By Nina Monzack

          In a recent decision that overturned a nearly $700 million Chancery verdict awarded to holders of public units of a Delaware Managed Limited Partnership (MLP), the Delaware Supreme Court held that a general partner was shielded by a dual-layer exculpatory provision. The provision was found in the MLP’s partnership agreement which allowed the partnership to rely on an opinion of counsel, and, in doing so, receive the protection of a conclusive presumption of good faith. In Boardwalk Pipeline Partners, LP v. Bandera Master Fund LP,[1] the state’s highest court rejected the Chancery’s finding of willful misconduct, holding that proper adherence to contractually explicit terms disclaiming fiduciary duties insulated the general partner from claims it had breached the implied covenant of good faith and fair dealing.

          The Supreme Court issued the December 2022 reversal against appellant Bandera based on Boardwalk’s reasonable reliance on “an opinion about an opinion,” specifically a contractually mandated opinion of counsel that was itself an assessment of a first opinion of counsel. In finding that Boardwalk had indeed reasonably relied on that second opinion—as the partnership agreement dictated it must in order to avoid liability—it had therefore triggered a conclusive presumption of good faith, which was contained within the agreement.

          A decade earlier in Gerber v. Enter. Prods. Hldgs., the Supreme Court had overturned Chancery concerning a “nearly identical” contractual provision.[2] This provision had outlined the necessary procedure to secure a conclusive presumption of good faith in the face of expressly disclaimed fiduciary duties.[3] However, unlike in Boardwalk, the Gerber Court did find a violation of the implied covenant. The Gerber Court based the case on the general partner’s reliance on an “insufficient” opinion.[4] Distinguishing Gerber from Boardwalk, the Court here noted that the opinion of counsel “is itself a meaningful limitation.”[5]

          Indeed, in both its outcome and its substance, Boardwalk may serve as a reinforcing foil to Gerber insofar as the Supreme Court’s reliance on express terms, rather than the more abstract function of the implied covenant. Regarding Gerber, one commenter summarized:

          In a foundational holding on contractual good faith, the Delaware Court endorsed the view that the implied covenant of good faith is associated with adherence to a hypothetical contract—the contract that parties would have entered if they had considered the unprovided-for circumstance. As Justice Jacobs of the Delaware Supreme Court has explained, although “this test requires resort to a counterfactual world,” it is still “commonsensical,” capturing an intuitive notion of the sort of gap-filling the implied covenant is supposed to achieve.[6]

          In contrast, the partnership agreement in Boardwalk, and the steps taken by the general partner in exercising its rights under its terms, did not require such a “hypothetical contract.” To the contrary, the scenario that arose was one which the parties had contemplated and bargained for, within the flexibility allowed under Delaware law for MLPs.

          Boardwalk was formed and went public in 2005 when its sponsor, Lowes Corporation, took advantage of changes to Federal Energy Regulatory Commission (FERC) policy. The FERC policy allowed owners of oil and gas pipelines organized as limited partnerships to claim an income tax allowance for all partners.[7] Because they also avoid entity-level income taxes, such partnerships “became attractive investment vehicles because they were allowed a full tax allowance.”[8]

          Delaware law permits an MLP to be organizationally structured so as “maxim[ize] flexibility over investments and operations.”[9] This includes the ability to:

[E]liminate fiduciary duties, meaning that an investor’s rights are, for the most part, limited to the four corners of the MLP agreements. It is safe to generalize that MLP prospectuses warn of the sponsor’s lopsided rights that include their right to make self-interested decisions to the economic disadvantage of the public investors.[10]

Because of these limited rights, and because “Delaware courts respect the terms of a partnership’s governing agreements to preserve the ‘maximum flexibility’ of contract,” courts have a “strict approach to contract interpretation and enforcement [in order to] ‘put[] investors on notice’ regarding the primacy of partnership agreements.”[11]

          The Supreme Court found that Boardwalk had consistently disclosed these limited rights and their attendant risks to its investors in numerous public filings between 2005 and 2017.[12] The disclosures included unequivocal warnings that the general partner’s limited fiduciary duties “may permit them to favor their own interests to your detriment;” that it had “call rights that may require you to sell your common units at an undesirable time or price;” and that it  “may use its own discretion, free of fiduciary duty restrictions, in determining whether to exercise this right.”[13]

          Indeed, Boardwalk was organized to have “made full use of the MLP structure to limit fiduciary duties and to consolidate governing power in its general partner.”[14] In addition, the partnership agreement insulated the general partner from damages under certain conditions in which a conclusive presumption of good faith attached when relying on the advice of counsel.[15] At issue here was Boardwalk’s reliance on such an opinion to exercise a call right to take the MLP private.

          This was a situation anticipated by the partnership agreement. Foreseeing the possibility of future changes to FERC policies, the agreement included a mechanism for Boardwalk to exercise its call right should the tax benefits of remaining a public entity no longer work to its advantage.[16] The agreement provided that “the call right could not be exercised without an opinion of counsel acceptable to the General Partner.”[17]

          In March, 2018, responding to a FERC announcement that it was indeed reconsidering its policy, Boardwalk sought an opinion of counsel from Baker Botts regarding its exercise of the call option. In turn, for purposes of determining whether the Baker Botts opinion was “acceptable to the General Partner” as the agreement required, Boardwalk retained Skadden “for its expertise in FERC and MLP matters and for its relationship with Loews. . .” to assess the Baker Botts opinion.[18]

          Where Chancery focused its analysis on the Baker Botts Opinion – holding that it had not been issued in good faith[19] – the Supreme Court’s decision instead turned on Boardwalk’s reliance on the Skadden opinion, as that was the information on which the “proper decision maker” (according to the terms of the partnership agreement) had relied.

          Moreover, the Court found, the proper decisionmaker had reasonably relied on the Skadden opinion, noting that although “[t]he Court of Chancery described the Skadden Opinion as a ‘whitewash’ of the Baker Botts Opinion . . . the Court . . . did not find that Skadden acted in bad faith, and Bandera does not argue that Skadden acted in bad faith.”[20]

          In doing so, and as it had done in Gerber via a mirrored reversal of Chancery’s finding of no bad faith, the Supreme Court again reinforced the integrity of the implied covenant. The Gerber reversal:

[S]uggest[ed] the implied covenant is more than a mere “gap filler,” at least in the alternative entity context. . . . because the LP statute (like the LLC statute) prohibits an entity agreement from waiving the implied covenant, even express contract terms creating a “conclusive presumption” of good faith in compliance with the implied covenant cannot preclude judicial scrutiny.[21]

Far from precluding judicial scrutiny here, Boardwalk’s conclusive presumption survived it. In focusing on the critical decision based on the Skadden opinion, and not the Baker Botts opinion, the Supreme Court further reinforced the protection available to limited general partners who properly adhere to carefully crafted contractual exculpatory provisions. The implied covenant remains powerful precisely because it may be invoked only where parties either fail to plan or fail to reasonably follow their plan. Boardwalk did neither.

[1] Boardwalk Pipeline Partners, LP v. Bandera Master Fund LP, No. 1,2002, 2022 WL 1775038, *X (Del. Dec. 19, 2022).

[2] See generally Gerber v. Enterprise Products Holdings, LLC, 67 A.3d 400, X (Del. 2013) (overruled on other grounds by Winshall v. Viacom Int’l Inc., 76 A.3d 808, 816 n.13 (Del. 2013)).

[3] Boardwalk, 2022 WL 1775038, at *26.

[4] Id. at *39 n.256.

[5] Id.

[6] Daniel B. Listwa, Cooperative Covenants: Good Faith for the Alternative Entity, 24 Stan. J. L. Bus. & Fin. 137, 141 (2019).

[7] Boardwalk, 2022 WL 1775038, at *1.

[8] See generally Delaware Supreme Court Rules That Limited Partnership Provision Conditioning Exercise of Call Right on Counsel’s Opinion Was Satisfied by Law Firm’s Opinion That Counsel’s Opinion Was Reasonable, 48 No. 2 Pro. Liab. Rep. NL 15 (2023).

[9] Boardwalk, 2022 WL 1775038, at *1.

[10] Id.

[11] Id. at *16.

[12] Id. at *5.

[13] Boardwalk, 2022 WL 1775038, at *6.

[14] Id. at *17.

[15] Id. at *1.

[16] Gail Weinstein, Steven Steinman & Brian Mangino, Del. Justices Reversal of Boardwalk Award May Apply Widely, Law360 (Jan. 10, 2023), https://www.law360.com/articles/1563983/del-justices-reversal-of-boardwalk-award-may-apply-widely.

[17] Boardwalk, 2022 WL 1775038, at *9.

[18] Id. at *12.

[19] Id. at *1.

[20] Id. at *25.

[21] Mohsen Manesh, Creatures of Contract: A Half-Truth About LLCs, 42 Del. J. Corp. L. 391, 437–38 (2018).