Paul Morris v. Spectra Energy Partners (DE) GP, LP
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Opinion
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
PAUL MORRIS, on behalf of all ) similarly situated former unitholders of ) SPECTRA ENERGY PARTNERS, LP, ) ) Plaintiff, ) ) v. ) C.A. No. 2019-0097-SG ) SPECTRA ENERGY PARTNERS (DE) ) GP, LP, ) ) Defendant. )
MEMORANDUM OPINION
Date Submitted: June 27, 2019 Date Decided: September 30, 2019
Michael J. Barry and Michael T. Manuel, of GRANT & EISENHOFER P.A., Wilmington, Delaware; Peter B. Andrews, and Craig J. Springer, of ANDREWS & SPRINGER LLC, Wilmington, Delaware; OF COUNSEL: Jeremy Friedman, Spender Oster, and David Tejtel, of FRIEDMAN OSTER & TEJTEL PLLC, New York, NY, Attorneys for Plaintiff .
Robert S. Saunders, Ronald N. Brown, III, and Ryan M. Lindsay, of SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, Wilmington, Delaware; OF COUNSEL: Noelle M. Reed, Daniel S. Mayerfeld, and Alston L. Walker, of SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, Houston, Texas, Attorneys for Defendant.
GLASSCOCK, Vice Chancellor This is the second incarnation of a challenge—by a unitholder of a master
limited partnership—to a buyback (a “reverse dropdown”) of partnership assets
formerly purchased from the controller of the partnership’s general partner. The first
litigation in the matter alleged that a special committee appointed by the general
partner consented to the transaction in violation of its contractual duty of good faith,
at an inadequate price. That litigation was brought in pertinent part derivatively, and
survived a motion to dismiss.1 Standing to pursue the matter was lost, however,
when the controller acquired the partnership via merger.
The Plaintiff then brought this challenge to that merger, alleging that the
general partner agreed to the merger in bad faith, in that it failed to receive any value
for the derivative litigation asset. Generally, the litigation assets of an entity, like
any other asset, pass to an acquirer. The former derivative plaintiff can, as a
stockholder or unitholder, challenge the fairness of the merger in general directly,
but she may not continue to litigate the derivative claim itself. The question arises,
where a former derivative plaintiff seeks to pursue loss of the claim post-merger,
whether the new complaint remains derivative in nature, in which case the plaintiff
lacks standing, or whether it represents a direct attack on the merger itself.
In limited circumstances, a former derivative plaintiff has standing to contest
the merger directly, on the ground that it wrongfully extinguished the derivative
1 Morris v. Spectra Energy Partners (De) GP, LP, 2017 WL 2774559 (Del. Ch. June 27, 2017).
1 claim. Those cases involve the situation where the entity’s fiduciaries have
permitted a material litigation asset to be extinguished in the merger process, without
value to the stockholders or unitholders. In such a situation, the plaintiff may have
standing to pursue a claim for the wrongful destruction of the asset. The analysis as
to whether a plaintiff can pursue such a claim directly, post-merger, is set out,
consistent with our Supreme Court’s opinion in Parnes v. Bally Entertainment,2 in
this Court’s Primedia decision.3 Primedia provides a three-part test for standing to
pursue a direct claim challenging a merger price solely on failure to obtain value for
a derivative litigation asset: Was the underlying claim viable? Was its value material
in light of the merger consideration? Did the company fail to receive value for the
claim in the merger because the buyer would not be willing to pursue it?
The Defendant has moved to dismiss, arguing that the Plaintiff does not pass
the Primedia test, and therefore lacks standing; and that in any event he has failed to
state a claim on which relief can be granted.
I find that the value of the derivative claim here was not material in light of
the merger transaction. The derivative claim asserted that in determining that the
reverse dropdown was fair to the partnership, the derivative defendants erred in
netting out from known value a reduction of future payments to the general partner
2 Parnes v. Bally Entm’t Corp., 722 A.2d 1243 (Del. 1999). 3 In re Primedia, Inc. S’holders Litig., 67 A.3d 455 (Del. Ch. 2013).
2 avoided due to the reverse dropdown. According to the derivative complaint, the
assets, valued at $1.5 billion, were undersold by $554 million. That is not the value
of the claim to the partnership, however. The potential value must be reduced to
reflect the minority unitholders’ interest, as well as the prospect of ultimate recovery
in light of the difficulties of proof inherent therein. Upon consideration, I find the
amount at issue not material to the partnership. Therefore, the Plaintiff lacks
standing and the Motion to Dismiss must be granted. Accordingly I need not reach
the Defendant’s argument under Rule 12(b)(6). My reasoning follows.
I. BACKGROUND4
A. The Parties and Relevant Non-parties
The Plaintiff, Paul Morris, owned common units of Spectra Energy Partners,
LP (“SEP” or the “Partnership”) at all relevant times through December 17, 2018,
when all outstanding public units of SEP were converted into common shares of
Enbridge, Inc. (“Enbridge”).5 He brings this action directly as a class action on
behalf of all owners of SEP public units during the period beginning May 17, 2018
through December 17, 2018.
4 The facts, except where otherwise noted, are drawn from the well-pled allegations of the Plaintiff’s Verified Class Action Complaint (the “Complaint” or “Compl.”) and exhibits or documents incorporated by reference therein, which are presumed true for purposes of evaluating the Defendant’s Motion to Dismiss. The parties agreed that documents produced in response to Plaintiff’s October 2018 books and records demand are incorporated into the Complaint. 5 Compl. ¶ 15.
3 Non-party SEP is a Delaware master limited partnership (“MLP”). Prior to
their conversion to common shares of Enbridge, SEP’s common units traded on the
New York Stock Exchange (“NYSE”). The Defendant, Spectra Energy Partners
(DE) GP, LP (“SEP GP”), is a Delaware limited partnership and the general partner
of SEP.6 SEP GP is controlled by its own general partner, non-party Spectra Energy
Partners GP, LLC (“SEP GP LLC”), a Delaware limited liability company.7 SEP
GP LLC’s Board of Directors manages SEP.8
Non-party Enbridge is the ultimate parent of SEP and a pipeline and energy
transportation company that owns interests in pipeline systems throughout North
America.9 Prior to their conversion to common shares of Enbridge, 83% of SEP’s
outstanding units were owned by Enbridge.10 Further, SEP GP is a “wholly owned
subsidiary” of Enbridge.11 Enbridge’s predecessor-in-interest as concerns all entities
relevant here was Spectra Energy Corp (“SE Corp”).12 Enbridge acquired SE Corp
in February 2017 in a stock-for-stock merger transaction.13
6 Id. ¶ 16. 7 Id. I will adopt the Complaint’s shorthand and simply refer to SEP GP and SEP GP LLC together as “SEP GP” for clarity. 8 Id. 9 Id. ¶ 24. 10 Id. ¶ 1. 11 Id. ¶ 16. 12 Id. ¶ 1 n.1. 13 Id. ¶ 24.
4 B. The Reverse Dropdown Transaction
1. The Proposed Transaction
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
PAUL MORRIS, on behalf of all ) similarly situated former unitholders of ) SPECTRA ENERGY PARTNERS, LP, ) ) Plaintiff, ) ) v. ) C.A. No. 2019-0097-SG ) SPECTRA ENERGY PARTNERS (DE) ) GP, LP, ) ) Defendant. )
MEMORANDUM OPINION
Date Submitted: June 27, 2019 Date Decided: September 30, 2019
Michael J. Barry and Michael T. Manuel, of GRANT & EISENHOFER P.A., Wilmington, Delaware; Peter B. Andrews, and Craig J. Springer, of ANDREWS & SPRINGER LLC, Wilmington, Delaware; OF COUNSEL: Jeremy Friedman, Spender Oster, and David Tejtel, of FRIEDMAN OSTER & TEJTEL PLLC, New York, NY, Attorneys for Plaintiff .
Robert S. Saunders, Ronald N. Brown, III, and Ryan M. Lindsay, of SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, Wilmington, Delaware; OF COUNSEL: Noelle M. Reed, Daniel S. Mayerfeld, and Alston L. Walker, of SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, Houston, Texas, Attorneys for Defendant.
GLASSCOCK, Vice Chancellor This is the second incarnation of a challenge—by a unitholder of a master
limited partnership—to a buyback (a “reverse dropdown”) of partnership assets
formerly purchased from the controller of the partnership’s general partner. The first
litigation in the matter alleged that a special committee appointed by the general
partner consented to the transaction in violation of its contractual duty of good faith,
at an inadequate price. That litigation was brought in pertinent part derivatively, and
survived a motion to dismiss.1 Standing to pursue the matter was lost, however,
when the controller acquired the partnership via merger.
The Plaintiff then brought this challenge to that merger, alleging that the
general partner agreed to the merger in bad faith, in that it failed to receive any value
for the derivative litigation asset. Generally, the litigation assets of an entity, like
any other asset, pass to an acquirer. The former derivative plaintiff can, as a
stockholder or unitholder, challenge the fairness of the merger in general directly,
but she may not continue to litigate the derivative claim itself. The question arises,
where a former derivative plaintiff seeks to pursue loss of the claim post-merger,
whether the new complaint remains derivative in nature, in which case the plaintiff
lacks standing, or whether it represents a direct attack on the merger itself.
In limited circumstances, a former derivative plaintiff has standing to contest
the merger directly, on the ground that it wrongfully extinguished the derivative
1 Morris v. Spectra Energy Partners (De) GP, LP, 2017 WL 2774559 (Del. Ch. June 27, 2017).
1 claim. Those cases involve the situation where the entity’s fiduciaries have
permitted a material litigation asset to be extinguished in the merger process, without
value to the stockholders or unitholders. In such a situation, the plaintiff may have
standing to pursue a claim for the wrongful destruction of the asset. The analysis as
to whether a plaintiff can pursue such a claim directly, post-merger, is set out,
consistent with our Supreme Court’s opinion in Parnes v. Bally Entertainment,2 in
this Court’s Primedia decision.3 Primedia provides a three-part test for standing to
pursue a direct claim challenging a merger price solely on failure to obtain value for
a derivative litigation asset: Was the underlying claim viable? Was its value material
in light of the merger consideration? Did the company fail to receive value for the
claim in the merger because the buyer would not be willing to pursue it?
The Defendant has moved to dismiss, arguing that the Plaintiff does not pass
the Primedia test, and therefore lacks standing; and that in any event he has failed to
state a claim on which relief can be granted.
I find that the value of the derivative claim here was not material in light of
the merger transaction. The derivative claim asserted that in determining that the
reverse dropdown was fair to the partnership, the derivative defendants erred in
netting out from known value a reduction of future payments to the general partner
2 Parnes v. Bally Entm’t Corp., 722 A.2d 1243 (Del. 1999). 3 In re Primedia, Inc. S’holders Litig., 67 A.3d 455 (Del. Ch. 2013).
2 avoided due to the reverse dropdown. According to the derivative complaint, the
assets, valued at $1.5 billion, were undersold by $554 million. That is not the value
of the claim to the partnership, however. The potential value must be reduced to
reflect the minority unitholders’ interest, as well as the prospect of ultimate recovery
in light of the difficulties of proof inherent therein. Upon consideration, I find the
amount at issue not material to the partnership. Therefore, the Plaintiff lacks
standing and the Motion to Dismiss must be granted. Accordingly I need not reach
the Defendant’s argument under Rule 12(b)(6). My reasoning follows.
I. BACKGROUND4
A. The Parties and Relevant Non-parties
The Plaintiff, Paul Morris, owned common units of Spectra Energy Partners,
LP (“SEP” or the “Partnership”) at all relevant times through December 17, 2018,
when all outstanding public units of SEP were converted into common shares of
Enbridge, Inc. (“Enbridge”).5 He brings this action directly as a class action on
behalf of all owners of SEP public units during the period beginning May 17, 2018
through December 17, 2018.
4 The facts, except where otherwise noted, are drawn from the well-pled allegations of the Plaintiff’s Verified Class Action Complaint (the “Complaint” or “Compl.”) and exhibits or documents incorporated by reference therein, which are presumed true for purposes of evaluating the Defendant’s Motion to Dismiss. The parties agreed that documents produced in response to Plaintiff’s October 2018 books and records demand are incorporated into the Complaint. 5 Compl. ¶ 15.
3 Non-party SEP is a Delaware master limited partnership (“MLP”). Prior to
their conversion to common shares of Enbridge, SEP’s common units traded on the
New York Stock Exchange (“NYSE”). The Defendant, Spectra Energy Partners
(DE) GP, LP (“SEP GP”), is a Delaware limited partnership and the general partner
of SEP.6 SEP GP is controlled by its own general partner, non-party Spectra Energy
Partners GP, LLC (“SEP GP LLC”), a Delaware limited liability company.7 SEP
GP LLC’s Board of Directors manages SEP.8
Non-party Enbridge is the ultimate parent of SEP and a pipeline and energy
transportation company that owns interests in pipeline systems throughout North
America.9 Prior to their conversion to common shares of Enbridge, 83% of SEP’s
outstanding units were owned by Enbridge.10 Further, SEP GP is a “wholly owned
subsidiary” of Enbridge.11 Enbridge’s predecessor-in-interest as concerns all entities
relevant here was Spectra Energy Corp (“SE Corp”).12 Enbridge acquired SE Corp
in February 2017 in a stock-for-stock merger transaction.13
6 Id. ¶ 16. 7 Id. I will adopt the Complaint’s shorthand and simply refer to SEP GP and SEP GP LLC together as “SEP GP” for clarity. 8 Id. 9 Id. ¶ 24. 10 Id. ¶ 1. 11 Id. ¶ 16. 12 Id. ¶ 1 n.1. 13 Id. ¶ 24.
4 B. The Reverse Dropdown Transaction
1. The Proposed Transaction
A previous derivative suit challenging the transaction at the heart of this case
survived a motion to dismiss in this Court in 2017.14 The opinion in that matter
recites the facts fully; what follows are those facts sufficient to the issues here.15
On September 8, 2015, SE Corp and Phillips 66 announced that they would
contribute certain assets to DCP Midstream, LLC (“DCP”), an existing 50/50 joint
venture between the two companies.16 Phillips 66 would contribute $1.5 billion17
and SE Corp would contribute two assets: a one-third interest in both DCP Sand
Hills Pipeline, a long haul natural gas pipeline running from the Permian Basin to
Mont Belvieu, Texas (“Sand Hills”), and DCP Southern Hills Pipeline, a long haul
natural gas pipeline running from southern Kansas to Mont Belvieu, Texas
(“Southern Hills” and, together with Sand Hills, the “Pipeline Interests”).18 Since
both companies contributed half of DCPs’ assets, the value of the Pipeline Interests
implied by Phillips 66’s cash contribution was $1.5 billion.
14 Morris v. Spectra Energy Partners (De) GP, LP, 2017 WL 2774559 (Del. Ch. June 27, 2017). 15 Interested readers may consult the memorandum opinion, id. 16 Compl. ¶ 35. 17 Id. 18 Id. See Transmittal Aff. of Ryan M. Lindsay, Esq. in Support of Def. Spectra Energy Partners (DE) GP, LP’s Opening Br. in Support of its Mot. to Dismiss the Verified Class Action Compl., D.I. 15 [“Lindsay Aff.”], Ex. 32, Discussion Materials Prepared for the Conflicts Committee of Spectra Energy Partners, dated September 2015 [the “September 2015 Discussion Materials”], at SEPENB00001162.
5 At the time of this announcement, SEP owned the Pipeline Interests, requiring
SE Corp to purchase them from SEP before it could contribute them to DCP.19
Previously, in November 2013, SE Corp had transferred the Pipeline Interests, which
it held at the time, to SEP in a dropdown transaction.20 The proposed sale of the
Pipeline Interests from SEP back to SE Corp was thus a “reverse dropdown” (the
“Reverse Dropdown”).21
Four days before the public announcement, on September 4, 2015, SE Corp
proposed the Reverse Dropdown in a letter to SEP GP.22 As consideration for the
sale of the Pipeline Interests, SE Corp (through its affiliates) offered to (i) surrender
20 million SEP limited partner units to SEP for redemption (the “LP Unit
Redemption”) and (ii) waive its right to receive up to $4 million in incentive
distribution rights (“IDRs”) for twelve consecutive quarters (the “IDR Give-
back”).23 On September 7, 2015, SEP GP authorized its Conflicts Committee via
written consent to evaluate the Reverse Dropdown, and appointed J.D. Woodward
19 Compl. ¶ 35. 20 Morris, 2017 WL 2774559, at *3. A dropdown transaction refers to a transaction in which an MLP purchases assets from its general partner or a related entity. Id. at *2 n.19. 21 Id. at *2. 22 Compl. ¶ 37. 23 Id. IDRs confer entitlement to distributions to the general partner of an MLP; they are a common mechanism among MLPs to incentivize the sponsor to maximize profitability of the partnership. Id. ¶ 32.
6 III (“Woodward”) and Nora Mead Brownell (“Brownell”), both members of the SEP
GP Board of Directors, to the Conflicts Committee (the “2015 Committee”).24
2. Duties and Conflict of Interest Provisions in the Second A&R LPA
SEP’s Second Amended and Restated Agreement of Limited Partnership (the
“Second A&R LPA”),25 in place at the time of the Reverse Dropdown,26 imposes a
general, overarching obligation of “good faith” on SEP GP and its Conflicts
Committee whenever they “make [a] determination or take or decline to take such
other action . . .”27 Under the Second A&R LPA, in order for a determination to be
made in “good faith,” the person acting “must believe that the determination or other
action is in the best interests of the Partnership.”28 That is, subjective good faith is
the applicable standard for SEP GP and its Conflicts Committee.29
24 Id. ¶ 38. 25 Lindsay Aff., Ex. 30, Second Amended and Restated Agreement of Limited Partnership of Spectra Energy Partners, LP [the “Second A&R LPA”]. 26 Compl. ¶ 1 n.2. 27 Second A&R LPA § 7.9(b). Conflicts Committee is defined as “a committee of the Board of Directors of [SEP GP] composed entirely of two or more directors, each of whom (a) is not a security holder, officer or employee of [SEP GP], (b) is not an officer, director, or employee of any Affiliate of [SEP GP], (c) is not a holder of any ownership interest in the Partnership Group other than Common Units and (d) meets the independence standards required of directors who serve on an audit committee of a board of directors established by the Securities and Exchange Act and the rules and regulations of the Commission thereunder and by the National Securities Exchange on which the Common Units are listed or admitted to trading.” Id. § 1.1. 28 Id. § 7.9(b). 29 Morris v. Spectra Energy Partners (De) GP, LP, 2017 WL 2774559, *6 (Del. Ch. June 27, 2017).
7 Section 7.10 of the Second A&R LPA titled “Other Managers Concerning the
General Partner” provides in subsection (b) that:
[t]he General Partner may consult with legal counsel, accountants, appraisers, management consultants, investment bankers and other consultants and advisors selected by it, and any act taken or omitted to be taken in reliance upon the opinion (including an Opinion of Counsel) of such Persons as to matters that the General Partner reasonably believes to be within such Person’s professional or expert competence shall be conclusively presumed to have been done or omitted in good faith in accordance with such opinion.30
This provides a conclusive presumption of good faith to SEP GP when it acts in
reliance on professional advisors.31
Section 7.9(a) of the Second A&R LPA provides four safe harbors in case of
conflicts. That section states that:
whenever a potential conflict of interest arises between [SEP GP] or any of its Affiliates, on the one hand, and [SEP] . . . on the other, any resolution or course of action by [SEP GP] or its Affiliates in respect of such conflict of interest . . . shall not constitute a breach of this Agreement . . . if the resolution or course of action in respect of such conflict of interest is (i) approved by Special Approval,32 (ii) approved by the vote of a majority of the Outstanding Common Units (excluding Common Units owned by [SEP GP] and its Affiliates), (iii) on terms no less favorable to the Partnership than those generally being provided to or available from unrelated third parties or (iv) fair and reasonable to [SEP] taking into account the totality of the relationships between the parties involved (including other transactions that may be particularly favorable or advantageous to [SEP]).33
30 Second A&R LPA § 7.10. 31 Morris, 2017 WL 2774559, at *7. 32 Defined as “approval by a majority of the members of the Conflicts Committee.” Second A&R LPA § 1.1. 33 Id. § 7.9(a).
8 3. The 2015 Committee Approves the Reverse Dropdown
The 2015 Committee retained Simmons & Company International
(“Simmons”) as its financial advisor in connection with the Reverse Dropdown.34
Simmons’ initial presentation to the 2015 Committee contained the terms of the
transaction and noted that the contribution of the Pipeline Interests by SE Corp “was
designed and intended to match Phillips 66’s $1.5 billion cash contribution.”35 The
presentation identified three “Components of Value” that SEP would receive as
consideration in the deal: (i) the LP Unit Redemption (valued at $832 million), (ii)
the IDR Give-back (valued at $53 million)36 and (iii) Reduced GP Cash Flow (valued
at $575 million) (the “Reduced GP Cash Flow”).37 Reduced GP Cash Flow
represented “reduced distributions from SEP after the sale of Sand Hills and
Southern Hills” and was calculated as the product of “[t]he reduction in GP
distributions and [t]he comparable GP transaction and trading multiples” (excluding
the value of the IDR Give-back).38
34 Compl. ¶ 39. 35 Id. ¶ 40. 36 The $53 million value for the IDR Give-back was a present value calculation based on the face value of $64 million over 16 quarters. The Give-back offer in the initial proposal to SEP was for twelve quarters and the Reverse Dropdown ultimately had a twelve quarter Give-back. It is unclear if the 16 quarter Give-back in this presentation was due to negotiation or was in error. 37 September 2015 Discussion Materials, at SEPENB00001187. The Reduced GP Cash Flow was later clarified to be $525 million. See Lindsay Aff., Ex. 33, Discussion Materials Prepared for the Conflicts Committee of Spectra Energy Partners, dated October 2015 [the “October 2015 Discussion Materials”], at SEPENB00001242. 38 September 2015 Discussion Materials, at SEPENB00001187. The reduced distributions were “expected reductions in future payments from SEP to SEP GP as SEP became less profitable upon
9 In a following presentation in October 2015, Simmons moved Reduced GP
Cash Flow to the appendix and the “Value of Consideration” section included only
the LP Unit Redemption and the IDR Give-back with a combined aggregate value
of $946 million.39 On October 7, 2015 Simmons delivered a fairness opinion on the
terms of the Reverse Dropdown and the 2015 Committee recommended that the SEP
GP Board of Directors approve the Reverse Dropdown.40 On October 8, 2015 the
SEP GP Board of Directors approved the Reverse Dropdown.41
Under the final terms of the Reverse Dropdown, SEP agreed to transfer the
Pipeline Interests to subsidiaries of SE Corp in exchange for (i) 21.56 million limited
partner units,42 (ii) the redemption of 440,000 general partner units,43 and (iii) a
the removal of the assets.” Morris v. Spectra Energy Partners (De) GP, LP, 2017 WL 2774559, *4 (Del. Ch. June 27, 2017). 39 Compl. ¶ 45; October 2015 Discussion Materials, at SEPENB00001230. 40 Compl. ¶ 46. 41 Id. 42 This was an increase from 20 million limited partner units in the initial proposal on September 4, 2015. This was a response to the “[i]mmediate negative market response” upon the public announcement of the Reverse Dropdown, triggering a drop in the SEP unit price. Compl. ¶ 47 n.17. 43 Lindsay Aff., Ex. 44, Press Release: Definitive Agreements Executed for Contributions of Sand Hills and Southern Hills Natural Gas Liquids Pipeline Interests to DCP Midstream, dated October 19, 2015, at SEPENB00002314. While the Complaint does not mention the redemption of 440,000 general partner units, I noted in the memorandum opinion in the underlying case that “[t]he 440,000 general partner units cancelled as part of the [Reverse Dropdown] was allegedly ‘a product of keeping SE Corp’s 2% GP interest constant when reducing the number of outstanding LP units’ as a result of the LP Unit Redemption. Historically, SEP has allowed SE Corp to ‘acquire additional GP units at the same price as LP units as necessary in order to maintain a 2% general partnership interest in SEP.’ The general partner units were thus implicitly valued on par with the limited partner units. Since Simmons valued the limited partner units in the LP Unit Redemption at $41.95 per unit, the implied valuation of the 440,000 general partner units would be, at most, roughly $18,458,000. Whether or not the GP Unit Redemption was properly excluded from
10 reduction in IDRs payable to SEP GP of $4 million per quarter through September
30, 2018.44
C. The Plaintiff’s Derivative Suit
On December 18, 2015 the Plaintiff served a books and records demand upon
SEP pursuant to the Second A&R LPA and 6 Del. C. §17-305 (the “2015 Demand).45
After review of the documents in response to the 2015 Demand, the Plaintiff filed a
Verified Class Action and Derivative Complaint (the “Derivative Complaint”) in
this Court on March 16, 2016 (the “Derivative Litigation”).46 The crux of the
Derivative Complaint was its contention that SEP only received value in the Reverse
Dropdown in the form of the LP Unit Redemption and IDR Give-back (worth a
combined $946 million) and, consequently, SEP did not receive sufficient value for
the Pipeline Interests valued at $1.5 billion.
The Plaintiff pled three derivative claims: Count II asserted a breach of the
Second A&R LPA against SEP GP, alleging that SEP GP breached its “good faith”
obligation by approving the Reverse Dropdown;47 Count IV asserted a breach of the
Simmons’ estimate of the total value of consideration is not material to this dispute at the pleading stage.” Morris, 2017 WL 2774559, at *5 n.49 (internal citations omitted). 44 Compl. ¶ 47. This represents twelve quarters including the quarter that the Reverse Dropdown was consummated. The Plaintiff does not allege that the final IDR Give-back was less than the initial proposal. 45 Id. ¶ 48. 46 Id. 47 The Plaintiff also argued SEP GP acted in bad faith by “improperly constraining” the 2015 Committee’s authority to a determination whether the Reverse Dropdown would hold SEP “net cash neutral.” Morris, 2017 WL 2774559, at *8. This argument was based on the written consent
11 implied covenant of good faith and fair dealing against SEP GP; and Count VI
asserted tortious interference with the Second A&R LPA against SE Corp.48
SEP GP and SE Corp moved to dismiss the Derivative Complaint pursuant to
Court of Chancery Rule 12(b)(6).49 I granted SEP GP’s motion to dismiss Count
IV50 and SE Corp’s motion to dismiss Count VI.51
I declined to grant the motion to dismiss Count II claim alleging a breach of
the Second A&R LPA (the “Derivative Claim”). 52 I noted that at that stage in the
proceedings “[t]he record [was] insufficient to determine the nature of the alleged
IDR savings from the sale of Sand and Southern Hills and whether it was properly
understood as value of consideration to SEP.”53 Drawing all reasonable inferences
in favor of the Plaintiff, I found that the Derivative Complaint “made adequate
allegations showing that under reasonably conceivable circumstances a facially
unreasonable gap in consideration exists sufficient to infer subjective bad faith.”54
authorizing the 2015 Committee, which read in part: “WHEREAS, the Company has received a formal non-binding proposal from Spectra Corp in which Spectra Corp has proposed that the Partnership transfer its membership interests in Sand Hills and Southern Hills to Spectra Corp in exchange for certain consideration from Spectra Corp to the Partnership, with the aim of holding the Partnership net cash neutral (the ‘Transaction’).” Id. at *4. 48 Id. at *8. Counts I, III and V, direct claims on behalf of the class, were abandoned by the Plaintiff due to a then-recent clarification of the law by our Supreme Court. 49 Id. 50 Id. at *17. 51 Id. at *18. 52 Id. at *16. 53 Id. 54 Id.
12 I concluded that it was “reasonably conceivable that the General Partner acted in
subjective bad faith.”55
Following my denial of the motion to dismiss as to the Derivative Claim and
until August 2018 the parties undertook fact and expert discovery in the Derivative
Litigation.56 On September 4, 2018 SEP GP moved for summary judgment on the
Derivative Claim.57 The summary judgment motion was pending when on March
26, 2019 the Derivative Claim was dismissed with prejudice for reasons explained
below.
D. The Roll-Up Transaction
On March 15, 2018 the Federal Energy Regulatory Commission (“FERC”)
announced plans to revise a policy to no longer allow pipeline MLPs such as SEP to
“recover an income tax allowance in their cost of service.”58 The market viewed this
as a negative development for MLPs; SEP’s trading price declined by twenty percent
within a week.59 On March 16, 2018 SEP and Enbridge issued press releases stating
they “anticipate[d] no immediate impact to [SEP’s] current gas pipeline cost of
service rates as a result of the revised policy” and that “[a]ny unmitigated impacts
55 Id. 56 Compl. ¶ 51. 57 Def. Spectra Energy Partners (DE) GP, LP’s Mot. for Summ. J., Morris v. Spectra Energy Partners (De) GP, LP, C.A. No. 12110-VCG (Del. Ch. dismissed March 26, 2019), D. I. 118. 58 Compl. ¶ 52. 59 Id.
13 are not anticipated to materially change SEP’s distributable cash flow outlook
beyond 2018.”60 SEP changed tune on May 9, 2018 in its first quarter 2018 earnings
release filed with the SEC, noting that “[t]he change in FERC’s policy has had a
negative impact on the MLP sector” and that it would attempt to mitigate the impact
of the policy change.61
On May 17, 2018 Enbridge offered SEP’s public unitholders 1.0123 common
shares of Enbridge in exchange for each publicly held common unit of SEP based
on the closing price of SEP common units and Enbridge common shares on the
NYSE on May 16, 2018 (the “Roll-Up”).62 Plaintiff contends that this was an
“opportunis[tic]” attempt to “squeeze out SEP’s public unitholders” as “SEP’s
trading price [was] still artificially depressed.”63 SEP’s closing price was $33.10 per
unit on May 16, 2018 and Enbridge’s price was $32.70 per common share.64
Enbridge’s offer was conditioned on approval by SEP GP’s Conflicts Committee.65
After receiving Enbridge’s offer letter, the SEP GP Board of Directors authorized its
Conflicts Committee (the “2018 Committee”) to consider the Roll-Up and to provide
60 Id. ¶ 53. As noted above, Enbridge acquired SE Corp in February 2017 in a stock-for-stock merger transaction and was the ultimate parent of SEP and SEP GP for the timeframe relevant to the Roll-Up. 61 Id. 62 Id. ¶ 54. 63 Id. 64 Id. At these prices and with the offered exchange rate, SEP’s public unitholders would receive Enbridge common stock worth $33.10 at market close on May 16, 2018 in exchange for their SEP units worth $33.10 at market close on May 16, 2018. 65 Id.
14 Special Approval.66 The 2018 Committee consisted of Woodward and Brownell
(both of the 2015 Committee) and Michael G. Morris, a fellow member of the SEP
GP Board of Directors.67
2. The 2018 Committee Approves the Roll-Up and Values the Derivative Claim at Avoided Costs
On May 18, 2018 the Plaintiff’s counsel in the Derivative Litigation, Grant &
Eisenhofer P.A. and Friedman Oster & Tejtel PLLC (collectively with Andrews &
Springer LLC, “Plaintiff’s Derivative Counsel”) sent a letter to the 2018 Committee
detailing support for the Plaintiff’s valuation of the Derivative Claim of over $500
million and requesting a meeting with the 2018 Committee to discuss the Derivative
Claim.68 Because the Derivative Claim is considered under Delaware law to be a
corporate asset, the purpose of the Plaintiff’s letter was to ensure the asset was
assigned proper value in determining whether the exchange ratio offered by
Enbridge was in the best interests of SEP. The letter noted that the offer proposed
on May 17, 2018 was “woefully inadequate in that it fails to provide SEP and its
66 Id. ¶ 55. At this time, SEP’s governing document was the Third Amended and Restated Agreement of Limited Partnership; the definition of “Special Approval” in this agreement is identical to the same definition in the Second A&R LPA. See Second A&R LPA §1.1; Lindsey Aff., Ex. 1, Spectra Energy Partners, LP, Current Report (Form 8-K) (Jan. 22, 2018) Ex. 3.1, Third Amended and Restated Agreement of Limited Partnership of Spectra Energy Partners, LP [the “Third A&R LPA”] §1.1. 67 Compl. ¶ 55. 68 Id. ¶ 60. See Lindsay Aff., Ex. 63, Letter from counsel for Paul Morris to the members of the Conflicts Committee of Spectra Energy Partners (DE) GP, LP [the “Letter to the 2018 Committee”].
15 public unitholders with any value associated with the Derivative Claim” and further
informed the 2018 Committee that it had an “unwavering duty to act in good faith”
that could only be “discharge[d] . . . by ensur[ing] that SEP (and its unaffiliated LP
unitholders) receive appropriate value for the Derivative Claim.”69
The 2018 Committee retained Sidley Austin LLP (“Sidley Austin”) as its legal
advisor70 and Jefferies LLC (“Jefferies”) as its financial advisor71 in connection with
its review of the Roll-Up.
On July 18, 2018, FERC finalized the aforementioned policy change, but
contrary to initial expectations it did not “meaningfully limit an MLP’s ability to
recover an income tax allowance in its cost of service.”72 SEP’s public units realized
a corresponding increase in market price.73
On July 20, 2018, the Defendant’s counsel in the Derivative Litigation,
Skadden, Arps, Slate, Meagher & Flom, LLP (“Skadden”) met with the 2018
69 Letter to the 2018 Committee, at 3. 70 Lindsay Aff., Ex. 8, Minutes of the Special Meeting of the Conflicts Committee to the Board of Directors of Spectra Energy Partners GP, LLC, dated May 23, 2018 [the “May 23, 2018 Minutes”], at 2. See Compl. ¶ 61. 71 Lindsay Aff., Ex. 9, Minutes of the Special Meeting of the Conflicts Committee to the Board of Directors of Spectra Energy Partners GP, LLC, dated May 29, 2018 [the “May 29, 2018 Minutes”], at 1. See Compl. ¶ 62. 72 Compl. ¶ 57. 73 Id. The Complaint does not indicate the market price of SEP public units after July 18, 2018 but it does note that the ratio of SEP’s unit price to Enbridge’s stock price increased from 1.018529 on March 16, 2018, the day following the original announcement of the policy change to 1.056746 following the finalization of the policy change, presumably reflecting the respective market prices.
16 Committee regarding the Derivative Litigation.74 Plaintiff alleges that Skadden
“acknowledged” that Simmons “relegated any supposed value from Reduced GP
Cash Flow to the appendix” of their discussion materials, “incorrectly stated that the
[Pipeline Interests] were ‘financially challenged’” at the time of the Reverse
Dropdown, and “mischaracterized the pro forma financial analysis done by
Simmons in connection with the Reverse Dropdown.”75 The 2018 Committee asked
Skadden to “express their degree of confidence that the defendant in the [Derivative
Litigation] would prevail if the case were to go to trial.”76 Skadden “declined to
quantify the defendant’s chance of success” but “noted that the [Derivative Claim]
had no merit and that the defendants should have a strong chance at success.”77
Skadden “emphasized that there was no evidence that the [2015 Committee] had not
possessed the subjective belief that the [Reverse Dropdown] was in the best interests
of the Partnership.”78
On July 26, 2018, Plaintiff’s Derivative Counsel met telephonically with
Sidley Austin and Jefferies in their respective capacities as legal and financial
74 Id. at ¶ 62. See Lindsay Aff., Ex. 13, Minutes of the Special Meeting of the Conflicts Committee to the Board of Directors of Spectra Energy Partners GP, LLC, dated July 20, 2018 [the “July 20, 2018 Minutes”], at 1. 75 Compl. ¶ 62. 76 July 20, 2018 Minutes, at 5. 77 Id. 78 Id.
17 advisors to the 2018 Committee regarding the Derivative Litigation.79 Plaintiff’s
Derivative Counsel also provided discussion materials to Sidley Austin and Jefferies
discussing the Reverse Dropdown, “the applicable legal standards under Delaware
law,” and, according to Plaintiff’s Derivative Counsel, “the reasons there was a
significant likelihood that SEP GP would be held liable for breaching the Partnership
Agreement by agreeing to the Reverse Dropdown, and an analysis of the damages
in the [Derivative Litigation].”80
At a meeting of the 2018 Committee on August 3, 2018, Sidley Austin noted
that Plaintiff’s Derivative Counsel had made a telephonic presentation to themselves
and Jefferies and provided a slide presentation summarizing their arguments and
reports from the Plaintiff’s expert James Read.81 The 2018 Committee discussed the
status of the Derivative Litigation with its advisors and determined that “if the [Roll-
Up] were consummated, the Partnership would receive a benefit in avoiding the
continuing litigation costs associated with the [Derivative] Litigation, so that the
amount of such avoided costs would represent modest incremental value that the
Partnership would obtain through the [Roll-Up].”82 In other words, the 2018
79 Compl. ¶ 64; See Lindsay Aff., Ex. 16, Minutes of the Special Meeting of the Conflicts Committee to the Board of Directors of Spectra Energy Partners GP, LLC, dated Aug, 3, 2018 at 10:00 am [the “August 3, 2018 Minutes”]. 80 Compl. ¶ 64. 81 August 3, 2018 Minutes, at 1. 82 Id. at 4–5.
18 Committee determined that the value of the Derivative Claim, net of defense costs,
was less than $0.
At a meeting the following day, August 4, 2018, the 2018 Committee
continued to discuss the Derivative Litigation. The 2018 Committee “confirmed its
preliminary determination that the Reduced GP Cash Flows should be included” as
a component of the consideration in the Reverse Dropdown and that “the total value
of consideration received by Partnership [sic] in the [Reverse Dropdown], including
the Reduced GP Cash Flows, was approximately $1.5 billion.”83 The 2018
Committee then determined that the Derivative Litigation “did not have any value
to the Partnership, other than the modest incremental value from the avoidance of
continuing ligation costs that would otherwise be incurred as a result of the
extinguishment of such derivative claim upon the consummation of the [Roll-Up].”84
The 2018 Committee determined it should attribute $4 million of value to SEP that
would “result from the avoidance of continuing litigation costs through the
extinguishment of the [Derivative Claim]” and asked Jefferies to “reflect that
incremental $4 million in subsequent updates of its financial analyses.”85
83 Lindsay Aff., Ex. 18, Minutes of the Special Meeting of the Conflicts Committee to the Board of Directors of Spectra Energy Partners GP, LLC, dated Aug, 4, 2018 [the “August 4, 2018 Minutes”], at 4. 84 Id. 85 Id.
19 At a meeting of the 2018 Committee on August 16, 2018, a revised offer was
announced from Enbridge with an exchange ratio of 1.09 Enbridge common shares
per SEP common unit.86 In communicating this offer, Enbridge’s representative
indicated that the revised offer “ascribed no value” to the Derivative Claim.87 The
2018 Committee noted that it had “previously determined that the value of the
[Derivative Claim] . . . was limited to the costs of continued litigation that would be
avoided . . . upon consummation of the [Roll-Up]” and that “Enbridge had indicated
that approximately $4.0 million had been reserved for such costs.”88 The 2018
Committee directed Jefferies to confirm that the $4 million in negative value “would
be taken into account in its valuation analyses of the Partnership.”89
On August 17, 2018 the 2018 Committee met to discuss another offer by
Enbridge, this time for 1.11 Enbridge common shares per SEP common unit.90
Jefferies urged the 2018 Committee to “make a final counter offer of 1.111x to
Enbridge so that the last offer in the negotiation of the [Roll-Up] would be made by
86 Lindsay Aff., Ex. 20, Minutes of the Special Meeting of the Conflicts Committee to the Board of Directors of Spectra Energy Partners GP, LLC, dated Aug, 16, 2018 [the “August 16, 2018 Minutes”], at 1. 87 Id. 88 Id. at 3. That is, Enbridge had earmarked $4 million of litigation costs to defend the Derivative Litigation. 89 Id. 90 Lindsay Aff., Ex. 21, Minutes of the Special Meeting of the Conflicts Committee to the Board of Directors of Spectra Energy Partners GP, LLC, dated Aug, 17, 2018, at 1. Jefferies noted that an exchange ratio of 1.11 Enbridge common shares per SEP common unit was “comfortably above the level at which Jefferies was prepared to opine as to the fairness, from a financial point of view, of the [Roll-Up].” Id.
20 the [2018 Committee], which Jefferies said they were confident that Enbridge would
accept.”91 Further, “[i]n response to a question that was raised, Jefferies confirmed
that . . . the incremental value to the Partnership related to the [Derivative Claim] . . .
was so small in comparison to the total value of the Partnership that there would be
no meaningful impact on the exchange ratio.”92 Ultimately, the 2018 Committee
decided to accept an exchange ratio of 1.111 Enbridge common share per SEP
common unit “assuming Enbridge accepted the [2018 Committee’s] final
counteroffer.”93
On August 23, 2018, the 2018 Committee passed a resolution, and resolved
in part that it “determine[d] in good faith that the [Roll-Up] . . . is fair and reasonable
to, and in the best interest of, the Partnership and the Public Unitholders.”94 The
2018 Committee “approve[d] the [Roll-Up]” and “recommend[ed] that the Board
approve the [Roll-Up].”95
On August 24, 2018, SEP announced that it had entered into a definitive
merger agreement with Enbridge (and its wholly-owned subsidiaries) “whereby
Enbridge would acquire all publicly held SEP units at an exchange ratio of 1.111
91 Id. 92 Id. at 1–2. 93 Id. at 2. 94 Lindsay Aff., Ex. 22, Minutes of the Special Meeting of the Conflicts Committee to the Board of Directors of Spectra Energy Partners GP, LLC, dated Aug, 23, 2018, Ex. B, Resolutions of the Conflicts Committee of the Board of Directors of Spectra Energy Partners GP, LLC, at SEPENB00000216. 95 Id.
21 shares of Enbridge stock for each publicly held unit of SEP.”96 The Roll-Up was
not subject to majority of minority approval.97
The Roll-Up was approved by SEP’s unitholders on December 13, 2018 by a
435,055,449 to 2,940,813 vote with 141,914 units abstaining.98 Enbridge-affiliated
entities held 402,989,862 units of the 484,896,871 units outstanding at the time of
the vote (approximately 83%).99 Of the 89,907,009 publicly held units, 32,065,987
units (approximately 39%) voted in favor of the Roll-Up.100
E. The Derivative Claim is Dismissed
Subsequent to the closing of the Roll-Up, SEP GP moved to dismiss the
Derivative Claim arguing that the Plaintiff lost standing to pursue that claim under
the continuous ownership requirement set forth in Lewis v. Anderson: “[a] plaintiff
who ceases to be a shareholder, whether by reason of merger or for any other reason,
loses standing to continue a derivative suit.”101 In its reply brief to SEP GP’s motion
to dismiss, the Plaintiff acknowledged that “[f]ollowing and as a result of the Roll-
Up Transaction, Enbridge is the sole owner of all common units of Spectra Energy”
96 Compl. ¶ 58. 97 Id. 98 Id. ¶ 59. 99 Id. 100 Id. 101 Def. Spectra Energy Partners (DE) GP, LP’s Br. in Support of its Mot. to Dismiss the Verified Class Action and Derivative Compl. at 5, Morris v. Spectra Energy Partners (De) GP, LP, C.A. No. 12110-VCG (Del. Ch. dismissed March 26, 2019), D. I. 128 (quoting Lewis v. Anderson 477 A.2d 1040, 1039 (Del. 1984)).
22 and noted that “[a]s the owner of the claim, Enbridge should be allowed to determine
whether to prosecute it against Defendants [sic].”102
On March 26, 2019, I granted the parties’ Stipulation and Proposed Order
dismissing the Derivative Claim with prejudice.103 The Order did not preclude the
Plaintiff from prosecuting this Action.104
F. Procedural Background of this Action
The Plaintiff made a books and records demand on SEP on October 8, 2018.105
The Plaintiff filed the Verified Class Action Complaint (the “Complaint”) on
February 8, 2019.106 The Defendant filed a Motion to Dismiss the Complaint on
April 8, 2019.107 I heard Oral Argument on the Motion to Dismiss on June 27, 2019,
and considered the Motion submitted for decision on that date.
The Complaint pleads two counts. Both are pled as direct claims.
Count I asserts breach of SEP’s Third Amended and Restated Agreement of
Limited Partnership (the “Third A&R LPA”) against SEP GP. It alleges that SEP
GP “allowed Enbridge to engineer the [Roll-Up] on terms that were patently unfair
102 Pl.’s Resp. to Spectra Energy Partners (DE) GP, LP’s Mot. to Dismiss ¶ 5, Morris v. Spectra Energy Partners (De) GP, LP, C.A. No. 12110-VCG (Del. Ch. dismissed March 26, 2019), D. I. 131. 103 Order Dismissing the Verified Class Action and Derivative Compl., Morris v. Spectra Energy Partners (De) GP, LP, C.A. No. 12110-VCG (Del. Ch. dismissed March 26, 2019), D. I. 137. 104 Id. 105 Lindsay Aff., Ex.64, Document Production and Confidentiality Agreement, at 1. 106 Verified Class Action Compl., D.I. 1. 107 Def.’s Opening Br. in Supp. of its Mot. to Dismiss the Verified Class Action Compl., D.I. 15 [“Def.’s Opening Br.”].
23 and unreasonable to SEP and its public unitholders” and that were not approved in
good faith by the 2018 Committee or the SEP GP Board of Directors.108 The basis
of this claim is that the 2018 Committee and the SEP GP Board of Directors as a
whole failed to “attempt to (i) appropriately value the Derivative Claim, or (ii) secure
any value for the Derivative Claim in its negotiations concerning the Roll-Up.”109
Count II asserts breach of the implied covenant of good faith and fair dealing
against SEP GP. The Plaintiff alleges that SEP GP violated the implied covenant of
good faith and fair dealing when it (1) “allow[ed] Enbridge to engineer the [Roll-
Up] on terms that are patently unfair and unreasonable to SEP,” and (2) secured
Special Approval using a “majority conflicted” committee that (i) did not
appropriately value the Derivative Claim and (ii) failed to secure any value for the
Derivative Claim.110
The Complaint does not challenge the fairness of the Roll-Up’s exchange
ratio, other than to allege failure to achieve value for the litigation asset.
II. ANALYSIS
The Defendant has moved to dismiss the action pursuant to Chancery Court
Rule 12(b)(6).111 The standard of review for a Rule 12(b)(6) motion is well settled:
108 Compl. ¶ 105. 109 Id. 110 Id. ¶ 110. 111 Ch. Ct. R. 12(b)(6).
24 (i) all well-pleaded factual allegations are accepted as true; (ii) even vague allegations are well-pleaded if they give the opposing party notice of the claim; (iii) the Court must draw all reasonable inferences in favor of the nonmoving party; and (iv) dismissal is inappropriate unless the plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances susceptible of proof.112
When reviewing a motion to dismiss, the Court may take into consideration
documents “incorporated into the pleadings by reference and may take judicial
notice of relevant public filings.”113
Standing is a predicate issue in any litigation.114 Since I find that the Plaintiff
lacks standing, I do not reach the Defendant’s Motion to Dismiss under Rule
12(b)(6).
Below I review both Counts of the Complaint. For the reasons that follow I
grant the Defendant’s Motion in full.
A. Standing Requirement for the Plaintiff’s Claims
As noted above, the Delaware Supreme Court held in Lewis v. Anderson115
that a plaintiff who ceases to be a stockholder loses standing to pursue derivative
litigation on behalf of the entity.
112 Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002) (footnotes and internal quotations omitted). 113 See Fairthorne Maint. Corp. v. Ramunno, 2007 WL 2214318, at *4 (Del. Ch. Jul. 20, 2007) (citations omitted). 114 E.g. Dover Historical Soc’y v. City of Dover Planning Comm’n, 838 A.2d 1103, 1110 (Del. 2003). 115 477 A.2d 1040 (Del. 1984).
25 In certain circumstances, Delaware law permits stockholders who lose
standing under this scenario to directly challenge the fairness of the merger that
extinguished their right to pursue the derivative litigation. These claims “embrace
the holding of the Supreme Court’s decision in Parnes v. Bally Entertainment
Corp.,116 which permits a plaintiff to attack a merger directly if the target board
agreed to a materially inadequate, and therefore unfair, price because the price did
not reflect the value of certain assets.”117
In re Primedia, Inc. Shareholders Litigation118 sets out the standing
requirements under Delaware law for a plaintiff who attacks the fairness of a merger
based on a “board’s alleged failure to obtain value for an underlying derivative
claim.”119 Primedia holds that a plaintiff seeking to pursue such a direct claim must
establish standing to sue via a three-part test:
First, the plaintiff must plead an underlying derivative claim that has survived a motion to dismiss or otherwise could state a claim for which relief could be granted. Second, the value of the derivative claim must be material in the context of the merger. Third, the complaint challenging the merger must support a pleadings-stage inference that the acquirer would not assert the underlying derivative claim and did not provide value for it.120
116 772 A.2d 1243 (Del.1999). 117 In re Massey Energy Co., 2011 WL 2176479, *17 (Del. Ch. May 31, 2011). 118 67 A.3d 455 (Del. Ch. May 10, 2013). 119 Id. at 477. 120 Id.
26 Only in those circumstances where a plaintiff can meet this three-part test will they
be permitted to directly challenge the merger on the grounds that the price did not
reflect the value of a material asset, the derivative claim.
Essential to any claim subject to Primedia’s standing requirements is that the
plaintiff alleges that the merger itself was unfair. This Court noted in In re
Riverstone National, Inc. Stockholder Litigation,121 upon considering a challenge to
standing under Primedia, that the “more fundamental” issue “is a direct challenge to
the merger as unfair.”122 Thus, “[e]ven in a self-interested transaction in order to
state a claim a shareholder must allege some facts that tend to show that the
transaction was not fair.”123 Failure to obtain value for a material asset, the minority
stockholders’ share of a derivative claim, may be an adequate basis to render a
merger unfair.124
The Plaintiff alleges that the Roll-Up was unfair because the 2018 Committee
and SEP GP failed to “secure any value” for the Derivative Claim on behalf of SEP’s
public unitholders.125 The 2018 Committee’s own minutes reflect its determination
that the Derivative Claim “did not have any value to [SEP], other than the modest
121 2016 WL 4045411 (Del. Ch. July 28, 2016). 122 Id. at *1. See Monroe City Emps.’ Retirement Sys. v. Carlson, 2010 WL 2376890, *2 (Del. Ch. June 7, 2010) (noting that “[f]air price, however, is often the paramount consideration.”). 123 Solomon v. Pathe Commc’ns Corp., 1995 WL 250374, *5 (Del. Ch. Apr. 21, 1995). 124 Primedia, 67 A.3d at 476 (“But the failure to obtain value for the Brophy claim in turn rendered the Merger unfair to Primedia’s minority stockholders, because they only received value for their share of Primedia’s operating business and not for their share of the Derivative Action.”). 125 Compl. ¶¶ 105–10.
27 [negative] incremental value from the avoidance of continuing ligation costs that
would otherwise be incurred as a result of the extinguishment of such derivative
claim upon the consummation of the [Roll-Up].”126 Based on this conclusion, the
2018 Committee and the SEP GP Board of Directors ultimately did not obtain any
value for the Derivative Claim as a corporate asset. The only value ascribed to the
Derivative Claim by the 2018 Committee was cost savings from the cessation of the
Derivative Litigation, an amount too small to affect the exchange ratio. The Plaintiff
alleges that the Derivative Claim had value,127 and it is incontrovertible that the
Defendant did not obtain value for the Derivative Claim and that the Plaintiff seeks
to challenge the Roll-Up on this ground. The Plaintiff, however, must first establish
standing to pursue this challenge.
B. The Plaintiff Does Not Have Standing
1. The Derivative Claim Was Viable, and the Plaintiff’s Class Received No Value for It
Primedia’s first prong dictates an inquiry into whether the underlying
derivative claim was viable. This can be answered in the affirmative when the
“underlying corporate claim has survived a motion to dismiss or otherwise could
state a claim on which relief could be granted.”128 The wisdom behind this inquiry
126 August 4, 2018 Minutes, at 4. 127 Compl. ¶ 1. 128 Primedia, 67 A.3d at 477.
28 is that if the underlying derivative suit lacks viability, then “there is no litigation
asset to value or maintain, and likewise no value to divert to the controlling
stockholder or other derivative action defendants.”129 Survival of a motion to
dismiss is an indicia that the underlying derivative suit is “meritorious.”130
The Derivative Claim here survived a motion to dismiss in this Court.131 The
record at that point was “insufficient to determine the nature of the alleged IDR
savings from the Sand and Southern Hills and whether it was properly understood
as value of consideration to SEP.”132 Drawing all reasonable inferences in favor of
the plaintiff in that motion to dismiss, I found that he “made adequate allegations
showing that under reasonably conceivable circumstances a facially unreasonable
gap in consideration exists sufficient to infer subjective bad faith” in breach of the
Second A&R LPA.133
The Defendant urges me to evaluate the viability of the Derivative Claim “as
of the date the Plaintiff’s standing was extinguished.”134 As of that date, December
17, 2018, the Defendant had moved for summary judgment on the Derivative
129 Id. 130 Id. (quoting Merritt v. Colonial Foods, Inc., 505 A.2d 757, 765 (Del. Ch. Jan 7, 1986)). 131 Compl. ¶ 105. See Morris v. Spectra Energy Partners (De) GP, LP, 2017 WL 2774559 (Del. Ch. June 27, 2017). 132 Morris, 2017 WL 2774559, at *39. 133 Id. 134 Def.’s Opening Br., at 33.
29 Claim.135 The Defendant’s summary judgment motion relied on discovery material
and the Defendant argues that the “Plaintiff cannot now contend that this Court must
assess the viability of his claim as if that summary judgment evidence did not
exist.”136
The Defendant’s argument misconstrues the purpose of the viability inquiry,
which seeks to identify only whether the underlying derivative suit is “meritorious.”
In discussing whether a claim is “meritorious,” the Delaware Supreme Court has
held that “[i]t is not necessary that factually there be absolute assurance of ultimate
success, but only that there be some reasonable hope.”137 Viability is a threshold
inquiry. If the complaint is devoid of actionable claims, the inquiry is at an end.
Primedia asks whether the claim has “survived a motion to dismiss.” The answer for
the Derivative Claim is in the affirmative. That is the end of the viability inquiry.
The Defendant’s argument that the facts favor a summary judgment is not pertinent
to viability, but, obviously, may be pertinent to the materiality prong of the Primedia
analysis, addressed below.
Likewise, the record reflects that the third Primedia prong was satisfied; the
public unitholders received no value for the Derivative Claim.
135 Def. Spectra Energy Partners (DE) GP, LP’s Mot. for Summ. J., Morris v. Spectra Energy Partners (De) GP, LP, C.A. No. 12110-VCG (Del. Ch. dismissed March 26, 2019), D. I. 118. SEP GP moved for summary judgment on September 4, 2018. 136 Def.’s Opening Br., at 34. 137 In re Primedia Inc. S’holders Litig., 67 A.3d 455, 478 (Del. Ch. May 10, 2013) (quoting Chrysler Corp. v. Dann, 223 A.2d 384, 387 (Del.1996)).
30 2. The Derivative Claim Was Not Material
The remaining prong of the Primedia inquiry is whether “the value of the
derivative claim was material in the context of the merger.”138 This first requires a
calculation of the “value” of the claim. Then, materiality is adjudicated by viewing
that value in the context of the merger as a whole.
The Complaint alleges that the Derivative Claim was worth “more than $660
million to SEP.”139 The Plaintiff calculates this number as the sum of (1) the
difference the Plaintiff alleges between the value of the Pipeline Interests ($1.5
billion) and the value the Plaintiff alleges was received as consideration for the
Pipeline Interests from SE Corp ($946 million)140 and (2) prejudgment interest using
the applicable statutory rate.141
Previous cases are unclear whether in determining materiality, prejudgment
interest should be included in the value of a derivative claim.142 I presume, without
138 Id. at 482. 139 Compl. ¶ 1. 140 $554 million, according to the Complaint. 141 $107 million, according to the Complaint. The Plaintiff notes in his brief that he “conservatively calculated pre-judgment interest only through the July 26, 2018 teleconference” and that “[a]n additional ~$19 million in interest had accrued as of the [Roll Up’s] consummation.” Pl’s Answering Br. in Opp’n to Def.’s Mot. to Dismiss, D.I. 20, at 30 n.28. 142 See Primedia, 67 A.3d at 482 (“[e]ven without interest, a potential recovery of this magnitude would be material in the context of the Merger.”); In re Massey Energy Co., 2011 WL 2176479, 27–28 (Del. Ch. May 31, 2011) (prejudgment interest not considered in determining the value of the claim, but such value was held to be limited the total coverage of the company’s directors and officers insurance policy).
31 deciding, that prejudgment interest is a part of the value attributable to the Derivative
Claim. I assume that the Derivative Claim, therefore, was for $661 million.143
But $661 million is not the value of the Derivative Claim for Primedia
purposes. Instead, the value of the Derivative Litigation must be “discounted to
reflect the minority stockholders’ beneficial interest in the litigation recovery.”144
This reflects the fact that the public unitholders of SEP would only share in that
portion of the recovery from the Derivative Claim for those units that were not
owned by Enbridge prior to the Roll-Up. The Complaint alleges that Enbridge
owned “approximately 83% . . . of SEP’s limited partner units.”145 This left the
minority unitholders with an approximately 17% interest in SEP. $661 million
multiplied by 17% equals $112,370,000. I therefore find the value of the Derivative
Claim, assuming a 100% chance of recovery, to be $112,370,000.
Yet the Plaintiff faced substantial roadblocks to a $112.37 million judgment,
as “there [was] risk in the litigation.”146 It remains, in my view, a litigable question
whether Reduced GP Cash Flow represented value to the Partnership in the Reverse
Dropdown, which would vindicate the Defendant’s approval of the transaction
objectively. But even if the Defendant was incorrect in its valuation, that would not
143 $554 million + $107 million. 144 Primedia, 67 A.3d at 482. 145 Compl. ¶ 1. 146 Primedia, 67 A.3d at 483.
32 breach the Second A&R LPA. Instead, the Plaintiff would have to show either that
the work of the Defendant’s advisor, Simmons, on the Reverse Dropdown did not
fit in the parameters of Section 7.10(b) of the Second A&R LPA,147 or that SEP GP
did not “reasonably believe” that the valuation of the transaction was within
Simmons’ competence, negating any “safe harbor” for the Defendant.
Clearing this bar, moreover, would only remove the conclusive presumption
of good faith. The Plaintiff would still have to demonstrate the Defendant’s
subjective bad faith to recover damages on behalf of SEP; the Second A&R LPA
insulated SEP GP as long as its actions were taken in subjective good faith. To
overcome that hurdle the Plaintiff would have had to show scienter: that SEP GP’s
Board of Directors and the 2015 Committee acted consciously against the best
interests of the Partnership.
I find that the chance of success of the Derivative Claim was slim, and
certainly less than one-in-four. Twenty-five percent of $112,370,000 is
$28,092,500. This represents less than one percent of the total value of the Roll-
147 “The General Partner may consult with legal counsel, accountants, appraisers, management consultants, investment bankers and other consultants and advisors selected by it, and any act taken or omitted to be taken in reliance upon the opinion (including an Opinion of Counsel) of such Persons as to matters that the General Partner reasonably believes to be within such Person’s professional or expert competence shall be conclusively presumed to have been done or omitted in good faith in accordance with such opinion.” Second A&R LPA § 7.10(b).
33 Up.148 One percent is not material in the context of the Roll-Up.149 The Plaintiff
consequently does not have standing to pursue his claims. Therefore, both Counts I
and II must be dismissed.
III. CONCLUSION
For the foregoing reasons the Defendant’s Motion is granted. The parties
should submit an Order consistent with this decision.
148 The total value of the Roll-Up was approximately $3.3 billion. Lindsay Aff. Ex. 4, Spectra Energy Partners, Current Report (Form 8-K) (Aug. 24, 2018) (Excerpt) Ex. 99.1, Enbridge Announces Definitive Agreement to Acquire All Public Equity of Spectra Energy Partners, Advances Corporate Structure Simplification, at 1. 149 See In re Massey Energy Co., 2011 WL 2176479, *28 (Del. Ch. May 31, 2011) (holding that $95 million was not material in the context of an $8.5 billion merger).
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