Lessons From Delaware’s Recent El Paso Decision

The Delaware Court of Chancery recently awarded $171 million in damages against the general partner of a master limited partnership (MLP). The ruling, in re El Paso Pipeline Partners, L.P. Derivative Litigation, came in connection with a drop-down that was approved by a conflicts committee with the help of legal and financial advisors, and after the receipt of a fairness opinion.

The decision is the first of its kind in the master limited partnership space. Several lawsuits have previously challenged drop-down transactions, but none had resulted in a liability finding. The opinion reinforces basic principles for deal lawyers and litigators in both MLP and corporate transactions.

The partnership agreement required committee members to subjectively believe that the drop down was in El Paso MLP’s best interests. This standard requires a plaintiff to show either that the general partner intended to act against the partnership’s best interest, or consciously disregarded its duty to make a determination in good faith.

In its post-trial opinion, the court noted that the committee members testified that they believed the transaction was in the best interests of El Paso MLP. The court was not persuaded.

According to the court, just because a transaction is accretive to limited partners does not mean it is in the partnership’s best interests. The court was critical of what it viewed as a “routine” approach and the committee’s failure to take into account what it had learned from a prior process.