Once in a while, a court decision provides not just guidance for participants in corporate transactions but also can serve as a wakeup call for the players’ legal advisors. Such is the case with the post-trial decision in Bandera Master Fund LP et al v. Boardwalk Pipeline Partners LP, in which Vice Chancellor Laster resolved various disputes regarding a transaction through which Boardwalk Pipeline Partners, LP (“Boardwalk”) was taken private by its controller, Loews Corporation (“Loews”). The resulting $700 million damages award, and sharp criticism of the legal opinions provided in support of the transaction, has garnered headlines, but the decision is also notable for its review of several long-standing principles of Delaware law that provide guidance for contract negotiations and litigation alike.
The Court’s 194-page decision, replete with more than 100 pages of facts, is impervious to summarization; nonetheless, we have mined a few key facts and other takeaways from this voluminous opinion.
Key Factual Background
Loews formed Boardwalk as a master limited partnership (“MLP”) and holding company for interstate pipeline systems for the transportation and storage of natural gas, a business regulated by the Federal Energy Regulatory Commission (“FERC”). In drafting Boardwalk’s partnership agreement before a public offering in 2005, Loews (the “General Partner”) wanted to reserve the option to take Boardwalk private if FERC took regulatory action that would have a material adverse effect on Boardwalk. To this end, Loews included in the agreement a call right, which could be invoked by the General Partner if two conditions were met. First, the General Partner had to receive “an Opinion of Counsel” that Boardwalk’s entity 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.” Second, the General Partner also had to determine that the Opinion was “acceptable.”
In March 2018, FERC proposed a package of new regulatory policies which were subject to review and comment, and could potentially be implemented in the following months. In that period of uncertainty, the General Partner explored exercising the call right to acquire the limited partners’ interests at what the Court described as “a highly attractive price.” The General Partner hired the lawyer who originally had drafted the call right provision in the partnership agreement to provide the legal opinion the partnership agreement required as a pre-condition for exercise of the call.
In the lawsuit brought by holders of the common MLP units, the Court held that neither condition was satisfied. As to the first, the Court held, among other things, that the opinion of counsel was based upon a series of “counterfactual assumptions” designed to yield a desired result. As to the second, the Court held that although the provision was ambiguous, the board that included several independent directors needed to assess the opinion’s acceptability (rather than the General Partner’s sole member, comprised of insiders).
While this lengthy and complex opinion is replete with practical guidance for practitioners, a few key takeaways are as follows:
- Opinions of Counsel As a Condition Precedent Can Pose Risks. This decision highlights the risks associated with any contractual provision that makes a future opinion of counsel a condition precedent. The Court of Chancery previously warned of this issue in Williams Cos., Inc. v. Energy Transfer Equity, L.P., 2016 WL 3576682 (Del. Ch. June 24, 2016), explaining that when parties agree to an opinion of counsel condition precedent, “it is [counsel]’s subjective good-faith determination that is the condition precedent.” In Boardwalk, Vice Chancellor Laster explained that an opinion giver “plainly must have competence in the particular area of law” (which counsel here did not) and proceeding regardless “is not acting in good faith.”
- Be Mindful of Potential Conflicts. As with any critical decision, it is wise to consider the interests and independence of those involved. This includes counsel. Here, the lawyer who drafted the call right was then retained, years later, to spearhead the opinion drafting process—a conflict that the attorneys involved arguably intentionally overlooked. Although the Court disclaimed any finding relating to attorney ethics, the Court noted in a lengthy footnote the pitfalls of not taking seriously the connection between the two retentions when evaluating conflicts. Further, at the risk of stating the obvious, any legal opinion should reflect objective, unbiased judgment and should never be based on the client’s desired result or on fabricated facts.
- Beware of Contra Proferentem. The Court held that the acceptability provision was ambiguous because it did not specify whether the General Partner’s sole member or board of directors had to make that decision. The Court therefore applied the doctrine of contra proferentem, which can apply when a contract is ambiguous, and calls for the ambiguous provision to be construed against the drafter. As for the acceptability provision, the interpretation most favorable to the non-drafter (e., the limited partners) was that the acceptability decision be made by the board of directors, with several independent actors, rather than the insider-controlled sole member. This decision offers an important reminder of the potential power of the contra proferentem doctrine (and of course, the importance of attempting to avoid contractual ambiguities where possible).
- A Material Adverse Effect Remains Difficult To Prove. The Court also offered an important reminder for analyzing when a material adverse effect is likely to occur, noting that under Delaware law, there must be a showing of “a basis in law and in fact” for the “serious adverse consequences prophesied by the party claiming the MAE.” Put simply, “proclaiming that bad things can happen” is insufficient to establish a material adverse effect. The analysis should be performed in good faith with a holistic view of the actual, not hypothetical, facts.
Defendants have publicly stated that they intend to appeal, and we thus expect the Delaware Supreme Court to weigh in on these issues in the months to come.