The plaintiff, Joel A. Gerber, held limited partnership units ("LP units") of Enterprise GP Holdings, L.P., a Delaware limited partnership ("EPE"). Gerber brought this action in the Court of Chancery on behalf of two classes of former public holders of LP units of EPE. On behalf of the first class ("Class I"), Gerber challenged the sale by EPE in 2009 of Texas Eastern Products Pipeline Company, LLC ("Teppco GP") to Enterprise Products Partners, L.P. ("Enterprise Products LP") (the "2009 Sale"). On behalf of the second class ("Class II"), Gerber challenged the triangular merger in 2010 of EPE into a wholly-owned subsidiary of Enterprise Products LP (the "2010 Merger").
Gerber's complaint asserted claims against Enterprise Products Holdings, LLC ("Enterprise Products GP" or "general partner") — EPE's general partner before the 2010 Merger. Other named defendants were Enterprise Products LP; certain members of Enterprise Products GP's Board of Directors (the "Director Defendants"); the Estate of Dan L. Duncan ("Duncan"), who before his death controlled EPE, Enterprise Products LP, and Enterprise Products GP ("Duncan's Estate");
The Defendants moved to dismiss the Complaint in its entirety.
EPE was a Delaware limited partnership engaged in the oil and gas business. Plaintiff Gerber owned EPE LP units continuously from October 24, 2006 until the 2010 Merger in which his EPE LP units were converted into units of Enterprise Products LP.
Enterprise Products LP is a Delaware limited partnership engaged in the oil and gas business. Before the 2010 Merger, EPE and Enterprise Products LP were part of a two-tier limited partnership structure. EPE was the 100% owner of Enterprise Products LP's general partner (Enterprise Products GP). Because EPE had no independent operations, the assets of Enterprise Products LP generated cash flows to both Enterprise Products LP and EPE.
EPCO is a privately-held Texas corporation whose stock was owned, at the time of the 2009 Sale, by Duncan and members of his family. EPCO's principal business was to provide employees, management, and administrative services to Duncan's companies, including Enterprise Products LP, Enterprise Products GP, and (until the 2010 Merger) EPE.
The Director Defendants — Randa Duncan Williams, O.S. ("Dub") Andras, Charles E. McMahen, Edwin E. Smith, Thurmon Andress, Ralph S. Cunningham, Richard H. Bachmann, B.W. Waycaster, and W. Randall Fowler — were at all relevant times directors of Enterprise Products GP (the "Board").
The somewhat labyrinthine relationships among these affiliated entities and their controllers before the 2009 Sale are shown in the following chart:
In May 2007, EPE purchased Teppco GP from a Duncan affiliate in exchange for EPE LP units worth $1.1 billion.
In the 2009 Sale, as consideration for selling Teppco GP to Enterprise Products LP, (i) EPE received $39.95 million worth of Enterprise Products LP's LP units, and (ii) Enterprise Products GP (then owned by EPE) received an approximately $60 million increase in the value of its general partner interest in Enterprise Products LP. The claim challenging the 2009 Sale is essentially that EPE acquired Teppco GP for $1.1 billion in 2007, but two years later was caused by the Defendants to sell Teppco GP to Enterprise Products LP for $100 million — only 9% of EPE's original purchase price.
The 2009 Sale was first presented to the ACG Committee of Enterprise Products GP for its approval. That Committee hired the investment bank, Morgan Stanley & Co. ("Morgan Stanley"), to furnish an opinion on whether the transaction was fair from a financial point of view to EPE and the public holders of its LP units. Morgan Stanley opined that, as of the date of its June 28, 2009 fairness opinion (the "Morgan Stanley 2009 opinion"), "the Consideration to be paid pursuant to the [combined 2009 Sale and Teppco LP Sale] is fair from a financial point of view to EPE and accordingly, to the limited partners of EPE (other than Dan Duncan and his affiliates)." Morgan Stanley cautioned, however, that it expressed "no opinion with respect to ... the fairness to EPE or its limited partners of any particular component of the Consideration (as opposed to the Consideration, taken as a whole), in each case in connection with the [two Sales]." The ACG Committee approved the 2009 Sale and recommended its approval by the Board, and on June 28, 2009 the Board approved the 2009 Sale.
We pause to focus on the consideration that Morgan Stanley opined was fair in its 2009 opinion. The 2009 Sale closed on October 26, 2009, when EPE sold Teppco GP to Enterprise Products LP. As noted, that same day, EPE sold Teppco LP to Enterprise Products LP in a separate but related transaction — the "Teppco LP Sale." The 2009 Sale and the Teppco LP Sale were separately negotiated and were the subjects of separate merger agreements.
As a result of the 2009 Sale, the relationships among the various entities became reconfigured as shown in the chart below:
In July 2010, Enterprise Products LP and the Board of Enterprise Products GP began discussing a merger between EPE and Enterprise Products LP. Between July 2010 and August 23, 2010, Enterprise Products LP made two offers to the Enterprise Products GP Board, which rejected both as inadequate. On August 23, 2010, Enterprise Products LP made a third offer. On August 25, 2010, the Board's ACG Committee met with its legal advisors and discussed the EPE LP unitholders' legal claims pending in Gerber I, as well as the unitholders' potential legal claims that might arise from the 2009 Sale (collectively, the "2007 and 2009 Claims").
After the ACG Committee considered the 2007 and 2009 Claims, the Board made a counteroffer on August 30, 2010. That same day, the ACG Committee of Enterprise Products GP met with its counterpart ACG Committee of Enterprise Products LP. Both ACG Committees exchanged views and information in an effort to arrive at mutually acceptable terms. Later that day, Enterprise Products LP made its final offer: Each LP unit of EPE would be converted into a right to receive 1.5 LP units of Enterprise Products LP.
The Court of Chancery found that a primary purpose of the 2010 Merger was to eliminate the 2007 and 2009 Claims. On September 3, 2010, Morgan Stanley orally opined, and later confirmed in writing, that the 2010 Merger exchange ratio
On September 7, 2010, EPE and Enterprise Products LP announced that they had agreed upon a merger in which Enterprise Products LP would acquire all of EPE's outstanding LP units. The proxy statement sent to the holders of EPE's LP units did not disclose that the 2007 and 2009 Claims had not been considered or valued for purposes of fixing the 2010 Merger consideration.
Enterprise Products LP and certain privately-held entities controlled by Duncan's Estate (including EPCO) collectively owned a combined 76% majority interest of EPE's LP units. Those entities voted their 76% interest in favor of the 2010 Merger, thereby ensuring its approval. On November 22, 2010, EPE merged into a wholly-owned subsidiary of Enterprise Products LP.
As a result of the 2010 Merger, the configuration of the relationships among the entities was again altered, this time as depicted in the following chart:
In his March 2011 amended complaint ("Complaint"), Gerber challenged the 2009 Sale and the 2010 Merger on behalf of the two classes of EPE former public unitholders described above. Gerber's claims are set forth in six Counts.
Count I alleges that because the 2009 Sale was neither fair nor reasonable to EPE and its LP unitholders, the Defendants breached their express contractual duties as well as the implied covenant of good faith and fair dealing, under EPE's Limited Partnership Agreement ("LPA").
In May 2011, the Defendants moved to dismiss the Complaint in its entirety for failure to state a cognizable claim for relief under Court of Chancery Rule 12(b)(6). In an opinion handed down on January 6, 2012, the Court of Chancery granted that motion.
In conducting its legal analysis, the Court of Chancery relied on certain provisions of the Delaware Revised Uniform Limited Partnership Act ("DRULPA")
Section 17-1101(d) of the DRULPA provides that a general partner's duties to a limited partnership or its unitholders, including fiduciary duties, "may be expanded or restricted or eliminated by provision in the [limited] partnership agreement; provided that the [limited] partnership agreement may not eliminate the implied contractual covenant of good faith and fair dealing."
The Vice Chancellor determined that, under DRULPA § 1101(d), the LPA had supplanted the fiduciary duties to which EPE's general partner and EPE's other fiduciaries would otherwise have been subject. Section 7.9(b) of the LPA expressly provided that the conduct of the general partner or any of its "Affiliates" must be in "good faith," defined as a "belie[f] that the determination or other action is in the best interests of the Partnership":
In addition to changing the liability standard, the LPA also created two separate layers of protection designed to insulate the Defendants from judicial review of whether the general partner or its "Affiliates" had satisfied their contractual duty. The first layer of insulation is Section 7.9(a) of the LPA, which covered "conflict of interest" transactions. That provision created four "safe harbors"
The first of those four enumerated safe harbors — "Special Approval" is implicated in this case. That term is defined in the LPA as "approval by a majority of the members of the [ACG] Committee."
The second layer of insulation from judicial review was afforded by Section 7.10(b) of the LPA, which applied more broadly and was not limited to conflict of interest transactions. Section 7.10(b) created a "conclusive presumption" that the general partner acts in "good faith" where the following condition is satisfied:
In addressing the legal sufficiency of the Complaint, the Vice Chancellor determined preliminarily that: (1) the 2009 Sale was a "conflict of interest transaction," because both the purchaser and seller had a common controller;
The court concluded, however, that the LPA had contractually modified the Defendants' fiduciary duties, by eliminating and supplanting them with an express contractual duty to act in good faith. Additionally, the court concluded, even under that good faith standard, Duncan, EPCO, and the Director Defendants were not subject to any contractual liability, for two reasons. First, the 2009 Sale and 2010 Merger received "Special Approval" and therefore the transactions were "deemed approved" and did not breach the contractual duty of good faith. Second, those Defendants were not subject to the implied covenant, because they were not parties to the LPA.
Accordingly, the court focused its analysis primarily on the question of whether the Complaint cognizably alleged that Enterprise Products GP-as EPE's general partner and the only Defendant that signed the LPA-breached the LPA's contractual good faith standard or the implied covenant in connection with the two challenged transactions.
The Vice Chancellor first analyzed the Counts relating to the 2009 Sale and concluded that they stated no legally cognizable claims for relief. The court reasoned as follows: The 2009 Sale had received valid Section 7.9(a) "Special Approval" by the ACG Committee of the Board of Enterprise Products GP, because that Committee's three members all satisfied the independence, qualification, and experience requirements of the United States Securities & Exchange Commission ("SEC") and the rules and regulations of the SEC and the New York Stock Exchange ("NYSE").
Nor (the court held) did the Complaint state a cognizable claim for breach of the implied covenant. The court acknowledged that although the implied covenant "constrains the Special Approval process," that covenant binds only the parties to the partnership contract.
The reason LPA Section 7.10(b) foreclosed contractual liability (the court ruled) was that the ACG Committee (and by logical inference EPE's general partner) had relied upon the Morgan Stanley 2009 opinion, and the Complaint alleged no basis to infer that the general partner had any reason to doubt Morgan Stanley's competence. The court premised its reasoning upon its apparent understanding that Morgan Stanley's 2009 opinion addressed only the fairness of the 2009 Sale. As the court stated in its opinion, Morgan Stanley opined that "the Consideration to be paid pursuant to the [2009 Sale] is fair from a financial point of view to EPE and accordingly, to the limited partners of EPE (other than Dan Duncan and his affiliates)."
In so characterizing Morgan Stanley's 2009 opinion, the court misquoted — and thus perhaps misread — that opinion. In fact, the "Consideration" that Morgan Stanley opined was fair to EPE was the total consideration for the combined 2009 Sale and Teppco LP Sale — not just the component of the total consideration specifically
Because the Complaint did not allege a legally sufficient underlying primary claim for breach of a contractual duty or the implied covenant against Enterprise Products GP or its Affiliates regarding the 2009 Sale, the court determined that the secondary liability claims alleged against the remaining Defendants — tortious interference with the LPA and aiding and abetting the general partner's claimed breaches of duty — were a fortiori also legally insufficient. Accordingly, the court dismissed those secondary liability claims as well.
The Court of Chancery next turned to the 2010 Merger claims. Their gist is that
Specifically, the court held that the Defendants could not have breached any express contractual duty of good faith in the 2010 Merger, because Section 7.9(a)'s Special Approval requirements were satisfied. Nor could the Defendants have breached the implied covenant, since Section 7.10(b)'s "conclusive presumption of good faith" precluded any implied covenant claim. Because the Complaint did not state a cognizable primary liability claim for an underlying contractual breach, it also failed, ipso facto, to state a claim of secondary liability for tortious interference and for aiding and abetting. Additionally, the court dismissed Gerber's separate unjust enrichment claim without specifically addressing it.
This appeal followed.
On appeal, Gerber claims that in determining that his Complaint failed to state any legally sufficient claim for relief, the Court of Chancery reversibly erred. Gerber argues that his Complaint cognizably alleged that: (i) in carrying out the 2009 Sale and the 2010 Merger, Enterprise Products GP and the Director Defendants were subject to both the express contractual duty to act in "good faith" and the implied covenant; and (ii) Enterprise Products GP — aided and abetted by one or more of the remaining Defendants — breached those duties. The Defendants respond that the court properly concluded that they were not subject to, nor did they breach, any duties owed to the partnership or its LP unitholders.
Regarding the 2009 Sale specifically, Gerber claims that the Vice Chancellor erred for three separate reasons. First, he argues that as a matter of law Enterprise Products GP and the Director Defendants were contractually obligated to act in good faith — by both the express terms of the LPA and the implied covenant — and that the court erred in holding otherwise.
To these arguments the Defendants respond that the Director Defendants had no duties under the implied covenant, because the implied covenant applies only to Defendant(s) who signed the LPA — here, only Enterprise Products GP. Moreover, and in any event, the Defendants' compliance with the LPA's "Special Approval" provision relieved them of any liability under the LPA's contractual good-faith standard. Alternatively, even if the implied covenant applies to the Defendants, they did not breach the implied covenant, because the Morgan Stanley 2009 opinion was a proper subject of reliance by Enterprise Products GP. Therefore, under Section 7.10 of the LPA, Enterprise Products GP was entitled to be "conclusively presumed" to have acted in good faith, and thereby insulated from any claim of liability asserted against the general partner or any other Defendant, even under the implied covenant.
Regarding the 2010 Merger, Gerber claims that the Court of Chancery erroneously held that the Defendants did not breach either their contractual duty of good faith or the implied covenant. In support, Gerber reiterates his earlier contentions in connection with the 2009 Sale,
To these arguments the Defendants reiterate their responses to Gerber's 2009 Sale-related arguments, and advance new ones as well. The Defendants argue that the Court of Chancery correctly held that they breached no contractual duty to act in good faith, because the 2010 Merger was separately approved under Section 7.9(a)(i)'s "Special Approval" safe harbor process. In addition, Section 7.10(b)'s "conclusive presumption" precludes claims under the implied covenant, because: (i) the implied covenant is merely a "gap filler" that cannot override the Defendants' express contractual right to rely upon the protections of Sections 7.9(a) and 7.10(b); and (ii) in any event, the implied covenant applies only to parties to the LPA (here, only Enterprises Products GP), which relied on the Morgan Stanley 2010 opinion and consequently became entitled to the LPA's conclusive good faith presumption.
Although these contentions raise a plethora of legal disputes, the issues that are dispositive of this appeal can be reduced to three. The first is whether the plaintiff's claims of liability are all precluded (as the court held) by the "conclusive presumption
That determination raises the second issue, which is whether, because the conclusive presumption does not bar Gerber's claims, the Complaint adequately pleads that EPE's general partner (Enterprise Products GP) breached the implied covenant. As for the 2009 Sale, the Court of Chancery answered that question in the affirmative.
Our disposition of the first two issues requires that the judgment of dismissal be reversed and that the case be remanded for further proceedings. For the guidance of the parties and the trial court on remand, we also identify a third set of issues. They are: (1) the conclusive presumption having been found not to bar a claim under the implied covenant, what Defendants (if any) other than the general partner are subject to claims of secondary liability for tortious interference and/or aiding and abetting a breach of contract; and (2) to the extent any Defendant is subject to those claims, does the Complaint adequately plead them?
Because we are asked to review the dismissal of a complaint for failure to state a claim under Court of Chancery Rule 12(b)(6), our review is de novo.
We begin our analysis by addressing LPA Section 7.10(b)'s conclusive presumption of good faith. We start there because the foundational premise of the Court of Chancery's analysis is that Section 7.10(b) bars any claim under the implied covenant. With respect to the 2009 Sale, the Vice Chancellor explicitly held that:
The Court of Chancery further concluded that "[a]lthough the well-pled facts of the Complaint may suggest that Enterprise Products GP breached the implied covenant, that claim is precluded by Section 7.10(b) of the LPA."
With respect to the 2010 Merger claims — viz., that "the public holders of EPE LP units failed to receive value for certain of EPE's unliquidated claims"
We conclude, for the following reasons, that the foundational premise of the court's reasoning is flawed. Specifically, insofar as Section 7.10(b) creates a conclusive presumption of good faith, that provision does not bar a claim under the implied covenant.
The flaw in the court's reasoning stems from a decision by the LPA's drafters to define a contractual fiduciary duty in terms of "good faith" — a term that is also and separately a component of the "implied covenant of good faith and fair dealing." Although that term is common, the LPA's contractual fiduciary duty describes a concept of "good faith" very different from the good faith concept addressed by the implied covenant. In ASB Allegiance Real Estate Fund v. Scion Breckenridge Managing Member, LLC, the Court of Chancery articulated the important differences between the implied covenant and the fiduciary duty concepts of good faith.
Although the court in ASB Allegiance was comparing the analysis under the implied covenant to the analysis under common law fiduciary duty precepts, its reasoning applies equally to contractual fiduciary duties, such as the LPA's "good faith" standard. Under Section 7.9(b), Enterprise Products GP and its Affiliates must make all determinations and take or decline to take any action in "good faith." The LPA defines "`good faith' for purposes of this Agreement" as a "belie[f] that the determination or other action is in the best interests of the Partnership." Like a common law fiduciary duty, Section 7.9(b)'s contractual fiduciary duty analysis looks to the parties as situated at the time of the wrong, and inquires whether Enterprise Products GP or its Affiliates "believe[d] that the determination or other action [was] in the best interests of the Partnership." That is different from the standard that is embedded in the implied covenant.
LPA Section 7.10(b)'s conclusive presumption must be read together with Section 7.9(b). Section 7.9(b) imposes a contractual fiduciary duty to act in "good faith," and defines "good faith" for the "purposes of this [a]greement." Under Section 7.10(b), Enterprise Products GP and its Affiliates are conclusively presumed to have met this standard if they rely upon the opinion of a qualified expert advisor. Nothing in Section 7.10(b) pertains to or addresses the implied covenant.
The reasoning in the Vice Chancellor's opinion improperly conflates two distinct concepts — the implied covenant and the LPA's contractual fiduciary duty — and ignores the temporal distinction between them.
Were we to adopt the Vice Chancellor's construction of Section 7.10(b), that would lead to nonsensical results. Examples readily come to mind of cases where a general partner's actions in obtaining a fairness opinion from a qualified financial advisor themselves would be arbitrary or unreasonable, and "thereby frustrat[e] the fruits of the bargain that the asserting party reasonably expected."
Having so determined, we next analyze whether Gerber has pled facts that, if true, would establish that Enterprise Products GP breached the implied covenant.
According to the Complaint, the 2009 Sale was a grossly unfair transaction wherein the Defendants caused EPE to sell Teppco GP to Enterprise Products LP for only 9% of EPE's original purchase price. Enterprise Products GP, acting through its ACG Committee, obtained the Morgan Stanley 2009 opinion to trigger Section 7.10(b)'s conclusive presumption that Enterprise Products GP satisfied its contractual duty of good faith. The Complaint pleads that the Morgan Stanley 2009 opinion did not address whether holders of EPE's LP units received fair consideration
As the Vice Chancellor noted, the LPA's "protections were minimal" and "did not provide EPE's public investors with anything resembling the protections available at common law."
We answer that question in the affirmative. When Gerber purchased EPE LP units, he agreed to be bound by the LPA's provisions, which conclusively deemed Enterprise Products GP's contractual fiduciary duty to be satisfied, if Enterprise Products GP relied upon the opinion of a qualified expert. At the time of contracting, however, Gerber could hardly have anticipated that Enterprise Products GP would rely upon a fairness opinion that did not fulfill its basic function — evaluating the consideration the LP unitholders received for purposes of opining whether the transaction was financially fair.
A similar analysis applies equally to the 2010 Merger challenges. The Vice Chancellor held that the Complaint pled that a principal purpose of the 2010 Merger was to terminate the 2007 and 2009 Claims. Despite that purpose, Morgan Stanley did not independently value the 2007 and 2009 Claims in assessing the 2010 Merger's fairness in that firm's 2010 opinion, nor did Enterprise Products GP obtain another valuation. Although the Morgan Stanley 2010 opinion stated that the 2010 Merger consideration was fair without considering the 2007 and 2009 Claims; it did not "address whether the consideration was fair with the [2007 and 2009
Although Gerber has pled that Enterprise Products GP breached the implied covenant, that does not end the analysis. If Enterprise Products GP independently satisfied the contractual Special Approval safe harbor in Section 7.9(a), then by Section 7.9(a)'s plain language, the general partner did not breach the LPA. Therefore the Court must address this second layer of contractual insulation, and determine whether the Complaint cognizably alleges that Enterprise Products GP violated the implied covenant in its effort to comply with Section 7.9(a). We conclude that it does.
As noted, the second layer of contractual insulation from judicial review is the "Special Approval" process that is a safe harbor from liability under Section 7.9(a)(i) of the LPA. Both transactions under attack in this case were made subject to the Special Approval process. Under LPA Section 7.9(a), compliance with that process relieves the general partner (Enterprise Products GP) of any duty, in law or equity. That safe harbor, however, is limited. The selection and carrying out of the Special Approval process must satisfy both the express overarching contractual duty in Section 7.9(b) to act in good faith and the duty under the implied covenant.
The ACG Committee gave the 2009 Sale and 2010 Merger Special Approval and relied on a fairness opinion in doing so. Without considering the implied covenant claims, Section 7.10(b)'s conclusive presumption and Section 7.9(a)'s safe harbor apply and therefore, Enterprise Products GP is presumed to have complied with its contractual duty to act in good faith. Accordingly, the Court of Chancery properly dismissed Gerber's claims alleging violations of the LPA's contractual fiduciary duty of good faith. But, the Court of Chancery also correctly held that the implied covenant independently constrains the Special Approval process. We conclude that Gerber has pled claims that, in its attempt to obtain Special Approval, Enterprise Products GP breached the implied covenant.
With respect to the 2009 Sale, the Court of Chancery held that: (i) Enterprise Products GP had a duty under the implied covenant to exercise its discretion reasonably when choosing the Special Approval process,
The Court of Chancery held that the Complaint cognizably alleges that the general partner selected the Special Approval process in bad faith in breach of its duties under the implied covenant.
The Court of Chancery held that Gerber pled that Enterprise Products GP breached the implied covenant when it selected the Special Approval process from among Section 7.9(a)'s four alternatives. Our independent review of the Complaint confirms that it alleges an implied covenant violation that survives a motion to dismiss. The LPA defines Special Approval as "approval by a majority of the members of the [ACG] Committee"
Here, Defendants argue that the ACG Committee relied on the Morgan Stanley 2009 opinion when it granted Special Approval. We have held that Gerber could not have anticipated that Enterprise Products GP would rely upon a fairness opinion that failed to evaluate the consideration the LP unitholders received when concluding that the 2009 Sale was fair. Nor could Gerber have anticipated that the ACG Committee would grant Special Approval based on their reliance on such a flawed opinion. Although the ACG Committee had no contractual duty to obtain a fairness opinion, the parties would not have agreed that the ACG Committee could obtain and rely on a fairness opinion so flawed.
We reach the same conclusion with respect to the 2010 Merger claim. That claim is that Enterprise Products GP did not act in good faith in effectuating the Merger, because that transaction was primarily intended to-and did-terminate EPE's 2007 and 2009 Claims without compensating EPE's LP unitholders for their value. In its opinion, the Court of Chancery recognized that "the general partner may enter into a merger, a principal purpose of which is to terminate claims belonging to the limited partnership, so long as the general partner considers the value of those claims in determining whether to enter into the merger."
It is inferable from both the Complaint and the Court of Chancery opinion that, but for the LPA's Special Approval process and Section 7.10(b)'s conclusive presumption, the court would have found that the Complaint cognizably alleged that the general partner breached the implied covenant in carrying out the 2010 Merger. There is, however, room for debate on that score, because the court did not specifically address the implied covenant claim in the 2010 Merger context. We, however, are able to analyze the Complaint independently and conclude that it states legally sufficient claims that the general partner breached the implied covenant in carrying out the 2010 Merger.
The Complaint alleges that: (i) a principal purpose of that Merger was to eliminate the 2007 and 2009 Claims belonging to EPE, (ii) those claims were not valued either by the general partner or Morgan Stanley in fixing the Merger consideration or in opining on its fairness to the LP unitholders of EPE, and (iii) the general partner was aware of those facts. Shorn of the insulating presumption created by Section 7.10(b) and Section 7.9(a) of the LPA, those pled facts permit a reasonable inference that the 2010 Merger was the product of a breach of the general partner's duty under the implied covenant.
Although the LPA does not expressly forbid the general partner from acting in this alleged fashion when effecting a merger, it is reasonably inferable that, had the parties focused on that question at the time of contracting, they would have proscribed such conduct. At this stage it cannot be concluded as a matter of law, that the LP unitholders would have agreed to allow the general partner to act in that manner. The LP unitholders had a reasonable expectation that if the general partner chose to terminate their investment by way of a merger primarily intended to eliminate valuable assets of the limited partnership (here, the 2007 and 2009 Claims), the LP unitholders would be compensated for the value of those eliminated claims. The parties would not have agreed to allow the general partner to eliminate those claims and also to exclude their value from the 2010 Merger consideration.
We conclude that, in holding that the Complaint failed to state a cognizable claim for relief in connection with the 2010 Merger, the Court of Chancery reversibly erred.
Our analysis thus far has focused on the liability claims against EPE's general partner, Enterprise Products GP. The Complaint, however, also asserts primary claims of liability against the remaining Defendants for breach of express and implied contractual duties, as well as secondary liability claims for tortious interference with contract rights and aiding and abetting the general partner's breach of contract.
The Court of Chancery held that the "safe harbor" and "conclusive presumption"
Because the Court of Chancery did not address those issues in the first instance, that court is instructed to do so on remand.
For the above reasons, the judgment of the Court of Chancery is affirmed in part and reversed in part, and the case is remanded for further proceedings consistent with the rulings in this Opinion. Jurisdiction is not retained.
Attachment I to the LPA ("Defined Terms"). No party disputes that this provision encompasses all of the Defendants.
Id. at *13 (emphasis in original).
That reasoning does not parse. The statute explicitly prohibits any partnership agreement provision that eliminates the implied covenant. It creates no exceptions for contractual eliminations that are "express." Although our Opinion in Nemec characterized the implied covenant as a "gap filler," that description cannot fairly be read to support the court's reasoning or result in this case. Our Nemec Opinion was not intended to be, nor should it be read as, an open-ended invitation to scriveners of partnership agreements to "fill the gap" by employing "express" contractual provisions that manifestly contravene Section 1101(d) of the DRULPA.
Suppose that Section 7.10(b) of the LPA provided (instead of its actual language) that "no Partner, or Affiliate of any Partner, shall have any duty, arising out of the implied covenant of good faith and fair dealing, to act in good faith; nor shall a claim that any such duty was breached be enforceable in any court of law or equity." It cannot seriously be argued that that provision (as worded) would survive scrutiny under Section 1101(d) of the DRULPA. In every meaningful sense, that hypothetical LPA provision "eliminates" the implied covenant — a result that the statute plainly proscribes. Under the court's reasoning, however, that (hypothetical) provision would pose no legal obstacle, because it creates an "express right" not to be subject to the implied covenant or any claim.
