GP Has “Broad Flexibility” to Commit Willful Misconduct

In 2021 the Delaware Court of Chancery ordered the General Partner of Boardwalk (a master limited partnership) to pay the company’s former public unit-holders about $700 million in damages in connection with the general partner’s $1.56 billion take-private of Boardwalk. Factual findings were that the GP and its affiliates was liable for willful misconduct because it had opportunistically timed the deal to occur during a short period of regulatory uncertainty and declining prices for Boardwalk’s units, and pressured their law firm to deliver a “contrived,” “sham” opinion to satisfy the only condition of the exercise of its call right. The Delaware Supreme Court reversed that decision in Dec. 2022, but notably did not overturn the Chancery Court’s findings. Its ruling was that the GP had merely made “full use” of the broad “flexibility” a controller is permitted under Delaware law when its fiduciary duties have been contractually eliminated and the absence of those duties has been fully disclosed to investors. The Supreme Court stated that the “proper focus” for the court was not on the validity of the legal opinion but on whether the general partner had acted reasonably in relying on it. It had done so based on its reliance on a second opinion from another law firm that concluded that it would be within the GP’s reasonable judgment to decide to rely on the first opinion. According to the Fried Frank article linked above, a practice may develop based on the case of obtaining an “opinion on an opinion”.