Archive: April 2015

Chancery Court Holds That a General Partner Breached a Limited Partnership Agreement for Failure to Act in the Best Interests of the Master Limited Partnership; $171 Million in Damages

By Scott Waxman and Joshua Haft

The Chancery Court held that a general partner of a master limited partnership breached the entity’s limited partnership agreement by failing to act in the best interests of the entity and instead acting in a manner that benefited the parent of its general partner and increased distributions to the entity’s common unitholders. The Chancery Court focused on the general partner’s failure to consider lessons learned from a similar past transaction and the inadequacy of the financial advisor’s fairness opinion.

In In re: El Paso Pipeline Partners, L.P. Derivative Litigation, plaintiff challenged two transactions in which El Paso Corporation (“Parent”) sold to El Paso Pipeline Partners, L.P., a master limited partnership (“El Paso MLP”), its interest in two subsidiaries of Parent, Southern LNG Company, L.L.C. and Elba Express, L.L.C. (collectively, “Elba”). Both subsidiaries were engaged in the liquefied natural gas (“LNG”) business. Parent is the parent company of El Paso MLP’s general partner, El Paso Pipeline GP Company, L.L.C. (the “General Partner”); and thus, Parent exercised control over El Paso MLP through the General Partner. In the first transaction, in March 2010, Parent dropped-down a 51% interest in Elba to El Paso MLP for total consideration of $963 million (the “Spring Dropdown”). In the second transaction, in November 2010, Parent dropped-down to El Paso MLP the remaining 49% interest in Elba for at least $931 million and 15% of another Parent subsidiary, for total consideration of $1.412 billion (the “Fall Dropdown”).

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Chancery Court Holds That a Proper Purpose with a Credible Basis to Investigate is Required to Grant a Section 220 Action in Pursuit of a Future Derivative Litigation

By Meghan Wotherspoon and Calvin Kennedy

The Chancery Court held that a stockholder must show that there is a proper purpose with a credible basis in order to succeed in a Section 220 action to inspect the books and records of a corporation.

In Southeastern Pennsylvania Transportation Authority v. AbbVie Inc. and James Rizzolo v. AbbVie Inc., the plaintiffs, Southeastern Pennsylvania Transportation Authority (“SEPTA”) and James Rizzolo (“Rizzolo”), as shareholders of defendant AbbVie Inc. (“AbbVie”), made individual written demands on AbbVie for inspection of certain books and records pursuant to Section 220 of the Delaware General Corporation Law (“DGCL”). The plaintiffs sought to obtain records to demonstrate that AbbVie’s directors breached their fiduciary duties. AbbVie rejected the demands for failure to state a proper purpose and each plaintiff then filed a Section 220 Complaint. As the actions stemmed from the same event, the Court utilized a single Memorandum Opinion to deliver its decisions.

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Chancery Court Holds that both Exclusive and Nonexclusive Forum Selection Clauses Can Supplant the McWane First Filed Doctrine

By Scott Waxman and David Valenti

The Chancery Court held that the McWane first filed doctrine does not necessarily require a complaint to be dismissed or stayed in favor of a case pending in another state involving similar claims, parties, and facts, when the claim is based on an agreement including a bargained for, nonexclusive and irrevocable forum selection clause.

On April 15, 2015, the Chancery Court in Utilipath v. Baxter, C.A. No. 9922-VCP (Del. Ch. April 15, 2015) (Parsons, V.C.) denied a Motion to Dismiss a complaint attempting to compel enforcement of an alternative dispute resolution (“ADR”) provision in a Redemption Agreement as it pertained to a dispute over closing net working capital. Prior to August, 2013, defendants Baxter McLindon Hayes, Jr., Baxter McLindon Hayes III, and Jarrod Tyson Hayes (the “Hayes Defendants”) were the sole members of defendant Utilipath, LLC (“Old Utilipath,” and together with Hayes Defendants, the “Defendants”), a North Carolina LLC. In August 2013, the Hayes Defendants transferred all of their membership interests in Old Utilipath to defendant Utilipath Holdings, Inc. (“Holdings”), a North Carolina corporation. Subsequently Old Utilipath merged with plaintiff Utilipath, LLC, (“Utilipath”) a Delaware LLC, resulting in Holdings becoming the parent company of Utilipath.

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Holders of Preferred Stock Beware: Delaware Chancery Court Holds that Preferred Stock Is Subject to the Issuer’s Need as a Going Concern, Not Just DGCL §160

By David Bernstein and B. Ashby Hardesty, Jr.

TCV v. TradingScreen, Inc. concerns the interplay between a charter provision providing for the mandatory redemption of preferred stock, Section 160 of the Delaware General Corporation Law (the “DGCL”), and Delaware common law. The Chancery Court held that despite an adequate surplus under Section 160, common law restrictions prohibited a corporation from redeeming preferred stock as required by its charter.

In TCV, TradingScreen’s charter required that if after a specified date holders of a majority of TradingScreen’s Series D preferred stock asked for assistance in selling their preferred stock, TradingScreen would give that assistance. If no third-party buyer were found, TradingScreen would repurchase its preferred stock at its fair value as agreed upon or determined by an expert.  In June 2012, the holders of a majority of the preferred stock requested assistance in selling their shares. When no suitable third-party buyer was found, an expert selected by Trading Screen and the majority owners of the preferred stock made a valuation and determined the sale price. After receiving the valuation, TradingScreen refused to repurchase more than a small portion of the preferred stock, stating that its board had determined, based on a study it had had prepared by an outside expert, that doing so would impair TradingScreen’s ability to continue as a going concern. The preferred stockholders brought suit, alleging, among other claims, that TradingScreen breached the Charter by failing to honor the charter’s redemption provision and, as a result, triggered interest payments at 13% on the unpaid amounts.

The preferred stockholders argued that because TradingScreen had a surplus that far exceeded the amount it would need to redeem the preferred stock without violating Section 160, its charter required it to repurchase the preferred stock. TradingScreen argued that under Delaware common law, funds would not be “legally available” for repurchase of preferred stock if doing so threatened the corporation’s ability to continue operating as a going concern. The Chancery Court agreed with TradingScreen. It held that even though redemption of the preferred stock would not violate Section 160, “outside the DGCL, a wide range of statutes and legal doctrines restrict a corporation’s ability to use funds.” It held that the common law restricted TradingScreen’s ability to redeem its shares when doing so would damage its ability to continue as a going concern, and that to challenge the Board’s judgment regarding the effect of redemption on TradingScreen’s ability to continue as a going concern, the preferred stockholders would have to show that the Board’s decision was made in bad faith or was so far off the mark as to constitute actual or constructive fraud. The Court rejected the argument that the charter provisions regarding the preferred stock were a contract between the corporation and the holders of the preferred stock, saying the preferred stockholders “fail to appreciate the hybrid nature of preferred stock” and that the preferred stockholders “are holders of equity, not debt.” It is likely many holders of preferred stock will be surprised to learn that their rights with regard to their preferred stock are subject to the issuers’ needs as going concerns.

TCV v. TradingScreen, Inc., C.A. No. 10164-VCN (Del. Ch. March 27, 2015) (Noble, V.C.)

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