In this memorandum opinion, the Delaware Court of Chancery dismissed direct and derivative claims initiated by certain limited partners of El Paso Pipeline Partners, L.P. (“EPB”), which claims arose out of El Paso Corporation’s (“El Paso”) merger with Kinder Morgan, Inc. (“Kinder Morgan”). The Court based its decision, in large part, on the express elimination, in the EPB partnership agreement, of any fiduciary duties that El Paso might otherwise owe to the limited partners.
EPB is a publicly traded master limited partnership that was formed by El Paso for the purpose of operating natural gas pipelines and certain related assets. EPB’s business growth depends, in part, on the acquisition of new energy assets through drop down transactions from El Paso, the parent of EPB’s general partner. The EPB partnership agreement and the IPO prospectus make clear that El Paso is not under any legal obligation to continue such drop downs. In October 2011, El Paso announced the execution of an agreement and plan of merger with Kinder Morgan, pursuant to which Kinder Morgan would be the surviving entity. At the time of the merger, El Paso indicated that Kinder Morgan’s master limited partnership likely would purchase a significant portion of the surviving entity’s pipeline assets. Plaintiffs asserted breach of fiduciary duty claims against El Paso, in its capacity as the controlling unitholder of EPB. Specifically, plaintiffs alleged that El Paso had an obligation to represent the interests of EPB’s minority unitholders in its merger negotiations with Kinder Morgan and that, as a result of the decreased likelihood of drop downs to EPB, El Paso extracted value from EPB at the expense of the minority unitholders and for its own benefit.
The Court concluded that, even if El Paso is the controlling unitholder of EPB, plaintiffs’ claims should be dismissed for failure to state a claim. Importantly, the Court noted that the EPB partnership agreement expressly eliminated, in plain and unambiguous terms, any fiduciary duties owed by El Paso to EPB’s minority unitholders, as permitted by the Delaware Revised Uniform Limited Partnership Act. In response, plaintiffs further argued that El Paso owed to the minority unitholders certain fiduciary obligations grounded in common law. The Vice Chancellor rejected these arguments, finding that the partnership agreement clearly specified that El Paso had no fiduciary duties to “any limited partner” and that the only duties imposed upon El Paso are those created in the partnership agreement. In further support of the granting of defendants’ motion to dismiss, the Court noted that “a controller cannot be liable for breaching fiduciary duties owed to minority holders unless it uses its control to direct the actions of the entity it controls against the interests of that minority.” Op. at 10 (citing Shandler v. DLJ Merchant Banking, Inc., 2010 WL 2929654 (Del. Ch. July 26, 2010)). In the instant case, however, plaintiffs failed to allege that El Paso used its control over the general partner to harm the minority unitholders. Rather, plaintiffs focused on the harm that would result from the decreased likelihood that the drop down transactions to EPB would continue. The Court found that such alleged harm derived solely from El Paso’s control over its own assets and not out of its control over EPB; thus, the merger did not implicate El Paso’s duties as a controller. Finally, the Court concluded that El Paso did not extract value from EPB or the minority unitholders because EPB did not have a right to require El Paso to continue selling assets to EPB through drop down transactions. In light of the foregoing, the Court granted defendants’ motion to dismiss.
The full opinion is available here.