Final Rule was to enable MLP pipelines to ask FERC to approve higher rates. Equally important, FERC determined that when an MLP pipeline eliminated its ADIT balance, it would not be required to return any amounts to shippers. Ex. 2 at 85-90. As a result of these clarifications, instead of the Revised Policy Statement having an adverse impact on the rates that MLP pipelines could charge, the Revised Policy Statement had a potentially favorable impact.

         On the second issue, FERC confirmed that the Revised Policy Statement would not affect negotiated rate contracts. Id. at 157-60. The Revised Policy Statement would thus not affect the Partnership's negotiated rates, consistent with the announcement the Partnership initially made in response to the Revised Policy Statement.

         On July 18, 2018, the General Partner exercised the Call Right. As a result, the Partnership became a wholly owned subsidiary of the General Partner and its affiliates.

         G. The Settlement Is Rejected, And The Current Plaintiffs Pursue The Litigation.

         The current plaintiffs objected to the proposed settlement. On September 28, 2018, the court declined to approve it. Because the current plaintiffs had prevailed on their objections, the court permitted them to take over the litigation.

         The current plaintiffs subsequently filed the operative complaint. They allege that the defendants carried out a "deliberate scheme" to "manipulate[] Boardwalk's common unit price for their own benefit" that included making the Potential-Exercise Disclosure so that the price of the common units would plummet. Compl. ¶¶ 1, 171. Based on the allegations in the complaint, the current plaintiffs assert six causes of action:

• Count I seeks a declaratory judgment that the defendants breached the express terms of the Partnership Agreement, the implied covenant of good faith and fair dealing, and their fiduciary duties.
• Count II contends that the Partnership, the General Partner, and GPGP breached the Partnership Agreement by exercising the Call Right in bad faith and in breach of the express terms of the Partnership Agreement.
• Count III contends that the Partnership, the General Partner, and GPGP breached the implied covenant of good faith and fair dealing that inheres in the Partnership Agreement by "teasing" the market that they were "seriously considering" exercising the Call Right, thereby depressing the unit price and allowing the General Partner to exercise the Call Right at a price significantly lower than intended by the Partnership Agreement. Compl. 226.
• Count IV contends that Holdings, the General Partner, GPGP, and Loews breached their equitable and contractual fiduciary duties to the Partnership and its limited partners by engaging in a "scheme [that] culminated] in the improper and unauthorized exercise of the Call Right to purchase the common units of all minority unitholders after Defendants had deliberately depressed the Purchase Price by threatening to exercise the Call Right . . . ." Compl. ¶¶ 240, 242.
• Count V contends that GPGP, Holdings, and Loews aided and abetted the General Partner's breach of its equitable and contractual fiduciary duties to the Partnership and its limited partners by causing the General Partner to breach its duties.
• Count VI alleges that GPGP, Holdings, and Loews tortiously interfered with contractual relations by using their control over the General Partner to cause it to breach the Partnership Agreement.

         II. LEGAL ANALYSIS

         The defendants have moved to dismiss the complaint under Rule 12(b)(6) for failure to state a claim on which relief can be granted. When considering a Rule 12(b)(6) motion, this court (i) accepts as true all well-pleaded factual allegations in the complaint, (ii) credits vague allegations if they give the opposing party notice of the claim, and (iii) draws all reasonable inferences in favor of the plaintiffs. Central Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 535 (Del. 2011). Dismissal is inappropriate "unless the plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances." Id.

         This decision does not address the counts of the complaint in the order presented. It does not discuss Count I at all, because that count seeks redundant declaratory judgments on the same issues raised substantively by the other counts. This decision's rulings on the other counts suffice to address the parallel declaratory judgments sought in Count I. This decision starts with Count IV, which asserts a claim for breach of fiduciary duty, then addresses a related claim in Count V for aiding and abetting a breach of fiduciary duty. These claims are readily swept away because the Partnership Agreement eliminated all fiduciary duties. This decision then returns the core contract-based claims that logically demarcate the disputed terrain in a purely contractual entity. At the pleading stage, the complaint states claims for breach of the express provisions of the Partnership Agreement (Count II), breach of the implied covenant that inheres in the Partnership Agreement (Count III), and tortious interference with the Partnership Agreement (Count VI).

         A. Count IV: Breach Of Fiduciary Duty

         Count IV of the complaint contends that the General Partner and its controllers breached their fiduciary duties when engaging in the conduct challenged in the complaint. The language of the Partnership Agreement clearly eliminated fiduciary duties. As a result, Count IV fails to state a viable claim.

         The Delaware Limited Partnership Act gives "maximum effect to the principle of freedom of contract and to the enforceability of partnership agreements." 6 Del. C. § 17-1101(c). This freedom is "often exercised in the MLP context" by "eliminating any fiduciary duties a partner owes to others in the partnership structure." Dieckman v. Regency GP LP, 155 A.3d 358, 366 (Del. 2017) (citing 6 Del. C. § 17-1101(d)). By doing so, the drafters of a limited partnership agreement replace fiduciary duties with contractual obligations. Id. If fiduciary duties have been validly eliminated, "the limited partners cannot rely on traditional fiduciary principles to regulate the general partner's conduct." Brinckerhoff v. Enbridge Energy Co., 159 A.3d 242, 252 (Del. 2017).

         The drafters of the Partnership Agreement chose to eliminate all common law duties, including fiduciary duties, that the General Partner and its affiliates might otherwise have owed to the Partnership and its limited partners. Section 7.9(e) of the Partnership Agreement 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.

Agr. § 7.9(e). The Partnership Agreement defines the term "Indemnitee" to include the General Partner and "any Person who is or was an Affiliate of the General Partner . . . ." Id. § 1.1 at 12. The Partnership Agreement defines the term "Affiliate" as "with respect to any Person, any other Person that directly or indirectly through one or more intermediaries controls, is controlled by or is under common control with, the Person in question." Id. § 1.1 at 3. Consequently, GPGP, Holdings, and Loews are Indemnitees for purposes of the Partnership Agreement.

         The language of Section 7.9(e) eliminated all "duties or liabilities, including fiduciary duties" owed by the General Partner and its affiliates to the Partnership and its limited partners. Section 7.9(e) left in place only those duties and liabilities "expressly set forth in [the Partnership] Agreement." Thus, the only duties and liabilities that the General Partner, GPGP, Holdings, and Loews owed to the ...


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