In Brinckerhoff v. Enbridge Energy, the Delaware Supreme Court (March 20, 2017) reversed the Court of Chancery's dismissal of an MLP investor's challenge to a $1.2 billion transaction between the MLP and its parent corporation. The factual context was the repurchase by the MLP of an asset it had previously sold to the parent–with the repurchase at a significantly higher price, despite strong indications that the value of the asset had declined, and without the general partner or its banker having considered the earlier sale as a comparable transaction.
The Supreme Court applied a standard to the general partner's approval of the transaction that the Court characterized as “equivalent to entire fairness.” Importantly, however, this ruling was based on the Court's interpretation of the particular, atypical language in the Enbridge limited partnership agreement.
The Supreme Court also “changed course” from previous holdings in connection with the pleading standard for bad faith by a general partner (in the context of the availability of exculpation); raised questions about whether an LPA's conclusive presumption of good faith based on reliance on a fairness opinion could be undermined due to the timing of and substantive weaknesses in the opinion; stated that equitable remedies (such as reformation or rescission of the challenged transaction) could be available to redress general partner breaches made while acting in good faith; and made other important holdings. Importantly, however, as all of these flowed from the Court's imposition of an entire fairness-like standard and/or from the Court's finding, based on that standard, that a valid claim of breach by the general partner had been made, the rulings are not likely to impact MLPs that operate under more typical LPAs (where such a standard would not be imposed and it would be much more difficult for a plaintiff to state a valid claim of breach).
Nonetheless, the decision underscores the importance of the particular language of the LPA at issue to the judicial result in MLP cases generally. Based on Brinckerhoff, MLPs operating under older-form LPAs without a state-of-the-art “safe harbor” for conflict transactions may want to consider amending the LPA to add a safe harbor, if possible. In the attached Briefing, we analyze the decision and offer related practice points.