Boardwalk Pipeline v. Bandera Master Fund LP
Opinion
IN THE SUPREME COURT OF THE STATE OF DELAWARE
BOARDWALK PIPELINE § PARTNERS, LP, BOARDWALK § PIPELINES HOLDING CORP., § BOARDWALK GP, LP, § BOARDWALK GP, LLC, § and LOEWS CORPORATION, § § No. 1, 2022 Defendants-Below, § Appellants-Cross Appellees, § Court Below: Court of Chancery § of the State of Delaware v. § § C.A. No. 2018-0372 BANDERA MASTER FUND LP, § BANDERA VALUE FUND LLC, § BANDERA OFFSHORE VALUE § FUND LTD., LEE-WAY § FINANCIAL SERVICES, INC., § and JAMES R. MCBRIDE, on behalf § of themselves and similarly situated § BOARDWALK PIPELINE § PARTNERS, LP UNITHOLDERS, § § Plaintiffs-Below, § Appellees-Cross Appellants. § Submitted: September 14, 2022 Decided: December 19, 2022 Before SEITZ, Chief Justice; VALIHURA, VAUGHN, TRAYNOR, Justices; and LEGROW, Judge,1 constituting the Court en Banc.
Upon appeal from the Court of Chancery of the State of Delaware: REVERSED AND REMANDED.
William Savitt, Esquire (argued), Sarah K. Eddy, Esquire, Adam M Gogolak, Esquire, Wachtell, Lipton, Rosen & Katz, New York, New York; Daniel A. Mason, Esquire, Paul, Weiss, Rifkind, Wharton & Garrison LLP, Wilmington, Delaware; Stephen P. Lamb, Esquire, Andrew G. Gordon, Esquire, Harris Fischman, Esquire, Robert N. Kravitz, Esquire, Carter E. Greenbaum, Esquire, Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, New York; Srinivas M. Raju, Esquire, Blake Rohrbacher, Esquire, Matthew D. Perri, Esquire, John M. O’Toole, Esquire, Richards, Layton & Finger, P.A., Wilmington, Delaware; Rolin P. Bissell, Esquire, Young Conaway Stargatt & Taylor LLP, Wilmington, Delaware, for Defendants Below, Appellants-Cross Appellees Boardwalk Pipeline Partners, LP, Boardwalk Pipelines Holding Corp., Boardwalk GP, LP, Boardwalk GP, LLC, and Loews Corporation.
A. Thompson Bayliss, Esquire (argued), J. Peter Shindel, Jr., Esquire, Daniel G.
Paterno, Esquire, Eric A. Veres, Esquire, Samuel D. Cordle, Esquire, Abrams & Bayliss LLP, Wilmington, Delaware for Plaintiffs Below, Appellees-Cross Appellants Bandera Master Fund LP, Bandera Value Fund LLC, Bandera Offshore Value Fund Ltd., Lee-Way Financial Services, Inc., and James R. McBride, on behalf of themselves and similarly situated Boardwalk Pipeline Partners, LP Unitholders.
SEITZ, Chief Justice, for the Majority: Oil and gas pipeline businesses transport petroleum products for their producer-customers. They often organize as Delaware Master Limited Partnerships (“MLPs”) to take advantage of tax benefits from Federal Energy Regulatory Commission (“FERC”) regulations. Under Delaware law, the MLP sponsor can structure the organizational agreements to permit maximum flexibility over investments and operations. Perhaps most significantly, a sponsor can eliminate fiduciary duties, meaning that an investor’s rights are, for the most part, limited to the four corners of the MLP agreements. It is safe to generalize that MLP prospectuses warn of the sponsor’s lopsided rights that include their right to make self-interested decisions to the economic disadvantage of the public investors.
The Boardwalk MLP sponsors took full advantage of the flexibility permitted under Delaware law. The Boardwalk limited partnership agreement (the “Partnership Agreement”) disclaimed the general partner’s fiduciary duties. It included a conclusive presumption of good faith when relying on advice of counsel.
It exculpated the general partner from damages under certain conditions. And the sponsors disclosed the investment risks in detail to the public investors.
At issue in this appeal is whether Boardwalk’s general partner properly exercised a call right to take the Boardwalk MLP private. Under the Partnership Agreement, the general partner could exercise a call right for the public units if it received an opinion of counsel acceptable to the general partner that a change in FERC regulations “has or will reasonably likely in the future have a material adverse effect on the maximum applicable rate that can be charged to customers.”
The Boardwalk MLP general partner received an opinion of counsel from Baker Botts, a Texas-based law firm, that a change in FERC policy met the call right condition (the “Baker Botts Opinion”). Skadden, a New York-based law firm, advised that (a) it would be reasonable for the sole member, an entity in the Boardwalk MLP structure, to determine the acceptability of the opinion of counsel for the general partner; and (b) it would be reasonable for the sole member, on behalf of the general partner, to accept the Baker Botts Opinion (the “Skadden Opinion”).
The sole member followed Skadden’s advice and caused the Boardwalk MLP general partner to exercise the call right and to acquire all the public units through a formula in the Partnership Agreement.
The Boardwalk MLP public unitholders filed suit and claimed that the general partner improperly exercised the call right. In a post-trial opinion, the Court of Chancery concluded that the general partner improperly exercised the call right because the Baker Botts Opinion had not been issued in good faith; the wrong entity in the MLP business structure determined the acceptability of the opinion; and the general partner was not exculpated from damages under the Partnership Agreement.
The court awarded almost $700 million in damages to the public unitholders for what it found were improperly redeemed units.
On appeal, the Boardwalk entities argue that the court erred as a matter of law and fact when it found that the Baker Botts Opinion was not issued in good faith; erred as a matter of law when it interpreted the acceptability requirement; should have exculpated the general partner and others from damages; and exceeded its discretion when awarding damages. After our review, we agree with the Boardwalk entities that the sole member was the correct entity to determine the acceptability of the opinion of counsel. We also agree with the Boardwalk entities that the sole member, as the ultimate decisionmaker who caused the general partner to exercise the call right, reasonably relied on Skadden’s opinion, and that the sole member and the general partner are therefore conclusively presumed to have acted in good faith in exercising the call right. Thus, the general partner and others were exculpated from damages under the Partnership Agreement. We reverse the Court of Chancery’s judgment and remand for further proceedings consistent with this opinion. We do not address any other arguments on appeal.
I.
A.
FERC, as the federal regulator of energy policy, sets the maximum rates, known as recourse rates, that oil and gas pipeline owners can charge shippers that send oil and gas through pipelines. 2 FERC adjusts recourse rates through an adversarial proceeding known as a rate case.3 FERC, shippers, or pipeline owners can bring a rate case if the parties think the rates are too high or too low.4 In a rate case, FERC “uses a methodology called cost-of-service ratemaking under which rates are designed based on a pipeline’s cost of providing service.”5 The idea is to allow a pipeline owner to recover its costs and create a reasonable rate of return for investors (the “return on equity” or “ROE”).6 Cost-of-service ratemaking is a fact- specific and intensive process that considers geographic zones, fixed and variable costs, and the type of shipping.7 Recourse rates do not change without a rate case, even with significant cost-of-service changes.8 And a change in one cost-of-service variable generally does not support a change in recourse rates without a complete review of all other components: focusing only on one factor is known as “single- issue ratemaking,” which FERC generally prohibits.9
FERC’s formula for cost of service historically includes the pipeline owner’s income taxes. Before 1995, all pipeline owners could incorporate an income tax allowance in their cost of service.10 Including income tax in the cost-of-service leads to a higher cost of service and generally allows pipeline owners to charge higher recourse rates through the cost-of-service ratemaking process.11 The treatment of accumulated deferred income taxes (“ADIT”) was one component of the tax allowance.12 Under federal tax provisions, pipeline owners can utilize accelerated depreciation rather than straight-line depreciation to depreciate their assets. FERC, however, does not recognize accelerated depreciation.14 As such, pipeline owners sometimes pay lower taxes than anticipated by FERC’s cost-of-service calculations. In other words, they claim a depreciated asset before FERC projects the asset will depreciate, and therefore have a lower cost of service than predicted in that year.15
On the flip side, because taxes are deferred to future years, this practice results in greater taxes and higher costs of service than FERC predicts for later years.16 The system of accelerated depreciation and tax deferral “effectively provides [FERC- regulated pipelines] with cost-free capital” that functions as an interest free-loan.17 FERC, recognizing this, historically subtracted a pipeline’s ADIT balance from the rate base for the cost-of-service calculations, benefiting shippers.18 When a rate case concludes, a pipeline’s recourse rates are published in a “tariff” schedule. 19 These recourse rates, or “tariff” rates, remain in effect until adjusted by future proceedings.20 In competitive shipping markets, however, the pipeline owner can negotiate separate contractual rates “not bound by the maximum and minimum recourse rates in the pipeline owner’s tariff.”21 These are referred to as “negotiated” rates.22 Pipeline owners can also “‘selectively discount their rates,” and the resulting rates are referred to as “discounted” rates.23 In any case, the tariff or recourse rate is the rate that, should negotiations fail, becomes the default rate.24 an asset’s life.” (quoting Inquiry Regarding the Effect of the Tax Cuts and Jobs Act on Commission-Jurisdictional Rates, 83 Fed. Reg. at 12373-74)).
The availability of discounted and negotiated rates often mean that a pipeline owner’s revenues and ultimate ROE are lower than they would be under recourse rates.25 The United States Court of Appeals for the District of Columbia (the “DC Circuit”) has addressed tax policy for pipelines organized as limited partnerships, of which MLPs are one publicly traded variety. In a 1990 case, the DC Circuit held that FERC could not engage in “retroactive ratemaking” if it abolished ADIT and required pipeline owners to return the balance over upcoming years, because it would be “forcing a utility to disgorge the proceeds of rates that have been finally approved and collected.”26 And in 1995, in Lakehead Pipeline Co., Ltd. P’ship, FERC decided that a pipeline organized as a limited partnership could claim an income tax allowance for partnership interests held by a corporation.27 The change accounted for the double taxation of the distributions to the investors in the corporate entities that held pipeline partnership interests and the higher returns those investors would require as an offset.28 This became known as the Lakehead Policy.29
In 2004, the DC Circuit abrogated the Lakehead Policy because the Commission had not “suppl[ied] reasoning for differentiating between individual and corporate tax liability” for the purpose of allocating tax allowances.30 In 2005, in response to this ruling, FERC abandoned the Lakehead Policy and allowed pipeline owners organized as limited partnerships to claim an income tax allowance for all partners, regardless of a partner’s corporate status (the “2005 Policy”). 31 Pipelines organized as limited partnerships, which do not pay entity-level income taxes but were now “allowed a full tax allowance[,]” became attractive investment vehicles.32 B.
Loews Corporation (“Loews”) formed Boardwalk Pipeline Partners, LP (“Boardwalk”) to take advantage of FERC’s policy change and went public in 2005 as an MLP. 33 Typical of interlocking agreements in the MLP structure, Loews owned a majority of Boardwalk’s units through a limited partnership: Boardwalk GP, LP (the “General Partner”).34 The General Partner had its own general partner, Boardwalk GP, LLC (the General Partner of the General Partner or “GPGP”).35 The GPGP had a board of directors (the “GPGP Board”) and a sole member: Boardwalk Pipelines Holding Corp. (the “Sole Member” or “Holdings”).36 The Sole Member was a wholly owned subsidiary of Loews and its board (the “Sole Member Board”) was controlled by Loews insiders. 37 As the Court of Chancery summarized the ownership structure, “[t]hrough Holdings, Loews controlled the GPGP. Through the GPGP, Loews controlled the General Partner. Through the General Partner, Loews controlled Boardwalk and its subsidiaries.”38 The Boardwalk subsidiaries operated interstate natural gas pipeline systems. 39 The following diagram, from Boardwalk’s 10-K, illustrates the partnership/corporate structure:40
The GPGP LLC Agreement (the “LLC Agreement”) required the GPGP Board to have between five and eight members, with at least three independent directors serving on an audit committee.41 At the relevant time, the GPGP Board had eight members: four independent directors, and four Loews insiders.42 The four Loews directors on the GPGP Board were:
• Kenneth I. Siegel, Senior Vice President of Loews and Chairman of the GPGP Board; • Andrew H. Tisch, the Co-Chairman of the board of directors of Loews, the Chairman of the Executive Committee of Loews, and member of the Office of the President of Loews; • Peter W. Keegan, a Senior Advisor to Loews; and • Stanley C. Horton, the President and Chief Executive Officer of Boardwalk.43 During the relevant period, the Sole Member directors were Siegel, Keegan, and Jane Wang, a Vice President of Loews.44 C.
There was always a possibility that FERC tax policy could change again.45 Thus, when Loews took Boardwalk public, it included a call right in Section 15.1 of the Partnership Agreement.46 The call right gives Boardwalk’s General Partner the right to acquire Boardwalk’s public limited partner interests under two Partnership Agreement provisions: Section 15.1(a) if the General Partner and its affiliates own at least 80% of Boardwalk’s total outstanding units; or Section 15.1(b) if the General Partner and its affiliates own more than 50% and the following condition is met:
The General Partner receive[s] an Opinion of Counsel that the Partnership’s status as an association not taxable as a corporation and not otherwise subject to an entity-level tax for federal, state or local income tax purposes has or will reasonably likely in the future have a material adverse effect on the maximum applicable rate that can be charged to customers . . . .47 The “Opinion of Counsel” definition in the Partnership Agreement required that the “written opinion of counsel” be “acceptable to the General Partner.” 48 In other words, before the General Partner could exercise the call right under Section 15.1(b), the General Partner had to find the opinion acceptable. The Partnership Agreement did not address which entity would act on behalf of the General Partner in accepting the opinion, the Sole Member or the GPGP Board.49 As explained later, these details were set forth in the LLC Agreement.50 The Partnership Agreement also provided that, in deciding whether to exercise the call right, the General Partner was free of any fiduciary duty and acted in its individual capacity. 51 In other words, it was bound only by the non-waivable implied covenant of good faith and fair dealing.52 Once the General Partner received an acceptable opinion, the General Partner had 90 days to trigger the call right, after which it would purchase all outstanding limited partner interests “at a purchase price . . . equal to the average of the daily Closing Prices . . . for the 180 consecutive Trading Days immediately prior to the date three days prior to the date” on which the General Partner had mailed notice that it would be exercising the call right.53 Two other Partnership Agreement provisions were relevant to the call right exercise. The first was Section 7.8(a) that exculpated the General Partner from monetary liability absent bad faith, fraud, willful misconduct, or criminality.54 The second was Section 7.10(b) that provided a conclusive good faith presumption for any action taken in reliance on expert advice, including that of legal counsel.55 D.
Between 2005 and 2017, Boardwalk’s public filings explained in great detail the General Partner’s authority and conflicts, and the self-interested decision-making other action free of any fiduciary duty or obligation whatsoever to the Partnership, any Limited Partner or Assignee, and the General Partner . . . shall not be required to act in good faith . . . .”). permitted by the Partnership Agreement.56 Although the language varied slightly over the years, each filing alerted investors that the General Partner had a call right to repurchase the common units, described the triggering events for the General Partner to exercise its call right, explained the absence of fiduciary duties when exercising the call right, and cautioned that the call right could force limited partners to sell their common units at “an undesirable time or price” leaving no return on their investments.57 The following warnings are illustrative: “Investing in our common units involves risks. . . . These risks include the following: . . . Our general partner has call rights that may require you to sell your common units at an undesirable time or price.”58 “If the FERC policy is reversed or implemented in a manner that is disadvantageous to us, our general partner’s call right may be triggered. . . .
Our general partner has call rights that may require you to sell your common units at an undesirable time or price.”59
“Our general partner and its affiliates own a controlling interest in us and have conflicts of interest and limited fiduciary duties, which may permit them to favor their own interests to your detriment. . . . These potential conflicts include, among others, the following situations: . . . Our general partner may exercise its rights to call and purchase (1) all of our common units if at any time it and its affiliates own more than 80% of the outstanding common units or (2) all of our equity securities (including common units) if it and its affiliates own more than 50% in the aggregate of the outstanding common units, subordinated units and any other classes of equity securities and it receives an opinion of outside legal counsel to the effect that our being a pass- through entity for tax purposes has or is reasonably likely to have a material adverse effect on the maximum applicable rates we can charge our customers.”60 “Our general partner has call rights that may require you to sell your common units at an undesirable time or price. . . . As a result, you may be required to sell your common units at an undesirable time or price and may not receive any return on your investment. You may also incur a tax liability upon a sale of your common units. Our general partner is not obligated to obtain a fairness opinion regarding the value of the common units to be repurchased by it upon exercise of the call rights. There is no restriction in our partnership agreement that prevents our general partner from issuing additional common units or other equity securities and exercising its call right. If our general partner exercised its call rights, the effect would be to take us private and, if the common units were subsequently deregistered, we might no longer be subject to the reporting requirements of the Securities Exchange Act of 1934 (‘Exchange Act’).’”61 “Common units are subject to our general partner’s limited call rights. Our general partner may exercise its right to call common units as provided in our partnership agreement or assign this right to one of its affiliates or to us. Our general partner may use its own discretion, free of fiduciary duty restrictions, in determining whether to exercise this right. As a result, a common unitholder may have his common units purchased from him at an undesirable time or price. Please read ‘The Partnership Agreement—Limited Call Rights.’”62 “In addition, if (a) our general partner receives an opinion of outside counsel to the effect that our being a pass-through entity for federal income tax purposes has or is reasonably likely to have a material adverse effect on the maximum applicable rates chargeable to customers by our subsidiaries that are regulated interstate natural gas pipelines and (b) at such time our general partner and its affiliates own more than 50% in the aggregate of the outstanding common units, subordinated units and other equity securities, then within 90 days of receiving such opinion our general partner will have the right, which it may assign to any of its affiliates or us, but not the obligation, to acquire all, but not less than all, of the equity securities units held by unaffiliated persons. The purchase price in the event of such an acquisition will be equal to the average of the daily closing prices of the equity securities over the 180 days preceding the date three days before the date on which our general partner first mails notice of its election to purchase the equity securities. The limited call rights are exercisable by our general partner, acting in its individual capacity, and may be assigned to its affiliates.
As a result of our general partner’s rights to purchase outstanding units, a holder of units may have his units purchased at an undesirable time or price.
The tax consequences to a unitholder of the exercise of this call right are the same as a sale by that unitholder of his common units in the market. Please read ‘Material Tax Consequences—Disposition of Common Units.’”63 E.
In July 2016, the DC Circuit issued its ruling in United Airlines, Inc. v. FERC.64 United Airlines challenged the 2005 Policy. The DC Circuit found that the tax allowance, as implemented, “permit[ted] [the] partners in a partnership pipeline to ‘double recover’ their taxes.” 65 MLPs are not taxed at the pipeline level, but FERC allowed a “discounted cash flow” ROE based on taxes for all pipelines.66 A partnership investor would recover more than a corporate pipeline investor, because the pipeline was claiming a credit for income tax—without actually being taxed.67 The partner would get the benefit of the taxes it would pay as a corporation, and through the partnership.68 The court remanded the case with instructions to FERC to figure out how it could fix the double-recovery problem, but noted that its precedent did not preclude the option of eliminating income tax allowance entirely.69 In December 2016, FERC issued a notice of inquiry in response to United Airlines, seeking comment on the double-recovery problem. 70 While the review process was underway, Congress passed the Tax Cuts and Jobs Act (the “Tax Act”), which lowered the federal corporate income tax rate from 35% to 21%.71 FERC 66
F.
Boardwalk saw an opportunity to exercise the call right following FERC’s announcement.98 Exercising the call right at the right time could be advantageous to Boardwalk’s sponsors, because the purchase price was based on a trailing market average.99 Boardwalk’s stock price was already significantly reduced.100 In 2014, it had cut its quarterly distributions from $0.5325 to $0.10, sending its unit price down about $20 in value. 101 It had not recovered. 102 Under the Partnership Agreement, there was nothing improper about Boardwalk’s consideration of the call right at this time. The Partnership Agreement allowed Boardwalk to exercise the call right to its advantage – and to the disadvantage of the minority unitholders – free from fiduciary duties.
G.
Under Section 15.1(b) of the Partnership Agreement, the call right could not be exercised without an opinion of counsel acceptable to the General Partner. The day after the FERC announcements, Marc Alpert, Loews’ general counsel, contacted Mike Rosenwasser, a partner at Baker Botts, and asked whether Baker Botts could render an opinion.103 Rosenwasser gathered a group of senior Baker Botts attorneys with extensive industry experience to consult regarding the call right. 104 Over the following months, Rosenwasser’s team worked with Boardwalk, Loews, and Barry Sullivan, a third-party rate expert, to determine whether the FERC announcements had triggered the Section 15.1(b) conditions and whether Baker Botts could deliver an opinion to that effect.105 Marc Alpert remained involved with the process.106 Kenneth Siegel, Mike McMahon, Boardwalk’s general counsel, and Ben Johnson, Boardwalk’s Vice President of Rates and Tariffs, also took lead internal roles.107 A key project was the development of a financial model to assess the impact to Boardwalk’s rates.108 Baker Botts also consulted with Richards Layton & Finger and, to a lesser extent, Skadden on issues of Delaware law.109 Baker Botts gave its final opinion on June 29, 2018, advising that it was of the opinion that the status of the Partnership as an association not taxable as a corporation and not otherwise subject to an entity-level tax for federal, state or local income tax purposes has or will reasonably likely in the future have a material adverse effect on the maximum applicable rate that can be charged to customers by subsidiaries of the Partnership that are regulated interstate natural gas pipelines.110
To support its conclusion, Baker Botts summarized the financial data underlying its analysis and provided a comprehensive memorandum explaining the basis for its opinion.
First, Baker Botts concluded that the lack of a tax allowance meant a lower cost of service, which in turn would mean lower rates.111 It described the rate model used in the financial analysis (the “Rate Model Analysis”) as a simplified cost-based determination of the hypothetical indicative rates that would result without the tax allowance after an assumed rate case for all of Boardwalk’s pipelines. 112 The indicative rates applied across each pipeline as a whole rather than in market-based or geographic segments. 113 It recognized that the hypothetical model was not a replication of the intensive rate case process, which, should one be initiated, would consider further cost and demand-side adjustments across various geographic zones before setting recourse rates.114 Baker Botts made key assumptions in this regard, namely “that each Subsidiary would charge all its customers the maximum applicable rate, and as a result, each Subsidiary would recover its entire cost of service” and that “reductions in the maximum applicable rates would not be offset by any reduction in costs incurred by the Subsidiaries.”115 An additional assumption was that the Revised Policy would not change in any relevant way.116 Baker Botts then noted: The Rate Model Analysis indicates that elimination of an income tax allowance from the cost of service would result in an estimated 12.12% decline in the maximum applicable rate for Texas Gas Transmission, LLC, an estimated 11.68% decline in the maximum applicable rate for Gulf South Pipeline Company, LP, and an estimated 15.62% decline in the maximum applicable rate for Gulf Crossing Pipeline Company LLC.117 Next, Baker Botts turned to an interpretation of key terms in the call right.
Relying on our Court’s decision in Norton v. K-Sea Trans. Partners L.P., it explained that key terms in Section 15.1(b) were unambiguous and were better viewed as “technical terms” with intended “special meaning[s]” that allowed consideration of extrinsic evidence. 118 It first considered the phrase “maximum applicable rate that can be charged to customers by subsidiaries that are regulated interstate natural gas pipelines of the Partnership.”119 According to Baker Botts, this phrase should be interpreted “to mean the recourse rates of the Subsidiaries now and in the future as that term is used by the FERC in its regulation, ruling and decisions.”120 This interpretation focused the opinion on FERC-regulated recourse rates rather than market-informed negotiated and discounted rates. Its reasoning rested in part on the requirement that attorneys were to provide the opinion rather than “an economist, a rate consultant or maybe an investment banker.”121 Including the words “maximum” and “can be charged to customers” also cut against a need “to consider actual rates considering actual or expected competitive conditions or other economic factors.”122 Providing further support for its interpretation was the use of the term “maximum applicable rates” in Boardwalk’s securities filings and FERC documents that referred to recourse rates.123 Baker Botts then interpreted “‘status as an association not taxable as a corporation’ to mean status as an entity not taxable as a corporation.” 124 As explained in the memorandum, “for tax purposes, the term ‘association’ normally refers to a corporation.”125 Interpreting “association” to mean “entity” helped avoid confusion over the underlying issue of Boardwalk’s status as an MLP. 126 If “association” did mean “corporation,” the memorandum reasoned that “the tax related language in Section 15.1(b)(ii), including ‘not taxable as a corporation’ and ‘not otherwise subject to entity-level tax’, would not make sense.” 127 And last, Baker Botts addressed the term “material adverse effect.” It considered “an estimated reduction in excess of ten percent in the maximum applicable rates that can be charged to the customers of each of the Subsidiaries on a long-term basis” to meet the threshold.128 As Baker Botts explained: The term “material adverse effect” as used in Section 15.1(b)(ii) of the Partnership Agreement is not defined in the Partnership Agreement or in the Delaware Revised Uniform Limited Partnership Act. In rendering the opinion set forth above, we have considered Delaware case law construing such term. Our analysis leads us to the conclusion that there is no case directly applicable to this situation and no bright- line test regarding what is a “material adverse effect,” although the case law has provided us some guidance.129 In arriving at the ten percent threshold, Baker Botts reviewed cases Skadden had flagged as important Delaware precedent.130 It also consulted with Richards Layton & Finger, a Delaware law firm.131 As Baker Botts explained, “[t]he well- known case law in Delaware interpreting ‘material adverse effect’ is primarily focused on the use of that term in connection with contracts governing mergers and acquisitions.”132 Recognizing that the context was not the same, Baker Botts also considered how materiality is assessed in other settings. 133 It considered federal securities law, which provides that “something is material if an investor would consider it important in making an investment decision[,]” and noted that “research has established that most accountants view materiality in terms of net income, usually 5% to 10%.”134 The long-term nature of the reduction served as a deciding factor for its recommendation.135 H.
The Baker Botts Opinion had to be “acceptable to the General Partner.”136 To address acceptability, Skadden was retained for its expertise in FERC and MLP matters and for its relationship with Loews.137 Although Skadden had initially been retained by the GPGP, after the attorneys concluded that the Sole Member and not the GPGP Board determined acceptability, Skadden shifted its representation to the Sole Member. 138 Skadden first determined which entity at the GPGP level was responsible for accepting the Baker Botts Opinion. Baker Botts had already concluded that the Sole Member should make the determination rather than the GPGP Board. 139 Skadden’s task was to “confirm” this. 140 Early deliberations among Skadden lawyers considered possible ambiguity arguments.141 According to internal emails, while an argument for ambiguity could be made, Skadden eventually found that it was reasonable to conclude the Sole Member had the authority to accept the opinion.142 Skadden arrived at this conclusion after consultation with Richards Layton & Finger, which relied on the GPGP LLC Agreement and its governance provisions.143 ex-Commissioner and who was very senior, very experienced in FERC rate matters.”); id. (“They were to -- in summary, to shadow us and eventually advise the -- Loews and the sole member that our opinion was acceptable.”); id. at A643 (Alpert Tr.).
Next, for the acceptability of the opinion itself, Skadden “shadow[ed]” Baker Botts as it prepared its opinion. 144 Skadden refrained from providing specific analysis on the issues Baker Botts addressed and instead framed its review as addressing solely the reasonableness of the analysis and the conclusion.145 When the Sole Member Board met on June 29, 2018, Skadden presented its final opinion.146 As an initial matter, Skadden reviewed its qualifications, Baker Botts’ qualifications, and Sullivan’s qualifications and noted Baker Botts’ consultation with Richards Layton & Finger.147 Skadden also stated at the outset: We believe that it is reasonable for the directors of Boardwalk Holding to conclude that they have the authority . . . to make the determinations called for under Article XV of the LPA, including the exercise of the Call Right and the acceptability of Bakers Botts as counsel and of the Baker Botts Opinion.148 The Skadden Opinion then addressed the reasonableness of Baker Botts’ assumptions regarding the Revised Policy. Skadden stated it was reasonable to assume the Revised Policy would be applied through regulatory proceedings without relevant changes. It supported this assessment by noting that FERC had already sought and considered comments on the issue; that the Revised Policy was in response to the D.C. Circuit’s remand order in United Airlines that left FERC “no choice” on the matter; and that other MLP pipeline entities had begun “restructurings demonstrating an apparent conviction that the Revised Policy Statement will continue to apply.”149 It concluded that “notwithstanding efforts by the Partnership and others to persuade the FERC to abandon or modify the revised policy, we think it is reasonable for Baker Botts to assume the new FERC policy will continue to apply.”150 Skadden then confirmed the reasonableness of the definitions Baker Botts had applied to key terms. It concluded that Baker Bott’s interpretation of “maximum applicable rate” to mean recourse rates was reasonable because of similar language in Boardwalk’s public filings and FERC’s use of the term.151 The meaning of “material adverse effect” received specific attention.
Skadden first reviewed Baker Botts’ analytical process, noting that Baker Botts had considered Delaware case law and consulted Delaware counsel on the matter.152 It then highlighted that Boardwalk “is likely the only MLP that has a provision similar to Section 15.1(b), requiring an opinion of counsel regarding a material adverse effect on . . . maximum applicable rate[s].”153 Thus, it was reasonable for Baker Botts to conclude it was writing on a clean slate.154 According to Skadden, Baker Bott’s reliance on financial data to assess a material adverse effect was also reasonable “as it b[ore] on potential changes in each interstate pipeline’s maximum applicable rate[.]” 155 While not rendering an opinion on whether there was a material adverse effect, Skadden concluded that the “general processes and analyses described in the Baker Botts Opinion . . . are reasonable.”156 In the end, Skadden advised the Sole Member Board: “[w]e believe that, based on the factors and considerations outlined herein, it would be within the reasonable judgment of Boardwalk Holding to find that Baker Botts is acceptable counsel and that the Baker Botts Opinion is acceptable, as that term is used in the LPA.”157 Following Skadden’s advice, the Sole Member Board determined that the Baker Botts Opinion was acceptable and directed the General Partner to exercise the call right.158 Boardwalk announced the decision later that day, which meant that it would purchase the units at a price of $12.06 per common unit, approximately $1.5 billion in total.159 The transaction closed on July 18, 2018.160
I.
The next day, on July 19, 2018, FERC issued an order on rehearing of the Revised Policy and a final rule on the NOPR.161 The order on rehearing stated that MLPs would not automatically be entitled to an income tax allowance but could argue that they were entitled to one based on the record in their case.162 FERC’s final rule also said that if MLPs were stripped of their income tax allowance, they could eliminate their ADIT balances.163 Other pipelines and industry associations had argued for this result, and FERC based its ruling in part on these arguments.164 For Boardwalk, this meant there would be no immediate effect on recourse rates.
There is no evidence that anyone involved had any advance notice about the substance of the July 19, 2018 order or FERC’s final rule.
J.
On May 24, 2018, two holders of common units – the initial plaintiffs – filed suit in response to Boardwalk’s and Loews’ disclosure that they were considering exercise of the call right.165 The news caused the price of Boardwalk units to decline – a benefit to Loews due to the call right’s pricing being based on a trailing market average. 166 To limit the impact of the disclosures on the unit price, the parties entered settlement negotiations and agreed in principle to a settlement with an exercise date on or before June 29, 2018, reducing the negative price impact of the call right exercise announcement to forty-four days post-disclosure.167 The current Bandera plaintiffs objected to the proposed settlement as inadequate, and the Court of Chancery declined to approve it.168 They took over the litigation from the initial plaintiffs and filed an amended class action complaint on October 14, 2020. 169 In the amended complaint, Bandera first alleged that Boardwalk and the General Partner had breached the Partnership Agreement through their exercise of the Section 15.1(b) call right without meeting the Opinion of Counsel requirements.170 A second breach of contract claim alleged that Boardwalk and the General Partner breached the Partnership Agreement by paying a deflated price per unit upon exercise of the call right.171 Bandera alleged alternatively that Boardwalk and the General Partner had breached the implied covenant of good faith and fair dealing by causing a decline in the price of Boardwalk units and then paying only $12.06 per unit.172 Finally, Bandera alleged tortious interference and unjust enrichment claims against the GPGP, the Sole Member, and Loews.173 K.
The Court of Chancery held a four-day trial.174 The central questions were whether the General Partner had breached the Partnership Agreement when it exercised the call right, and if so, whether the defendants were exculpated from damages under the Partnership Agreement, and if not, the damages caused by the improper exercise of the call right.
The court ruled that the General Partner had not received “a bona fide ‘Opinion of Counsel’ that could satisfy the Opinion Condition.” 175 This was, according to the court, because “the Opinion did not reflect a good faith effort to discern the actual facts and apply professional judgment.”176 The court pointed to a series of what it characterized as unsupported counterfactual assumptions and a misleading Rate Model Analysis as part of an effort by Baker Botts and Boardwalk to set up a biased analytical framework.177 It then criticized Baker Botts’ strained interpretation of key terms within that framework as evidence of “motivated reasoning” that resulted in a “flawed imitation” of an opinion. 178 The court concluded “[t]he Opinion was a contrived effort to reach the result that the General Partner wanted.”179 The Court of Chancery next addressed whether the General Partner had properly accepted the opinion. It found the language of the Partnership Agreement ambiguous as to whether the Sole Member or the GPGP Board made the decision to accept the Opinion of Counsel. 180 Although the court recognized that the Sole Member as decisionmaker had greater textual support, this interpretation, the court found, would render the acceptability requirement surplusage by negating the apparent protection it offered to limited partners.181 Also, according to the court, the LLC Agreement delegated management responsibilities to the GPGP Board, and the acceptability requirement was more closely related to the management of the partnership. 182 Finding both readings reasonable, the court applied contra proferentem – interpreting the agreements against the drafter – and concluded that the GPGP Board and not the Sole Member should have determined acceptability of the Baker Botts Opinion.183 The court believed this outcome “meshe[d] better with the overall structure of the agreements” despite having “fewer textual supports” than the reading granting the Sole Member acceptance authority.184 The Court of Chancery then turned to whether the Partnership Agreement exculpated the defendants from damages. Two provisions were relevant: the Exculpation Provision in Section 7.8(a) and the Reliance Provision in Section 7.10(b). 185 Section 7.8(a) shielded the General Partner from monetary liability absent fraud, bad faith, or willful misconduct.186 Boardwalk argued that the willful misconduct must rest with the Sole Member Board—Siegel, Keegan, and Wang— and that a showing of scienter was necessary for all three individuals.187 The court was not persuaded by this argument because, according to the court, the plaintiffs were seeking to recover from the General Partner rather than from those individuals.188 Further, the court pointed to “[a] basic tenet of corporate law, derived from principles of agency law, . . . that the knowledge and actions of the corporation’s officers and directors, acting within the scope of their authority, are imputed to the corporation itself.”189 The court found that Alpert, Siegel, McMahon, and Johnson, as agents of Loews, the Sole Member, the GPGP, the General Partner, and Boardwalk, acted “in a manner sufficient to impute scienter to the General Partner.” 190 The court also pointed to Baker Botts’ knowledge, and held that a “lawyer’s knowledge is imputed to the client for matters within the scope of the lawyer’s agency.”191 Because the General Partner pushed Baker Botts to provide the opinion that it wanted, the court found, Baker Botts’ scienter could be imputed to the General Partner. Imputing willful misconduct to the General Partner “render[ed] the exculpatory provision inapplicable.”192 Under Section 7.10(b) of the Partnership Agreement, the General Partner was conclusively presumed to act in good faith if it took an action in reliance on the advice or opinion of legal counsel.193 The Court of Chancery found that the General Partner did not rely on the Baker Botts Opinion because it knew “that the opinion in question was contrived to generate a result.”194 It also could not rely on the Skadden Opinion to escape liability. 195 First, the court held, it was unclear whether the General Partner could use a secondary opinion to cover up the flaws in the first opinion.196 Second, the issues with reliance still held, according to the court, because the General Partner was not actually relying on the Skadden Opinion, but rather “manufactur[ing] the [first] opinion and then get[ting] another opinion to whitewash the first one.”197 Finally, the court ruled that, even if the General Partner relied on the Skadden Opinion, the wrong decisionmaker made the acceptability determination. Thus, the court held, the General Partner did not “validly [rely] on Skadden’s advice.”198
The Court of Chancery awarded $689,827,343.38 in damages, pre- and post- judgment interest on that amount, and an award of fees.199 II.
A Delaware master limited partnership “allow[s] sponsors and public investors to take advantage of favorable tax laws” with the “benefit under Delaware law [of] the ability to eliminate common law duties in favor of contractual ones, thereby restricting disputes to the four corners of the limited partnership agreement.” 200 Section 17-1101(f) of the Delaware Revised Uniform Limited Partnership Act (the “DRULPA”) allows a partnership to eliminate “any and all liabilities for breach of contract and breach of duties (including fiduciary duties) of a partner or other person to a limited partnership or to another partner or to another person that is a party to or is otherwise bound by a partnership agreement” other than for “any act or omission that constitutes a bad faith violation of the implied contractual covenant of good faith and fair dealing.”201 Delaware courts respect the terms of a partnership’s governing agreements to preserve the “maximum flexibility” of contract.202 Our strict approach to contract interpretation and enforcement “puts investors on notice” regarding the primacy of partnership agreements “and therefore that investors should be careful to read partnership agreements before buying units.”203 It is common for MLP sponsors to “[take] advantage of DRULPA’s flexibility” to concentrate power in the general partner, to limit liabilities, and to waive fiduciary duties.204 A consequence is that MLPs “severely limit[] the limited partners’ ability to challenge or change the general partner’s management of the MLP’s business.”205 Within a limited partnership, “[g]eneral partners and limited partners invariably have different governance rights,”206 and “severe consolidation of governing power in the general partner is standard.”207 The customizability of governance structures and business relationships in this way might be one reason for the popularity of MLPs.208
Boardwalk made full use of the MLP structure to limit fiduciary duties and to consolidate governing power in its general partner. Section 7.1(a) of the Partnership Agreement allowed the General Partner “to do all things and on such terms as it determines to be necessary or appropriate to conduct the business of the Partnership” and provided a non-exhaustive list of decisions over which the General Partner has “full power and authority.” 209 Consolidation continues up Boardwalk’s chain of control as shown by Section 5.6 of the LLC Agreement that grants the Sole Member “exclusive authority” over important General Partner decisions.210 Further, Section 7.1(b) frees the General Partner and its controlling entities from “any duty that the General Partner may owe the Partnership or Limited Partners . . . or any duty stated or implied by law or equity” in its performance of the Partnership Agreement.211 Section 7.9 sets forth the standards of conduct and duties that do apply. Section 7.9(b) explains that actions by the General Partner “in its capacity as the general partner . . . as opposed to in its individual capacity” are only subject to a duty of good faith, a defined duty that requires an action to be taken under the “belie[f] that the determination or action is in the best interests of the Partnership.”212 On the other hand, under Section 7.9(c), the General Partner can take individual capacity decisions “free of any fiduciary duty or obligation whatsoever to the Partnership” and without a requirement to act in good faith.213 For further clarity, Section 7.9(e) reiterates that the General Partner is subject to no duties or obligations “[e]xcept as expressly set forth in this Agreement.” 214 The Court of Chancery has noted that “the doctrine of caveat emptor . . . is fitting given that investors in limited partnerships have countless other investment opportunities available to them that involve less risk and/or more legal protection.”215 Our Court echoed this sentiment in Norton and highlighted that the plaintiff “willingly invested in a limited partnership that provided fewer protections to limited partners than those provided under corporate fiduciary duty principles.”216 In that case, we found that the plaintiff was “bound by his investment decision.”217 More recently in Dieckman v. Regency GP LP, this Court again warned of the sponsor-friendly nature of typical MLP agreements: With the contractual freedom accorded partnership agreement drafters, and the typical lack of competitive negotiations over agreement terms, come corresponding responsibilities on the part of investors to read carefully and understand their investment. Investors must appreciate that “with the benefits of investing in alternative entities often comes the limitation of looking to the contract as the exclusive source of protective rights.” In other words, investors can no longer hold the general partner to fiduciary standards of conduct, but instead must rely on the express language of the partnership agreement to sort out the rights and obligations among the general partner, the partnership, and the limited partner investors.218 The sale of MLP units on a public exchange requires an MLP to comply with the filing requirements of securities laws. A section covering the risks of a particular investment is a standard part of a prospectus and regular filings.219 As noted earlier, Boardwalk used these filings to highlight the concentration of power in the general partner and how the call right could be exercised to the disadvantage of the public investors.
III.
Before the General Partner could take Boardwalk private, the General Partner had to receive “an Opinion of Counsel that the Partnership’s status as an association not taxable as a corporation and not otherwise subject to an entity-level tax for federal, state and local income tax purposes has or will reasonably likely in the future have a material adverse effect on the maximum applicable rate that can be charged to customers.”220 The Partnership Agreement defined “Opinion of Counsel” as “a written opinion of counsel acceptable to the General Partner.”221 If the General Partner breached the Partnership Agreement, under Section 7.8(a) the General Partner would not be “liable for monetary damages . . . unless there [was] a final and non-appealable judgment” that it “acted in bad faith or engaged in fraud [or] willful misconduct.”222 Relatedly, Section 7.10(b) provides that the General Partner is “conclusively presumed” to have acted in good faith when it relies on advice of counsel “as to matters the General Partner believes to be within [counsel’s] professional or expert competence.”223 In other words, when the General Partner acts in reliance on advice from competent counsel, it is conclusively presumed to have acted in good faith and is exculpated from damages.
The General Partner received an opinion from Baker Botts that Section 15.1(b)’s call right conditions had been satisfied, and that the General Partner could repurchase the public units. Skadden gave an opinion to the Sole Member Board – the Board it advised was the proper decisionmaker to determine acceptability – that “based on the factors and considerations outlined [in Skadden’s Board presentation], it would be within the reasonable judgment of [the Sole Member Board] to find that Baker Botts is acceptable counsel and that the Baker Botts Opinion is acceptable, as that term is used in the [Partnership Agreement].”224 The Court of Chancery found that the General Partner breached the Partnership Agreement by exercising the call right. According to the court, Baker Botts offered a contrived opinion that failed to satisfy the Opinion Condition.
Because the General Partner acted “intentionally and opportunistically” in securing the opinion, its breach constituted willful misconduct.225 As the court held, knowing participation in securing the contrived opinion also meant the General Partner could not rely on the Baker Botts Opinion and the conclusive presumption that followed from such reliance.226 The court also held that the General Partner failed to satisfy the Acceptability Condition, because the Sole Member and not the GPGP Board made the determination.
On appeal, the Boardwalk entities argue that even if the Court of Chancery rejected the Baker Botts Opinion, the General Partner nonetheless relied in good faith on the Skadden Opinion, both in identifying the acceptability decisionmaker and in expressing its opinion that it was reasonable for the Sole Member Board to determine that the Baker Botts Opinion was acceptable. As they argue, the General Partner acted through the Sole Member and was the ultimate beneficiary of Skadden’s advice. Importantly, the Court of Chancery did not find, nor did Bandera contend, that the Skadden Opinion was the product of bad faith or willful misconduct. Thus, according to the Boardwalk defendants, the General Partner was presumed to have acted in good faith and is exculpated from damages.
We address the proper decisionmaker and exculpation arguments in turn. In considering the arguments on appeal, “[w]e review questions of law and contractual interpretation . . . de novo.”227 “We defer to the Court of Chancery’s factual findings supported by the record” and review them for clear error.228 A.
Under the Partnership Agreement, an Opinion of Counsel had to be acceptable to the General Partner. The Partnership Agreement did not address the details of how the General Partner would make the determination. Based on this perceived gap, the Court of Chancery found that “[a] limited partner . . . could not readily determine from the Partnership Agreement who would make the acceptability determination on behalf of the General Partner” and that the Partnership Agreement was therefore ambiguous.229 The court also found that, even if the court looked to the GPGP’s LLC Agreement to answer the question, “the LLC Agreement also does not clearly address what decisionmaker would make the acceptability determination.”230 Given the perceived ambiguity and what the court believed was the need to interpret the LLC Agreement in an investor-friendly way, the court concluded that the Baker Botts Opinion was contrived because, among other things, the law firm steered the acceptability determination away from the GPGP Board and towards the more receptive Sole Member and its board.
Our disagreement with the Court of Chancery begins with its assumption that the Partnership Agreement’s silence about the mechanics of the General Partner’s acceptability review means an ambiguity existed in the Partnership Agreement. The Partnership Agreement placed the acceptability determination in the hands of the General Partner. Having directed the acceptability determination to the General Partner, the LLC Agreement dictated how it was to make the acceptability determination.
In our view, the Court of Chancery’s analysis went off track when the court read the Partnership Agreement in isolation and not as part of the MLP’s overall governance structure. An MLP can be organized as a limited partnership managed by a general partner that is often ultimately controlled by a limited liability company.
The governing agreements – the Partnership Agreement and the LLC Agreement – were both disclosed to investors in the offering documents.231 This makes sense as both agreements work together to spell out how the General Partner managed Boardwalk.232
For instance, the Partnership Agreement directs attention to the “General Partner’s organizational documents” – of which the LLC Agreement is a part – to ascertain who at the General Partner decides whether to take action when the General Partner exercises its individual as opposed to general managerial authority.233 The call right exercise, being an individual capacity determination, directly implicates the LLC Agreement. 234 The LLC Agreement also has many other provisions addressing how the General Partner exercises its authority under the Partnership Agreement. 235 It would have been redundant to spell out in the Partnership Agreement how the General Partner executed its partnership authority – the instruments came into force in 2005 for Boardwalk’s initial public offering and were by and between affiliated entities. App. to DOB at A1327–28 (Initial Prospectus); id. at A1306 (LLC Agreement § 1.1); id. at A1299, A2482, A2554. mechanics were set forth in the LLC Agreement. Further, when the Partnership Agreement drafters assigned specific matters to the GPGP Board, they did so expressly.236 Absent a specific direction in the Partnership Agreement about how the General Partner exercised its authority, it was a matter for the General Partner and its internal governance according to the LLC Agreement.
Turning to the LLC Agreement, the drafters divided managerial responsibilities between the GPGP Board and the Sole Member. Section 5.2 of the LLC Agreement gave the GPGP Board general authority to exercise the business and affairs of the GPGP.237 But Section 5.6 contained extensive carveouts to that general managerial authority.238 Of relevance here is the “exclusive authority” of the Sole Member “over the business and affairs of the Company that do not relate to the management and control of the MLP.”239 Under this Section, the Sole Member had “exclusive authority to cause the Company to exercise the rights of the Company and those of the MLP General Partner, as general partner of the MLP.” 240 The Section listed eleven references to sections of the Partnership Agreement – one of which is “Section 15.1 (‘Right to Acquire Limited Partner Interests’).”241 In other words, the Sole Member, acting for the General Partner in its individual capacity and free from fiduciary duties, had the “exclusive authority to cause” the General Partner to exercise the call right and to acquire all outstanding limited partnership interests.242 An integral part of the General Partner’s “exclusive authority to cause” the call right exercise was obtaining an opinion of counsel acceptable to the General Partner. As the Court of Chancery noted, “[i]f the Opinion was not acceptable, then the Acceptability Condition could not be met and the General Partner could not exercise the Call Right.”243 The possibility that the GPGP Board could find the opinion unacceptable and then obstruct the exercise of the call right is at odds with the Sole Member having “exclusive authority to cause” the exercise of the call right.
Two further points dispel any surprise or doubt that the Sole Member was to determine the acceptability of the Opinion of Counsel. First, Boardwalk’s public disclosures stated that “[a]ctions of [its] general partner, which are made in its individual capacity, will be made by [Holdings], the sole member of [the GPGP], rather than by [the GPGP] Board” and noted multiple times that the call right exercise was an individual capacity matter. 244 There is no mention of separate treatment of the Acceptability Condition. 245 That the filings do not treat the acceptability determination as distinct from the exercise “provides helpful context regarding what [Boardwalk] contemplated . . . and what the public unitholders accepted by purchasing” their units.246 And second, and perhaps conclusively, in the LLC Agreement, “Opinion of Counsel” was defined as “a written opinion of counsel . . . acceptable to the Sole Member.”247 B.
We respectfully disagree with the Court of Chancery’s reasons supporting its ambiguity finding. First, the court acknowledged that the opinion of counsel definition in the LLC Agreement – “a written opinion of counsel . . . acceptable to the Sole Member” – provided textual support for the Sole Member to make the acceptability determination. But the court dismissed the opinion of counsel definition as a “stray definition” because the drafters did not use the term “opinion of counsel” in other sections of the LLC Agreement.248 If the opinion of counsel definition was a stray definition devoid of meaning, however, it would more likely have read “opinion of counsel acceptable to the GPGP Board” – the entity having general management responsibilities over the General Partner. But the drafters identified the Sole Member as the entity determining acceptability. In keeping with our duty to give meaning to agreement terms whenever possible, and reading the agreements together, we conclude that the drafters more likely chose “acceptable to the Sole Member” and not the GPGP Board to reinforce that, when it came to the acceptability of an Opinion of Counsel for the call right exercise, the Sole Member and not the GPGP Board controlled all aspects of the General Partner’s call right exercise.249 Second, the court found that the acceptability determination was a better fit under “the management and control” of the GPGP LLP. According to the court, corporate law principles would consider a going private transaction part of the business and affairs of the corporation.250 But that analogy divorces the acceptability determination from the call right exercise. Section 5.6 confers exclusive authority on the Sole Member to “cause” the General Partner to exercise the call right under Section 15.1 of the Partnership Agreement.251 The acceptability determination is both incorporated into Section 15.1 and is a necessary condition to exercising the call right – a right that falls within the Sole Member’s “exclusive” authority to “cause” the exercise of the call right.252 Detaching the Acceptability Condition from the Opinion Condition as the Court of Chancery suggests would make the Sole Member’s exclusive authority non-exclusive and would equate causing the exercise with the exercise itself.253 Third, the court reasoned that, under the Partnership Agreement, the acceptability determination and the call right exercise had to be made separately by the GPGP Board and the Sole Member, respectively. Otherwise, according to the court, there would be surplusage in the Partnership Agreement as the Sole Member “always had the ability to make a de facto acceptability determination” by not exercising the call right.254 To avoid the acceptability determination “serving as a redundant condition,” the Court of Chancery believed that it “exist[ed] to protect the Partnership” by “ensur[ing] that the General Partner cannot obtain a contrived opinion.”255 The GPGP Board, having four independent members, could thus serve as a protective check, giving it, in the Court of Chancery’s view, responsibility for the acceptability determination.256 But the fact that the GPGP Board had four independent directors was by happenstance rather than a feature dictated by the LLC Agreement, which only requires three out of a maximum of eight directors of the GPGP Board to be independent.257 Thus, the court’s interpretation lacks textual support and creates protections untethered to the language of the LLC Agreement.258 It also conflicts with the overall scheme of Boardwalk’s sponsor-friendly MLP framework, which allowed a streamlined privatization process in the event of changes to FERC policies adversely affecting Boardwalk. 259 Further, as the Boardwalk entities point out, acceptance and exercise are separate steps – “[o]ne creates an option; the other addresses whether to exercise it.” 260 Even after the General Partner deemed the opinion acceptable, commercial circumstances could intervene that might cause the General Partner not to exercise the call right. Boardwalk’s public disclosures explained that receipt of the opinion gives the General Partner “the right . . . but not the obligation” to exercise the call right.261 As distinct steps, neither acceptance nor exercise would be “mere surplusage” under a single decisionmaker.262 Surplusage means a provision has no meaning.263 If there is a reasonable construction, it is not for courts to assign a meaning beyond what was written.
Finally, the Court of Chancery discussed internal law firm emails where attorneys went back and forth about what advice should be offered about the proper decisionmaker to accept the Opinion of Counsel. That attorneys considered ambiguity arguments does not make the acceptability determination ambiguous.264 It is what attorneys do – explore arguments as part of their professional advice. Here, we have found that the Partnership Agreement and the LLC Agreement, when read together, were unambiguous. Thus, we do not consider what attorneys might have discussed as part of their internal deliberations before rendering their opinion.
The Court of Chancery erred when it decided that the GPGP Board had to make the acceptability determination. The Sole Member Board, and not the GPGP
Board, exercised ultimate authority to cause the exercise of the call right. Thus, the General Partner did not breach the Acceptability Condition.
C.
The Court of Chancery also found that the General Partner breached Section 15.1(b) because Baker Botts gave a contrived opinion at the behest of individuals associated with the Boardwalk entities. Our colleagues in concurrence raise important concerns about the Court of Chancery’s analysis of the Baker Botts Opinion. But we choose a different path to decide this appeal.
Under Section 7.8(a), the plaintiffs cannot recover damages from the General Partner unless it acted in bad faith or engaged in fraud or willful misconduct. 265 Under Section 7.10(b), the General Partner is “conclusively presumed” to have acted in good faith when it relies on advice of counsel “as to matters that the General Partner reasonably believes to be within [counsel’s] professional or expert confidence.”266 The General Partner, through the Sole Member, obtained advice from Skadden that the Baker Botts Opinion was reasonable and that it would be reasonable to accept the Opinion and cause the General Partner to exercise the call right. Skadden staffed the engagement with a team of FERC policy experts and Delaware law experts and delivered a comprehensive written presentation to the Sole Member Board. 267 It included a thorough analysis of Boardwalk’s governing documents and a complete review of the Baker Botts Opinion.268 Three other law firms, Davis Polk, Richards Layton & Finger, and Vinson & Elkins, provided advice regarding the Acceptability Condition, bolstering the credibility of Skadden’s opinion. 269 In our view, the General Partner’s decisionmaker for the call right exercise – the Sole Member – reasonably relied on the Skadden Opinion to cause the call right exercise. Thus, the General Partner is presumed to have acted in good faith and is immune from damages. For the reasons explained below, we find unpersuasive the Court of Chancery’s reasons for disregarding the Skadden Opinion and the Sole Member Board’s reliance on the Opinion.
1.
As an initial matter, we disagree with the Court of Chancery’s conclusion that agency law should take precedence over the MLP’s contractual scheme. The Court of Chancery lumped together a number of individuals and found that their scienter as management-level officers and agents of Loews, the Sole Member, the GPGP, the General Partner, and Boardwalk could be imputed to the General Partner. 270 To support its agency theory, it relied in part on the Court of Chancery’s decision in Dieckman v. Regency GP LP, where the court found that “[a]n entity … can only make decisions or take actions through the individuals who govern or manage it.”271 Relying again on Dieckman, the court found that the General Partner could be charged with the wrongdoing of its agents and others when they “engaged in ‘intentional wrongdoing … designed to … seek an unconscionable advantage.’”272 The Dieckman decision, however, requires the court to focus on the state of mind of the decisionmaker – here, the Sole Member – and not agents of the General Partner.273 The Court of Chancery in Dieckman did not sanction an agency theory to extend the exculpation inquiry beyond those who govern a partnership or limited liability company. The “govern and manage it” quote relied on by the court comes from Gerber v. EPE Holdings, LLC, where the Court of Chancery made clear that those who govern and those who manage means board-level actors. 274 Quoting from Gerber: “[a]n entity, such as Enterprise Products GP, can only make decisions or take actions through the individuals who govern or manage it. In this case, Enterprise Products GP is managed by its board of directors.”275 The same holds true in Dieckman, where the Court of Chancery made clear that “it is the Board that governs and manages the General Partner and in turn, Regency.”276 Regency, the MLP in Dieckman, had a structure similar to Boardwalk’s – a general partner, Regency GP LP; and a general partner LLC of the general partner, Regency GP LLC.277 Regency had “governance documents vest[ing] the board of directors of Regency GP LLC . . . with the authority to govern and manage Regency.” 278 Authority flowed to Regency GP LLC through the Regency LP partnership agreement, but at the LLC level, the sole member delegated its authority to the LLC board. 279 The partnership agreement also contained an exculpation provision nearly identical to the one here.280 The Court of Chancery found after trial that the General Partner breached the implied covenant of good faith and fair dealing by manipulating the special approval and safer harbor MLP provisions. When reviewing whether the General Partner engaged in fraud or willful misconduct for exculpation purposes, the Court of Chancery looked to the Board that approved the transaction and not to the conduct of the agents of the general partner: Here, it is the [LLC] Board that governs and manages the General Partner and, in turn, Regency. Thus, determining whether the General Partner acted in bad faith or engaged in fraud or willful misconduct turns on the state of mind of the directors on the [LLC] Board who voted to approve or otherwise authorized a challenged action.
Consistent with the default rules governing the [LLC] Board, to the extent the directors who voted to approve an action had different states of mind with respect to a particular matter, the determination of whether the General Partner acted with scienter inimical to the Partnership’s interests would turn on the state of mind of a majority of directors who voted to approve the challenged action.281 In this appeal, we have decided that the Sole Member, acting for the General Partner, caused the General Partner to exercise the call right and therefore “voted to approve or otherwise authorized a challenged action.” Allowing agency law to displace the Sole Member Board and the MLP’s contractual terms undermines the approval structure in the Partnership Agreement and the LLC Agreement. The proper review centers on the Sole Member Board – the entity responsible for the call right exercise – and not non-decisionmaker agents of the General Partner.282
The Court of Chancery also held that the General Partner could not rely on the Skadden Opinion for purposes of Section 7.10(b) because the Sole Member Board received the Opinion and not the General Partner. But the Skadden Opinion still redounds to the benefit of the General Partner because the Sole Member Board was acting for the General Partner when it caused the call right exercise.
We addressed a similar situation in Norton.283 There, the plaintiffs challenged a merger between K–Sea Transportation Partners L.P. (“K–Sea”) and Kirby Corporation. K–Sea’s general partner was K–Sea General Partner L.P. (“K–Sea GP”). K–Sea GP’s general partner was K–Sea General Partner GP LLC (“KSGP”).
KSGP ultimately controlled K–Sea. KSGP’s conflicts committee secured a fairness opinion addressing the adequacy of the merger consideration. 284 Like here, a conclusive presumption of good faith applied to the general partner when relying on professional advice.285 The Court reasoned that even though a conflicts committee of the KSGP board obtained the fairness opinion, the presumption nonetheless applied to K–Sea’s general partner: Although the Conflicts Committee of the K–Sea Board actually obtained the fairness opinion, it is unreasonable to infer that the entire K–Sea Board did not rely on the opinion that a K–Sea Board subcommittee obtained. Similarly, because K–Sea GP is a “pass- through” entity controlled by KSGP, the only reasonable inference is that K–Sea GP relied on the fairness opinion. K–Sea GP is therefore conclusively presumed to have acted in good faith when it approved the Merger and submitted it to the unitholders for a vote.286 The same reasoning applies here with equal force. The General Partner is a “pass-through entity” controlled by the GPGP. For purposes of the call right, the Sole Member, rather than the GPGP Board, controlled the GPGP and accepted Skadden’s opinion for the General Partner. Thus, “the only reasonable inference” is that if the Sole Member relied on Skadden’s opinion, then so did the General Partner.
3.
The Court of Chancery described the Skadden Opinion as a “whitewash” of the Baker Botts Opinion. But other than using a colorful word and speculating that Skadden was brought in to lend credibility to the Baker Botts Opinion, the Court of Chancery did not find that Skadden acted in bad faith, and Bandera does not argue that Skadden acted in bad faith.287 The court also described the Skadden Opinion as an “opinion about an opinion,” and cast doubt on whether multiple opinions were contemplated by Section 7.10(b).288 We find nothing disqualifying about Skadden giving “an opinion about an opinion.” Ultimately, under the Partnership Agreement and the LLC Agreement, the Sole Member Board had to determine whether the Baker Botts Opinion was acceptable before it caused the General Partner to exercise the call right. Skadden provided an opinion of counsel on both the reasonableness of the Baker Botts Opinion and the reasonableness of accepting the Opinion.289 Skadden concluded that it would be reasonable for the Sole Member Board to accept the Baker Botts Opinion. It did so having full knowledge of Baker Botts’ analytical framework, including its assumptions, models, and its interactions with Boardwalk’s officers. Implicit in this acceptability opinion is Skadden’s conclusion that the Baker Botts Opinion was not contrived and that it was rendered in good faith. That the Court of Chancery found otherwise after intensive litigation, which included the testimony of fourteen witnesses (including six experts) and a four-day trial, does not retroactively negate the Sole Member Board’s reasonableness in relying on the Skadden Opinion – an opinion not independently challenged by Bandera.
The Court of Chancery also found that “the General Partner cannot invoke the Reliance Provision for purposes of the Acceptability Condition because the wrong decisionmaker considered the issue” and “with the wrong decisionmaker having acted, the General Partner cannot claim to have relied validly on Skadden’s advice.” 290 Our earlier finding that the Sole Member Board was the proper decisionmaker negates this basis for disregarding the Sole Member Board’s reliance on the Skadden Opinion.
5.
Unlike a rebuttable presumption, Section 7.10(b)’s conclusive good faith presumption is, as its name denotes, conclusive.291 Interpreting a nearly identical provision in Gerber, this Court explained that “Section 7.10(b) is a contractual provision that establishes a procedure the general partner may use to conclusively establish that it met its contractual fiduciary duty.”292 In other words, once Section 7.10(b) is validly triggered through reliance on expert advice, good faith is “conclusively establish[ed]” and no longer subject to challenge.293 Here, the Sole Member Board received the Skadden Opinion, followed its advice that it would be reasonable to accept the Baker Botts Opinion, and caused the call right exercise. The conclusive presumption was triggered and therefore required a finding of good faith by the Sole Member Board. In turn, the Sole Member Board’s good faith actions on behalf of the General Partner exculpate the General Partner from damages.
6.
Finally, leaving aside the conclusive presumption, the Court of Chancery did not find that a majority of the Sole Member Board engaged in fraud, bad faith, or willful misconduct. Kenneth Siegel, Jane Wang, and Peter Keegan made up the Sole Member Board. The Court of Chancery addressed the alleged misconduct of one board member, Kenneth Siegel.294 But there were no findings about the other two directors. The Court of Chancery did not review the conduct of Jane Wang and Peter Keegan, finding their states of mind irrelevant to whether the limited partners could recover from the General Partner.295 The court only referred to them in passing, noting their positions on the Sole Member Board and in relation to the Loews and the Boardwalk entities.296 A further reference to Jane Wang was in a footnote with excerpts from Kenneth Siegel’s trial testimony that included a question where Siegel was asked if “Barclays gave input to Ms. Wang about the model” and to which he responded “I don’t know.”297 For the first time on appeal, Bandera asserts that Jane Wang “also knew the score.”298 It claims there is “ample evidence” in the record demonstrating her willful misconduct. 299 But the record Bandera points us to shows only that Wang was involved in the diligence process for the call right, as her duties as a Loews SVP and Sole Member director would require.300 It does not show that she manipulated the process or forced desired outcomes as the court found for Alpert, Siegel, McMahon, and Johnson.301 Her involvement in drafting the press release is also tenuous – no direct action is attributable to her except for passing on Loews’ collective comments to Boardwalk.302 The ADIT and rate case risk evidence Bandera relies on shows at most that Wang was aware of a degree of uncertainty regarding the impact of the FERC policies.303 A degree of uncertainty is not enough to show that Wang engaged in willful misconduct.304 Thus, even if we consider arguments raised for the first time on appeal and put aside the fact that the Sole Member Board, and therefore the General Partner, could have reasonably relied on Skadden’s opinion, the record does not support a bad faith or willful misconduct finding for two out of the three members of the Sole Member Board.
IV.
Under the Partnership Agreement and the LLC Agreement, the General Partner could exercise the call right to repurchase the public units if it received an Opinion of Counsel that was acceptable to the Sole Member. When exercising the call right, the Sole Member acted in its individual capacity, meaning it was free from fiduciary duties. If it complied with the Partnership Agreement and the LLC
Agreement, it was free to exercise the call right, even if the timing of the exercise was disadvantageous to the public unitholders.
Even though the Court of Chancery found after trial that Baker Botts provided a compromised opinion, under the Partnership Agreement and LLC Agreement, the proper focus was on the Sole Member and the opinion it received from Skadden.
Skadden found the Baker Botts Opinion reasonable and advised that the Sole Member Board would be acting reasonably if it accepted the Baker Botts Opinion.
The Sole Member Board followed Skadden’s advice and caused the call right exercise. Having reasonably relied on Skadden’s advice, the General Partner, through the Sole Member, is conclusively presumed to have acted in good faith and is exculpated from damages.
The Court of Chancery severed and stayed Counts II, III, IV, and V of Bandera’s complaint pending appeal. Thus, we reverse the Court of Chancery’s partial final judgment and remand for further proceedings consistent with this opinion.
VALIHURA, Justice, concurring, with LEGROW, Judge, joining: I agree with the Majority that the trial court erred in holding that Boardwalk GP, LLC’s Board was the correct decision-maker as to the Acceptability determination. As the Majority concludes, the General Partner, acting through the Sole Member, was the correct decision-maker.
Although I concur in the decision to reverse, and, thus, in the judgment, I write separately because I would reverse the trial court’s decision that the opinion of counsel (the “Opinion”) of Baker Botts LLP (“Baker”) was not rendered in good faith (the “Breach Holding”). I do not address the exculpation issues and express no view as to the correctness of the Majority’s analysis, particularly as to the various findings of bad faith which the Majority allows to remain standing.1 The issues presented regarding the Breach Holding were the focal point of the case and are important to both practitioners and their corporate clients. The Breach Holding has the potential to fundamentally alter the legal environment in which opinions of counsel are prepared.
I believe the trial court misapplied our existing law in analyzing Baker’s Opinion.
It viewed the Opinion through a de novo lens, instead of the more deferential standard set forth in Williams.2 The trial court rejected Baker’s view of what Section 15.1(b) required.
Instead, it substituted its own legal analysis of Section 15.1(b)’s analytical framework and then measured Baker’s work product against that standard. Baker’s legal analysis — whether it was substantively correct or not — was entitled to deference unless it was so far off the mark substantively as to warrant rejection, or unless it was the product of bad faith.
The trial court undertook extensive fact-finding after reviewing a vast trial record.
Notwithstanding its impressive effort, I do not believe that its findings of bad faith on Baker’s part are entitled to our usual deference for several reasons.3 First, many of the key findings are a function of the court’s misapplication of Williams and its rejection of Baker’s model. In particular, many of the court’s findings of bad faith depend upon its critique of Baker’s interpretation of the Call Right and Baker’s assumptions in its model. However, Delaware case law regarding opinions of counsel does not permit a trial court to substitute its legal interpretation for one reached by counsel in good faith. The trial court then applied its interpretation of the Call Right to Baker’s assumptions and concluded that they were unreasonable. But several key facts suggest that Baker’s assumptions and its interpretation of Section 15.1(b) were not the product of bad faith. For one, Plaintiffs’ Federal Energy Regulatory Commission (“FERC”) expert testified at trial that the assumptions employed by Baker in its analysis were reasonable.
In addition to Plaintiffs’ FERC expert, two law firms previously engaged by Plaintiffs agreed that the Call Right had been triggered. Further, the Plaintiffs’ representative even agreed that Baker’s reading of the contractual language was the correct reading.
Second, Baker’s analysis was confirmed by its Delaware counsel. Richards, Layton & Finger, P.A. (“Richards Layton”) agreed with Baker that recourse rates meant “maximum applicable rates.”4 Third, Skadden opined that Baker’s Opinion was acceptable and that Baker’s assumptions were reasonable. Not a single finding of bad faith was made against Skadden.
Although the evidence suggests that Loews’ Alpert “threatened to fire Skadden,” beat them up until they fell in line, and sidelined them by terminating their representation of GPGP, Skadden’s lead corporate partner testified that the firm did not experience pressure or “bullying” from its client. And though the record amply supports the conclusion that Loews was an aggressive client, the record also contains clear testimony from the lead corporate partner that the firm’s advice and independence were not affected by any such behavior.
Notwithstanding what I perceive to be a legal error that permeates the court’s factual analysis, the record is far from perfect for Appellants. Here, the unveiling of the legal privileges and attorney work product communications revealed to all the sausage-making process. But one should recognize that what emerges as the end product may differ significantly from earlier drafts, and that earlier drafts may reflect differences of views among the working group members, and theories and views may change over time.5 The drafting of a legal opinion may involve numerous lawyers and client representatives across multiple disciplines and areas of the business. The process may demand an exploration of issues, exchanges of ideas, discussions, and numerous drafts — including research and drafts by team members less senior and those not responsible for the ultimate decision- making. Basing findings of bad faith on preliminary drafts and internal discussions when views may develop differently and change as a result of the give-and-take during the process could potentially chill the free exchange of ideas, analysis, and discussion needed to undertake such complicated tasks.6 My reasoning on these points is set forth more fully below.
A. The Trial Court Applied the Wrong Standard of Review In Williams Cos. Inc. v. Energy Transfer Equity, L.P.,7 the Court of Chancery correctly articulated the standard of review for a trial court’s review of an opinion of counsel. There, the Court of Chancery observed: “Therefore, it is Latham’s subjective good-faith determination that is the condition precedent. As a result, it is not appropriate for me to substitute my judgment on the Section 721(a) issue for that of Latham; my role is to determine whether Latham’s refusal, thus far, to issue a ‘should’ opinion is in good faith, that is, based on Latham’s independent expertise as applied to the facts of the transaction.”8 Similarly, in NHB Advisors, Inc. v. Monroe Capital LLC,9 the Court of Chancery applied the same deferential standard focused on the good faith of counsel as opposed to the legal correctness of the opinion itself.10 There, “[u]nder [a] Trust Agreement, the Trustee was authorized to take ‘any action that, based upon the advice of counsel, it determine[d] it is obligated to take (or fail to take) in the performance of any fiduciary or similar duty which the [Trustee] owes to the Beneficiaries or any other person or entity.’”11 “The Trustee sought the advice of independent counsel, Grover C. Brown, Esquire, who opined that ‘the Trustee can be said to have a ‘fiduciary duty or similar duty’ to accept the settlement proposal.’”12 In NHB Advisors, the “Defendants argue[d] that [the Court of Chancery] should review the substance of Mr. Brown’s decision to determine whether Mr. Brown was correct in opining that the Trustee has a duty to accept the settlement.” 13 In refusing to do so, the Court of Chancery stated: “Defendants argue that Mr. Brown’s determination as to the Trustee’s duty is incorrect. I need not review the substance of Mr. Brown’s decision for its correctness under Delaware law, however. In this matter, the Plaintiff seeks a declaratory judgment as to whether it is empowered to accept the settlement offer.”14 “The relevant language of the Trust Agreement provides that the Trustee may so act if counsel advises that the Trustee has a fiduciary duty to so act; the contract does not require the Trustee to seek court approval or to ensure that the advice it received from counsel was legally correct.”15 The trial court’s “review of the substance of Mr. Brown’s opinion would render the advice-of-counsel provision of the agreement superfluous. The Trustee has sought, and received, advice of counsel under the Trust Agreement.”16
“A good-faith determination by the Trustee that it has a fiduciary duty to accept the settlement, based on advice of counsel, triggers the Trustee’s authority. The Plaintiff need not demonstrate that [counsel’s] advice is correct in order to demonstrate its authority under the Trust Agreement.”17 The trial court below erred when it departed from Williams and NHB Advisors in deciding the Breach Holding. Rather than deferring to counsel’s view as to what kind of opinion Section 15.1(b) requires, the trial court engaged in its own substantive, de novo legal analysis.18 Our law does not require that Baker’s advice be legally correct, although that is certainly desirable. What it requires is a good faith effort to render an opinion of counsel on the potential exercise of the Call Right.
B. The Court Substituted Its Own View of Section 15.1(b) for that of Counsel The opinion below reveals that the trial court had a different view of what the Opinion should consider. For convenience, I repeat the text of Section 15.1(b), as it drives the legal analysis: “Section 15.1 Right to Acquire Limited Partner Interests.
(b) Notwithstanding any other provision of this Agreement, if at any time: (i) the General Partner and its Affiliates hold more than 50% of the total Limited Partner Interests of all classes then Outstanding and (ii) the General Partner receives an Opinion of Counsel that the Partnership’s status as an association not taxable as a corporation and not otherwise subject to an entity-level tax for federal, state or local income tax purposes has or will reasonably likely in the future have a material adverse effect on the maximum applicable rate that can be charged to customers by subsidiaries of the Partnership that are regulated interstate natural gas pipelines, then the General Partner shall then have the right, which right it may assign and transfer in whole or in part to the Partnership or any Affiliate of the General Partner, exercisable at its option within 90 days of receipt of such opinion, to purchase all, but not less than all, of all Limited Partner Interests then Outstanding held by Persons other than the General Partner and its Affiliates, at a purchase price for each class of Limited Partner Interests equal to the average of the daily Closing Prices per Limited Partner Interest of such class for the 180 consecutive Trading Days immediately prior to the date three days prior to the date that the notice described in Section 15.1(c) is mailed.”19 The trial court construed Section 15.1(b) as calling for an analysis of whether there was a material adverse effect on the business. A few of the court’s findings on this point suggest that this is the case: “The Opinion Condition required counsel to address a mixed question of fact and law: whether an event had or was reasonably likely in the future to have a material adverse effect on the maximum applicable rate that Boardwalk could charge its customers. By focusing on a rate that could be charged to customers, the Opinion Condition meshed imperfectly with Loews’ business goal of protecting against future regulatory action that would have a material adverse effect on Boardwalk.”20 “The Call Right sought to protect Loews against a regulatory change that would have a materially adverse effect on Boardwalk.”21 “As described in the Factual Background, Rosenwasser developed his syllogism so that Baker Botts could render the Opinion. Rosenwasser knew that the Call Right was intended to address a business issue by protecting Loews against a regulatory change that would have a materially adverse effect on Boardwalk. Rates were relevant because they led to revenue. The Call Right was not intended to create a regulatory trapdoor that could be triggered by a change that ‘wasn’t substantive, wasn’t meaningful.’ In fact, Rosenwasser did not believe that ‘rates’ were what the Call Right was designed to protect. The Call Right was intended to provide Loews with an ‘off-ramp’ if FERC changed its policy in a way that materially threatened Boardwalk as an entity.”22 “Rosenwasser’s syllogism ignored that the Call Right was drafted to address a business issue, not an abstract legal question. The syllogism ignored the absence of any real-world effect on revenue in favor of focusing on recourse rates. It ignored the question of rate case risk and the real-world events that would have to take place before there was any effect on recourse rates. The syllogism was a contrived exercise designed to achieve a particular result.”23 The trial court’s different view of the proper focus of Section 15.1(b) then formed the basis upon which the court evaluated Baker’s conduct. In this regard, the court’s approach to Section 15.1(b) surpassed its mandate under Williams. “[I]t is not appropriate for [the Court of Chancery] to substitute [its own] judgment” on the merits of an opinion of counsel.24 The principle articulated in Williams makes practical sense. The parties to the LPA required an opinion of counsel in order to trigger the Call Right. They did not bargain for an opinion of a court to do so.25 Although there may be circumstances where a legal opinion is so deficient on its face that a court may properly determine that it is not sufficiently reliable, I do not think that this is such a case. My view is reinforced by the record below, where, as noted above,
Id. at *63 (internal citations omitted) (emphases added). Id. at *65. 24 Williams, 2016 WL 3576682, at *11.
This principle of judges not substituting their own views and judgment for that of the lawyers in the trenches can be found in other areas of practice, including intellectual property litigation, for example. See, e.g., Graco, Inc. v. Binks Mfg. Co., 60 F.3d 785, 793 (Fed. Cir. 1995) (“Whether or not an opinion was legally correct is not the proper focus.”); Ortho Pharm. Corp. v. Smith, 959 F.2d 936, 944 (Fed. Cir. 1992) (“While an opinion of counsel letter is an important factor in determining the willfulness of infringement, its importance does not depend upon its legal correctness.”). even Plaintiffs’ counsel, expert, and representative all agreed with Baker’s view that the Call Right was easily triggered, was likely triggered here, and that Baker’s assumptions were reasonable or, at least, not unreasonable.
For example, Plaintiffs’ representative agreed with Baker’s reading of the contract: “I think this is a winning argument in court and that Loews’ attorneys will tell them so, which is why I think they will exercise the option now and I think we should be buying. The reason why I think it is a winning argument is twofold: First, it is a reasonable reading of the contractual language, without importing any ideas about fairness to rewrite the text. Any other reading makes the 90-day requirement meaningless. Second, despite the elimination of fiduciary duties in the MLP agreement, which Delaware courts will enforce, Loews is still subject to the duty of ‘good faith and fair dealing.’
Although Delaware courts haven’t given this duty a very expansive reading, even they agree that this duty requires complying with ‘implicit requirements naturally inferred from the express terms’ of the MLP agreement. I think that reinforces the notion that Loews has an implied requirement to act promptly after the change of law that is naturally inferred from the express 90-day requirement.”26 Plaintiffs’ representative also stated that the Call Right could be triggered “even if [] the change in law won’t affect rates until 1,000 years from now[.]”27 Further, Plaintiffs’ prior counsel acknowledged that the Call Right was easy to trigger. At a settlement hearing early in this case, counsel stated that the Call Right is “a pretty easy option to trigger. I mean, on the face of it . . . the way this crazy option is worded is if FERC changes the maximum rate, the option is available, even if it doesn’t have any impact on the business.”28
A4346 (emphasis added).
Id. A158 (Settlement Hearing Trans. at 9:9–14).
Then at trial, Plaintiffs’ FERC expert testified that the assumptions and inputs relied upon by Baker were reasonable, or, at least, not unreasonable. The following chart shows the lack of disagreement between Baker and Plaintiffs’ FERC expert as to Baker’s assumptions.29 Baker’s Assumptions Plaintiffs’ FERC Expert Testimony “The Revised Policy [by FERC] was “Q. If we look at Slide 57, these final.”30 unsound assumptions include that ‘the Revised Policy will not be revised, reversed,’ et cetera, et cetera. A.
Right. Q. Ms. Court, since the revised policy statement and Opinion 511-C, no MLP has successfully argued to FERC that it should retain their income tax allowance; right? A. I don’t know that for a fact. Q. But you aren’t aware of any contrary examples; right? A.
That’s correct.”31 “Q. And to this date, FERC has not reversed the revised policy statement; correct? A. That is correct.”32 “Recourse rates are the same as “Q. Ms. Court, you would agree that it hypothetical indicative rates.”33 was reasonable for Baker Botts and Skadden to equate the terms ‘maximum applicable rate’ – to equate the term ‘maximum applicable rate’ Plaintiffs’ FERC expert did not agree with Baker’s second assumption, which was that “the rates that Boardwalk’s subsidiaries could charge would change to the subsidiaries’ detriment without a rate case.” Trial Opinion, 2021 WL 5267734, at *58. See also A778 (Susan Court Trial Test. at 864:13–865:10). But Baker’s view of Section 15.1(b), which requires an analysis of events “in the future,” encompassed a view that rate cases would take place in the future. See A584 (Michael Rosenwasser Trial Test. at 91:8–10) (noting that Baker looked at “if Boardwalk decided to file a rate case in the future, what would be their maximum applicable rates if they filed that rate case in the future[.]”) (emphasis added).
Trial Opinion, 2021 WL 5267734, at *55.
A787–88 (Susan Court Trial Test. at 901:18–902:5).
A788 (Susan Court Trial Test. at 903:6–8).
Trial Opinion, 2021 WL 5267734, at *60.
Baker’s Assumptions Plaintiffs’ FERC Expert Testimony with recourse rate; right? A. Was it reasonable for them in the circumstances? Yes.” 34 “[H]ow FERC would treat ADIT was a “Q. Would it have been unreasonable known fact and that FERC would use for Baker Botts to have assumed the Reverse South Georgia Method.”35 Reverse South Georgia Method prior to the July 18th rulings? A. Not unreasonable.”36 C. Many of the Court’s Key Findings of Bad Faith Derive From its Super-Imposition of its Model over Baker’s Legal Analysis Appellants contend that “[t]he trial court then convicted Baker of ‘bad faith’ for having answered the question 15.1(b) does ask—evaluating the ‘reasonably likely’ impact of tax status on recourse rates at any point ‘in the future’ based on neutral rate models.” 37 To use an analogy raised at oral argument, the trial court used its own, different “Scantron” and graded Baker’s conduct according to its interpretation of Section 15.1(b). 38 In other words, its factual findings are inextricably intertwined with its different, de novo interpretation of Section 15.1(b).
The trial court summarized its findings of bad faith as follows: “Loews achieved this remarkable result because its in-house legal team and outside counsel worked hard to generate a contrived Opinion. The Opinion that outside counsel provided did not satisfy the Opinion Condition because outside counsel did not render it in good faith. Outside counsel knowingly made unrealistic and counterfactual assumptions, knowingly relied on an
A787 (Susan Court Trial Test. at 901:2–7).
Trial Opinion, 2021 WL 5267734, at *62 (emphasis in original).
A786 (Susan Court Trial Test. at 894:2–5).
Appellants Reply Br. at 10 (emphasis in original).
See Oral Argument, at 9:00–11:30, https://livestream.com/delawaresupremecourt/events/10612698/videos/232917888. artificial factual predicate, and consistently engaged in goal-directed reasoning to get to the result that Loews wanted. Among other noteworthy decisions detailed in this opinion, outside counsel determined that the regulatory proposals were sufficiently final to trigger the Call Right, even though everyone knew the proposals were not final. And outside counsel determined that the proposals were reasonably likely to have a material adverse effect on Boardwalk’s rates, even as Boardwalk stated in its comments to FERC that it was impossible to determine the effect on Boardwalk’s rates until FERC made a decision on the treatment of ADIT.
To address the issue that management deemed impossible to assess, outside counsel examined hypothetical indicative rates, failed to incorporate the admittedly low chance that Boardwalk’s rates actually would change, and derived the magnitude of the assumed change from a simple syllogism.
Viewed as a whole, outside counsel’s conduct went too far to constitute a good faith effort to render a legal opinion.”39 The findings, for the most part, can be grouped into three categories: (i) model- based findings; (ii) public comment findings; and (iii) pressure/bullying findings. It may be that even when deferring to Baker’s model and disregarding the court’s different construct, the record does not necessarily justify giving Baker an “A.” The Vice Chancellor’s careful and detailed examination of the record reveals aggressive tactics by the client and other evidence that, if viewed in a short-term perspective, creates some dissonance with Baker’s analyses. However, it is not necessary to say where on the grading scale Baker’s effort falls because — when viewing the record as a whole — the conduct, in my view, does not equate to bad faith.
1. The Model-Based Findings Courts should be especially cautious about wading into the thickets of a highly complex, regulatory arena, like the FERC arena. One of the prime examples of where the
Trial Opinion, 2021 WL 5267734, at *2. trial court did so was in its interpretation of “maximum applicable rates” for Baker’s interpretation. The trial court opined that: “A threshold question was the meaning of ‘maximum applicable rates.’ If ‘maximum applicable rates’ meant the real-world rates applicable to the shippers who purchased capacity on the subsidiaries’ pipelines, then the March 15 FERC Actions—even if they become final—would not have a meaningful effect, because the majority of the shippers on Boardwalk’s pipelines paid negotiated or discounted rates. As discussed in greater detail below, Baker Botts sidestepped that issue by interpreting ‘maximum applicable rates’ to mean ‘recourse rates.’ But that solution created another problem: Recourse rates do not change without a rate case.”40 “Yet to reach the conclusion that the phrase meant ‘recourse rates,’ Baker Botts declined to apply the doctrine of contra proferentem . . . If Baker Botts had reached that interpretive judgment, assessed each pipeline’s risk of a rate case, relied on a full ratemaking analysis, and rendered opinions about the reasonably likely effect on recourse rates, then Baker Botts’ decision to interpret ‘maximum applicable rates’ as ‘recourse rates’ would not have fatally undermined the Opinion . . . Baker Botts thus could have reached a reasoned conclusion that it was appropriate under the circumstances to consider extrinsic evidence in the form of Boardwalk’s Form S-1, and Baker Botts could have concluded in good faith . . . that when drafting the Call Right, Rosenwasser meant to refer to recourse rates.”41 “But Baker Bott did not do those things. Baker Botts made an unstated assumption that resulted in the Opinion not actually interpreting the phrase ‘maximum applicable rate’ as ‘recourse rates.’ Baker Botts instead considered the highest rates that FERC would allow Boardwalk to charge in a hypothetical world that assumed there was a full market for the pipelines’ services.”42
Id. at *58. Id. at *61. Id. Contrary to the court’s interpretation of “maximum applicable rates,” all witnesses agreed the term meant recourse rates.43 In its analysis of Baker’s model, the trial court looked to the model’s underlying assumptions and took issue with each of the four assumptions. As discussed in more depth below, the court elaborated on its disagreement with all four “counterfactual assumptions,”44 finding that they reflected a bad faith effort to generate a particular result in the Opinion.
For example, the trial court found that Baker “knowingly made unrealistic and counterfactual assumptions, knowingly relied on an artificial factual predicate, and consistently engaged in goal-directed reasoning to get to the result that Loews wanted.”45 The trial court took issue with the very predicate upon which the Opinion was based, finding that Baker’s Rate Model Analysis “did not provide an adequate factual basis for the Opinion.”46 A snapshot of a few findings on the counterfactual assumptions demonstrates the point:
See A574 (Michael Rosenwasser Trial Test. at 52:18–19) (noting that “maximum applicable rates” “referr[ed] to the technical term ‘recourse rates[.]’”); A614 (Gregory Wagner Trial Test. at 209:4–5) (“Maximum applicable rate signaled to me the recourse rate in a gas pipeline[’]s tariff.”); A787 (Susan Court Trial Test. at 901:2–7) (noting that “recourse rate” was an appropriate interpretation of “maximum applicable rate”); A4250 (noting that Skadden’s Mike Naeve agreed “maximum applicable rates” meant “recourse rates”); A5748 (Suedeen G. Kelly Dep. Trans. at 69:3–4) (noting that “maximum applicable rate” “can also mean the overall recourse rate.”).
See Trial Opinion, 2021 WL 5267734, at *55 (first counterfactual assumption); id. at *58 (second counterfactual assumption); id. at *59 (third counterfactual assumption); id. at *61 (fourth counterfactual assumption). Id. at *2. Id. at *66.
“The plaintiffs proved that the Opinion did not reflect a good faith effort to discern the actual facts and apply professional judgment. Instead, Baker Botts made a series of counterfactual assumptions that were designed to generate the conclusion that Baker Botts wanted to reach. Baker Botts then deployed those assumptions as part of a syllogism that turned on elementary subtraction. In the process, Baker Botts stretched its analysis in myriad other ways. The Opinion was a contrived effort to reach the result that the General Partner wanted.”47 “The timing of the Opinion points in the same direction. Given the non-final nature of the Revised Policy, the avalanche of comments that FERC received, the direct linkage between the Revised Policy and the ADIT NOI that Boardwalk itself identified, and the uncertainty regarding the treatment of ADIT, Baker Botts could not have believed in good faith that it could render the Opinion before FERC provided further guidance. There were too many known unknowns. And an opportunity for clarity on these unknowns was on the horizon: FERC was likely to provide more guidance at its meeting on July 19, 2018. Baker Botts needed to wait.”48 “The analysis of the Opinion is necessarily holistic. Although this decision has discussed various aspects of the Opinion individually, it is the totality of the evidence that results in the finding that the Opinion did not reflect a good faith effort. If Baker Botts had only stretched once or twice, or made an isolated counterfactual assumption, then it would not be possible to reject the Opinion. Under those circumstances, the court might have disagreed with Baker Botts’ assessments, but those disagreements would not have been sufficient to support a lack of good faith. But here, the record as a whole depicts a contrived effort to generate the client’s desired result when the real- world facts would not support it. Baker Botts produced a simulacrum of an opinion, and that flawed imitation did not satisfy the Opinion Condition.”49 Contrary to the results-driven approach the court ascribed to Baker’s conduct, the Baker model did not preordain the answer to the Call Right analysis. There had to be a finding of material adverse effect on the rates Boardwalk could charge in the future due to
Id. at *55. Id. at *69. Id. at *70–71.
FERC regulatory changes. Baker considered the various data points made available to the lawyers and concluded that Boardwalk likely would suffer an MAE in the future — which is the event that would trigger the Call Right. The record suggests that the Opinion was the product of an intensive effort to analyze the Call Right and was not rushed50 nor devoid of supporting information. Although Baker’s Opinion was relatively short, it was supported by a 50-page memorandum, which itself was supported by 200 pages of documentary evidence.51 Skadden opined “that, based on the factors and considerations outlined herein, it would be within the reasonable judgment of Boardwalk Holding to find that Baker Botts is acceptable counsel and that the Baker Botts Opinion is acceptable, as that term is used in the LPA.”52 2. The Public Comment Findings The second category of findings by the trial court relates to Boardwalk’s public comments. I acknowledge that these findings are, to be frank, not favorable to the Appellants. In short, they demonstrate that Boardwalk was telling its regulators and the market one thing, while taking a different position with its counsel in drafting the Opinion.
Baker was first contacted on March 16, 2018, to discuss providing the Opinion. See id. at *18.
The Opinion was ultimately provided on June 29, 2018 — over three months later. See A5123 (Baker Opinion).
See A4825–5080.
A4736. Skadden listed the following factors and considerations that formed the basis of its opinion: “Framework for Boardwalk Holding’s deliberations;” “[t]he actual ‘Opinion of Counsel’ Delivered by Baker Botts;” “Baker Botts’ Qualifications;” “Baker Botts Consulted with Delaware Counsel;” “Baker Botts Retained and Consulted with an Expert Consultant;” “No Time Constraints;” “No Predetermined Outcome;” “Full Access to Information;” “Reasonableness of Assumptions;” “Reasonableness of Definitions;” and “Material Adverse Effect.” A4740.
I recount some of these findings below. But I believe that these findings are not sufficient to render the Opinion a product of bad faith.
For example, in its comments to FERC on the Notice of Proposed Rulemaking (“NOPR”) on March 15, 2018, Boardwalk stated that “[u]ntil the Commission provides a final decision on the treatment of ADIT, Boardwalk cannot correctly assess the impact of the Revised Policy Statement and ADIT on its pipelines’ costs of service, and any response in the Form No. 501-G will be misleading and inaccurate.”53 Skadden noted that Boardwalk’s public comments were “relatively unhelpful” and “could be problematic[.]”54 In response to the March 15 NOPR, Boardwalk scrambled to draft a press release, realizing that other pipeline companies had done the same.55 Boardwalk’s draft press release, circulated among its senior team, focused solely on rates. As the trial court noted, Boardwalk’s team wanted to make “the release stronger by stating that the overall impact to Boardwalk and its rates would not be material.”56 But when the time came to issue the press release, it was changed in a significant way. As the trial court noted, “Loews changed the wording of the release to address revenues rather than rates.”57 “In changing the language of the press release, Loews focused on the fact that the language of the Call Right did not mention revenues.” 58 This
B1228 (Boardwalk Public Comments to FERC at 14).
B1310–11.
See Trial Opinion, 2021 WL 5267734, at *16. Id. (emphasis added). Id. at *19 (emphasis added). Id. version of the press release was the version released to the public. In handwritten notes associated with a counsel call, one of the lawyers wrote “Hypothetical Rates — not analyzed” and that even though Boardwalk faced “no actual change — no effect” on rates, such view would “screw min[ority unitholders.]”59 Although this evidence is not helpful to Appellants, the focus of the public comments was on the impact of the business in the near term.60 But the focus of the Call Right did not center on the near term impact; it centered on the impact “in the future[.]”61 In my view, this mitigates, to some degree, the impact of the public comments. Although this extrinsic evidence may provide a view of what occurred in the periphery — as Boardwalk lobbied its regulators for favorable treatment — the design of the Call Right was quite simple: it asked for an opinion of counsel on whether certain action by FERC would have a material adverse effect on the maximum applicable rate Boardwalk could charge in the future. At the end of the day, Baker concluded that it would. And the other lawyers agreed with Baker’s conclusion.
B1126.
See Trial Opinion, 2021 WL 5267734, at *40 (“Loews also pushed for language focusing on the effects on Boardwalk’s rates, rather than on revenue or other aspects of Boardwalk’s business . . . [Loews’] analyses projected a short-term bump in the trading price, followed by a steady decline over time.”); id. at *41 (“Boardwalk’s initial press release had not limited the absence of a material impact to the near term, and the record does not suggest any additional analysis that would have shortened the time horizon of any effect. In reality, Boardwalk did not anticipate any material impact on revenue for the foreseeable future.”).
A3117 (LPA § 15.1(b)) (emphasis added).
3. The Pressure/Bullying Findings The third and final category of bad faith findings by the trial court are those related to client pressure and bullying. These findings are directly related to the court’s broader conclusion that bad faith undergirded Baker’s Opinion from the start. The trial court connected the dots from client pressure to the supposed bad faith actions taken by Baker.
To illustrate a few of these findings, the trial court found: “In the Opinion, Baker Botts made a series of counterfactual assumptions.
One was explicit. The rest were not. Baker Botts did not make those assumptions legitimately because its client asked for a hypothetical opinion about a set of alternative facts. Instead, Baker Botts made those assumptions because Baker Botts knew they were the only way that the firm could purport to reach the outcome that its client wanted.”62 “Baker Botts acted as if it was rendering a third-party closing opinion on a routine issue, which it plainly was not. The fact that Baker Botts rendered a non-explained opinion on the existence of a material adverse effect itself suggests that Baker Botts was serving Loews’ interests.”63 “Baker Botts strived to conclude that the General Partner could exercise the Call Right because that is what its client wanted. Rosenwasser had an additional, personal incentive to push the limits. He drafted the Call Right, and he understandably wanted that provision to accomplish what his client thought it should do. And Loews was a forceful client. Throughout the events giving rise to this litigation, Alpert demonstrated that he knew how to manipulate his outside counsel so that counsel would deliver the answers that he wanted to receive.”64 The above findings do demonstrate that Loews exerted some pressure on Baker. It is not a far-fetched idea that Loews desired a certain result: it wanted to exercise the Call
Trial Opinion, 2021 WL 5267734, at *55. Id. at *69. Id. (internal citation omitted).
Right.65 The trial court described Baker’s work as a type of “getting to yes” analysis, but the record, in my view, does not suggest blind obedience to client demands. I see no record evidence that Baker changed course due to Loews’ actions.66 What is in the record, however, are over 250 pages of support underlying the conclusion reached in the Opinion.
A finding that client pressure forced Baker’s hand in interpretating Section 15.1(b) is further negated by the arrival of two additional firms at the same conclusion. Once Richards Layton was brought in, the firm undertook its own analysis and reached the same conclusion on what Section 15.1(b) required: “[l]ess than twenty-four hours later, Raju and his team gave advice orally to Baker Botts via teleconference. Raju advised that the ‘[b]etter [r]eading’ was to ‘look [at] rates more, not effects.’”67 Skadden’s team — which included a former FERC commissioner — also reached the consensus that maximum applicable rate meant recourse rates.68 No one on the Baker team, the Richards Layton team, or the Skadden team testified that they felt pressure from Loews and acted accordingly. In fact, the record evidence demonstrates the exact opposite.69
“[L]awyers tend to be responsive to the interests of their clients.” Williams, 2016 WL 3576682, at *11.
The Skadden presentation observed that “Baker Botts’ fees are not contingent on the delivery of an opinion.” A4743. The presentation also stated that Skadden understood “from Baker Botts that no predetermined outcome was conveyed or mandated to Baker Botts[.]” A4746.
Trial Opinion, 2021 WL 5267734, at *34 (internal citation omitted).
See id. at *28.
See A578 (Michael Rosenwasser Trial Test. at 66:4–6) (“Neither Loews nor Boardwalk pressured us with respect to anything related to the substance of the opinion. Not anything.”); A766 (Srinivas Raju Trial Test. at 817:18–21) (“Q. Did you feel that anyone at Loews or Boardwalk put pressure on you with regard to your advice on the acceptability question? A. No.”); Appellees spent time in their briefing70 and again at oral argument71 painting a picture of Loews as a Goliath-type client, who bent its counsel to its every whim. The trial court agreed with them, but only with respect to Baker, not Skadden72 or Richards Layton.
And sworn deposition and trial testimony from lawyers from all three firms indicates that no one changed course due to any client pressure.73 For the foregoing reasons, I do not agree with the trial court that Loews pressured its lawyers into reaching a certain result.
D. Conclusion In sum, I believe that the trial court erred in holding that the Opinion was rendered in bad faith. Under existing Delaware law, opinions of counsel are entitled to deference.
It is not the place of a trial court, or this Court, to substitute our own judgment for that of the lawyers who are asked to render legal opinions. Although lawyers should always strive to reach the legally correct answer, the law does not require that opinions of counsel be substantively correct. What the law requires is that lawyers undertake a good faith effort.
Such good faith effort is entitled to deference. Although there are, for sure, outer limits to
A5552 (Richard Grossman Dep. Test. at 234:13–16) (“Q. Did Skadden reach that conclusion because of pressure from Loews? A. No. We reached that conclusion on our own.”).
Appellees Ans. Br. at 73. In an internal email, Alpert — Loews’ general counsel — wrote that he “[r]eally had to beat on Skadden, but they fell in line finally . . . I will look to other firms re potential litigation.” B1247.
See Oral Argument, at 55:10–56:10, https://livestream.com/delawaresupremecourt/events/10612698/videos/232917888.
See Trial Opinion, 2021 WL 5266734, at *27 (noting Skadden’s careful analysis). Appellees conceded at oral argument that there were no bad faith findings as to Skadden. See Oral Argument, at 51:22–43, https://livestream.com/delawaresupremecourt/events/10612698/videos/232917888.
See supra n.69. this deference, this case does not push beyond that boundary in my view. Because the trial court’s findings of bad faith are inextricably intertwined and dependent upon this legal error, I would reverse. In the aggregate, the record rather supports the conclusion that Baker’s Opinion was rendered in good faith and, at a minimum, was not rendered in bad faith.
Case-law data current through December 31, 2025. Source: CourtListener bulk data.