IN THE SUPREME COURT OF THE STATE OF DELAWARE

EMPLOYEES RETIREMENT § SYSTEM OF THE CITY OF ST. LOUIS, § No. 291, 2016 § Plaintiff Below, § Court Below: Court of Appellant, § Chancery of the State of § Delaware v. § § TC PIPELINES GP, INC., § No. 11603-VCG TRANSCANADA AMERICAN § INVESTMENTS, LTD., and § TRANSCANADA CORPORATION, § § Defendant Below, § Appellees, § § and § § TC PIPELINES, LP, § § Nominal Defendant Below, § Appellee. §

Submitted: December 14, 2016 Decided: December 19, 2016

Before STRINE, Chief Justice; HOLLAND, VALIHURA, VAUGHN, and SEITZ, Justices, constituting the Court en Banc.

ORDER

(1) The appellants challenge a drop-down transaction between a limited

partnership—TC Pipelines—and the ultimate owner of its general partner— TransCanada Corporation. 1 The limited partnership agreement provides, in

relevant part, that conflicted transactions will be ―conclusively deemed fair and

reasonable‖ to the limited partnership if the general partner obtains ―Special

Approval‖2—approval by a Conflicts Committee made up of two or more directors

―who are neither security holders, officers nor employees of the General Partner

nor officers or employees of any Affiliate of the General Partner.‖ 3 When a

transaction has been deemed fair and reasonable by Special Approval or some

other method outlined in the limited partnership agreement, the agreement provides

that the transaction is conclusively: i) approved by the limited partners, ii) not a

breach of the limited partnership agreement, and iii) not a breach of ―any duty

stated or implied by law or equity.‖4 Below, the Court of Chancery dismissed the

complaint in a thorough written decision. The appellant‘s complaint focused

singularly on alleging: i) that the drop-down transaction was not economically fair

to the limited partnership, ii) that if the transaction could be thought unfair an

inference arose that the Conflicts Committee therefore must have acted in

subjective bad faith, iii) that it was implied in the limited partnership agreement

that the Conflicts Committee must act in good faith, and, therefore, iv) that this

1 Emps. Ret. Sys. of St. Louis v. TC Pipelines GP, Inc., 2016 WL 2859790, *1–2 (Del. Ch. May 11, 2016) (describing the transaction). 2 App. to Appellant‘s Opening Br. at A159 (Second Amended and Restated Agreement of Limited Partnership of TC Pipelines, LP § 7.9(a)) [hereinafter Limited Partnership Agreement]. 3 Id. at A122 (Limited Partnership Agreement § 1.1). 4 Id. at A159 (Limited Partnership Agreement § 7.9(a)).

2 bare allegation of economic unfairness thus supported a claim for breach of the

implied covenant of good faith and fair dealing. The Court of Chancery rejected

the viability of this theory, noting that the appellant had not pled any facts

supporting an inference that the Conflicts Committee had any improper motive or

other specific reason to act in bad faith, had not pled any specific acts of

misfeasance by the Conflicts Committee in its deliberation process, and that the

limited partnership agreement made the Conflicts Committee‘s judgment

conclusive, and thus allowing a complaint to proceed solely because the

transaction‘s economic merits were subject to reasonable questions would be

inconsistent with the evident purpose of the safe harbor created by Conflicts

Committee approval in the agreement. In so ruling, the Court of Chancery relied

upon earlier authority of this Court and the Court of Chancery itself5 and did not

rule out the possibility that specific circumstances could be pled regarding the

motives or other conduct of a Conflicts Committee that could give rise to an

5 See 2016 WL 2859790 at *5–6; see also Haynes Family Trust v. Kinder Morgan G.P., Inc., 135 A.3d 76, 2016 WL 912184, at *1–2 (Del. Mar. 10, 2016) (TABLE) (―[T]here was no room for a substantive judicial review of the fairness of the transaction because the general partner had complied with its contractual duties in the approval process of the merger and that compliance conclusively established the fairness of the transaction, precluding the judicial scrutiny that the unitholders now seek.‖); Gerber v. Enter. Prod. Holdings, LLC, 67 A.3d 400, 418 (Del. 2013) (considering application of implied covenant in limited partnership context), aff’d in part rev’d in part on other grounds, 68 A.3d 665, 2013 WL 1914714 (Del. 2013), overruled in part on other grounds, 67 A.3d 808 (Del. 2013); Brickell Partners v. Wise, 794 A.2d 1, 4 (Del. Ch. 2001) (interpreting similar transaction approval provisions).

3 implied covenant claim.6 In other words, we read the Court of Chancery as having

issued a careful, case-specific ruling that addressed the stark argument made by the

appellant, in which its sole basis for alleging an implied covenant claim was its

contention that the drop-down transaction was economically unfair to the limited

partnership.

(2) The Court of Chancery rejected that contention, holding that the

appellant could not escape the effect of the conflict of interest provisions of the

limited partnership agreement solely by contending that the Conflicts Committee

had approved an unfair transaction and must therefore have acted in bad faith. On

appeal, the appellant reiterates its arguments below that pleading facts supporting

an inference that a transaction is unfair creates an inference that the Conflicts

Committee acted in bad faith and thus states an implied covenant claim.7

(3) The appellant also sought to buttress that core argument by noting that

the limited partnership agreement required the Conflicts Committee to consider the

6 2016 WL 2859790 at *7 n.48 (observing that bribery of otherwise-independent directors by the general partner would have been the sort of unanticipated situation meriting application of the implied covenant). 7 We note that the appellant has not attempted to argue that it has pled facts that would suggest that the drop-down transaction satisfied the stringent definition of waste, that no reasonable person of good faith would have approved the transactions as fair to the limited partnership. See STEPHEN A. RADIN, THE BUSINESS JUDGMENT RULE 388 (2009) (―A waste claim requires a showing that the corporation has entered into a transaction in which it received consideration ‗so inadequate in value that no person of ordinary, sound business judgment would deem it worth what the corporation has paid.‘‖ (quoting Grobow v. Perot, 539 A.2d 180, 189 (Del. 1988))); see also Harbor Fin. Partners v. Huizenga, 751 A.2d 879, 901 (Del. Ch. 1999) (―The test for waste is whether any person of ordinary sound business judgment could view the transaction as fair.‖). Rather, the plaintiff has simply argued that the transaction is not, in its view, fair, and pled some facts to support that contention.

4 fairness and reasonableness of the drop down ―in the context of all similar or

related transactions,‖ 8 and that, because the drop down was, in the appellant‘s

view, less favorable than two previous drop downs, an inference arose that the

Conflicts Committee acted in conscious bad faith to approve an unfair transaction.

But, the appellant never pled that the Conflicts Committee did not know about

those transactions or consider them in its deliberations. In fact, at oral argument

before this Court, the appellant admitted that this was the case, that the Conflicts

Committee likely knew about the previous transactions, and that its argument was

that because the Committee members knew the earlier transactions were more

favorable, the Conflicts Committee could not have approved the drop-down

transaction at issue in good faith. Thus, the appellant‘s argument before the Court

of Chancery boiled down to saying that because the price was arguably less

favorable to the limited partnership in this drop down than in earlier drop downs,

the Conflicts Committee must have acted in bad faith—an argument the Vice

Chancellor rejected.

(4) We agree with the Court of Chancery‘s conclusion that the appellant‘s

arguments are without merit. As in analogous circumstances in the corporate

context, 9 the appellant cannot escape the conclusive effect given to Conflicts

8 See App. to Appellant‘s Opening Br. at A160 (Limited Partnership Agreement § 7.9(c)). 9 E.g., In re MFW Shareholders Litigation, 67 A.3d 496, 518 (Del. Ch. 2013), aff’d sub nom., Kahn v. M&F Worldwide Corp, 88 A.3d 635 (Del. 2014) (―For a court to determine whether a

5 Committee approval solely by attacking the fairness of the underlying transaction.

If that was the case, the safe harbor would be virtually no safe harbor at all as

every case would proceed to discovery so long as a plaintiff could plead facts

suggesting a rational person could deem the transaction unfair. Rather, as the

Court of Chancery explained, the implied covenant is narrowly applied, and if a

plaintiff is to invoke it, the plaintiff must plead some specific facts suggesting that

the Conflicts Committee process was tainted in some specific way by unanticipated

behavior, such as the example of bribery the Vice Chancellor pointed to, or other

factors bearing on whether the Conflicts Committee process fulfilled its evident

contractual purpose. Like the Court of Chancery, we do not rule out the possibility

that future plaintiffs may invoke the implied covenant successfully in this context,

but like the Court of Chancery, we agree that if a safe harbor provision such as the

limited partnership agreement‘s § 7.9(a) applies, plaintiffs may not invoke the

covenant solely by contending that a transaction is unfair to the limited partnership

and that the Conflicts Committee therefore must have acted in bad faith. Also, like

the Court of Chancery, we believe it is not the role of courts to identify future

situations in which the implied covenant may be invoked. Rather, it is up to

special committee was effective in obtaining a good economic outcome involves the sort of second-guessing that the business judgment rule precludes. When a committee is structurally independent, has a sufficient mandate and cannot be bypassed, and fulfills its duty of care, it should be given standard-shifting effect.‖). This Court later reaffirmed that the pleading stage is an appropriate point to determine if a transaction complied with MFW‘s procedural requirements. Swomley v. Schlecht, 128 A.3d 992, 2015 WL 7302260 (Del. Nov. 19, 2015) (TABLE) (affirming Swomley v. Schlecht, C.A. No. 9355-VCL (Del. Ch. Aug. 27, 2014)).

6 plaintiffs in specific cases to develop facts relevant to the situation they are

addressing and to plead how those facts support a claim.

NOW, THEREFORE IT IS ORDERED that the judgment of the Court of

Chancery is AFFIRMED.

BY THE COURT:

/s/ Leo E. Strine, Jr.

Chief Justice

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