Delaware Chancery Court Finds Complaint Sufficient to Allege Breach of the Obligation of Good Faith and Fair Dealing; Or, What’s Half a Billion Dollars Among Friends?

Delaware Chancery Court Finds Complaint Sufficient to Allege Breach of the Obligation of Good Faith and Fair Dealing; Or, What’s Half a Billion Dollars Among Friends?

      In a decision from earlier this summer, the Delaware Chancery Court (V.C. Glasscock), denied a motion to dismiss with respect to a challenge to related party transaction involving a master limited partnership. In this decision, the Vice Chancellor found that the discrepancy between the value received for the assets, just under $1 billion, and the value attributed to those assets when contributed to another venture, that being $1.5 billion, was of sufficient magnitude to indicate that something might not be right. Morris v. Spectra Energy Partners (DE) GP, LP, C.A. No. 12110-VCG, 2017 WL 2774559 (Del. Ch. June 27, 2017).

      In that this is a master limited partnership case, the organizational structure is somewhat complicated, even as it is somewhat indecipherable because all of the related companies have nearly indistinguishable names. For these purposes, the party who ultimately controlled a master limited partnership had some time ago contributed certain assets to it. The control entity now wanted to buy those assets back in order to devote them to a new venture with a third party. While the control entity had the right to enter into a transaction with the limited partnership that it ultimately controlled, the terms and conditions of those transactions were subject to a number of protections including review by independent directors, review by independent financial experts and, as always, the non-waivable obligation of good faith and fair dealing.

      Parsing the agreement, the Vice Chancellor determined that certain language in the document would give rise only to a rebuttable presumption of good faith consequent to the reliance upon a fairness opinion.

      In the face of that presumption of good faith, the court found that the plaintiff is obligated to plead facts supporting an inference that either the conflicts committee or the general partner of the limited partnership could not subjectively have believed that the transaction was in the best interest of the limited partnership. In this instance, the court found that pleading obligation to have been satisfied. Essentially, as the limited partnership was receiving just less than $1 billion for the assets, and the control entity had already announced the contribution of those assets to the new venture at a $1.5 billion valuation, the gap of $,0500,000 gave rise to a reasonable inference of a problem and at least the possibility the general partner acted with subjective bad faith.