Delaware Supreme Court Reinvigorates The Implied Duty Of Good Faith And Fair Dealing

During 2013, the Delaware Supreme Court has addressed challenges to transactions involving publicly traded limited partnerships in four cases: (1) Brinckerhoff v. Enbridge Energy Co., Inc., et al.1; (2) Norton v. K-Sea Transportation Partners L.P., et al.2;(3) Gerber v. Enterprise Products Holdings, L.L.C., et al.3;and (4) Allen v. Encore Energy Partners, L.P., et al.4

On the heels of its decisions in Enbridge and K-Sea Transportation, and immediately prior to its decision in Encore, each of which enforced partnership agreements exculpating directors and officers from claims for breaches of fiduciary duties, the Delaware Supreme Court in Gerber injected a cautionary note and reinvigorated the concept of the "implied duty of good faith and fair dealing."

Facts

The Gerber case involved Enterprise GP Holdings, LP ("EPE") and Enterprise Products Partners LP ("Enterprise Products LP"), which were part of a two-tiered Delaware master limited partnership structure. At issue were two transactions: (i) EPE's 2009 sale of the general partner of a pipeline company, Texas Eastern Products Pipeline Company LLC ("TEPPCO GP"), by merger to Enterprise Products LP (the "2009 Sale"), and (ii) EPE's 2010 decision to merge with Enterprise Products LP (the "2010 Merger"). Plaintiff Gerber, an EPE unitholder, challenged the approval of these transactions by EPE's Audit, Conflict and Governance Committee (the "Committee").

The 2009 Sale. EPE originally acquired the asset involved in the 2009 Sale—TEPPCO GP—for approximately $1.1 billion in 2007. The 2009 Sale was structured for tax purposes as two concurrent, cross-conditional mergers of Teppco Partners, L.P. ("Teppco L.P.") and of its general partner, TEPPCO GP, in another agreement. For purposes of the motion to dismiss, and based solely on the untested allegations in the pleadings, the Delaware Supreme Court assumed that these concurrent transactions were "separately negotiated" and that EPE received consideration of approximately $100 million for TEPPCO GP. The Committee approved the 2009 Sale based in part upon a fairness opinion rendered by Morgan Stanley. Morgan Stanley opined that the total consideration paid for (i) the 2009 Sale and (ii) EPE's sale of Teppco L.P. was fair from a financial point of view in the aggregate. Morgan Stanley expressly disclaimed any opinion as to the fairness of any particular component of the consideration, including the amount paid in the 2009 Sale alone.

The 2010 Merger...