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Boardwalk Pipeline stockholders sue over potential discounted buyout by Loews

A pair of Boardwalk Pipeline Partners LP investors filed a lawsuit alleging that parent company Loews Corp. artificially depressed Boardwalk's stock price to give Loews the opportunity to buy out the partnership at a steep discount.

TAM Capital Management Inc. President Tsachy Mishal and Paul Berger claimed in Delaware's Court of Chancery that the sponsors of the master limited partnership acted in bad faith and violated a contractual provision that enables Loews to buy Boardwalk's units at the average daily closing price for the 180 days preceding the purchase. They filed the suit May 24, seeking to represent other Boardwalk stockholders in a class action against Boardwalk, Loews subsidiary Boardwalk Pipelines Holding Corp. and affiliated companies.

At issue is the fallout from a March decision by the Federal Energy Regulatory Commission to no longer allow oil and gas pipeline MLPs to recover an income tax allowance on cost-of-service rates. Boardwalk initially stated that the ruling would not materially impact the partnership. Six weeks later, Loews said it was considering exercising its right to purchase the MLP's outstanding units, citing the FERC policy's potential to hurt future rates. Boardwalk stock prices plummeted.

In the week after the April 30 announcement, the Boardwalk unit price fell from $11.37 to $9.56. Boardwalk units recouped some of those losses after May 9, but the unit price settled May 24 at $10.56, still 7% below the April 30 close.

"The general partner and its affiliates have eviscerated the contractual protection afforded to minority unit holders by publicly threatening to consummate a buyout, without actually committing to do so," Mishal and Berger stated in the complaint.

They added that Loews' decision to consider exercising its purchase right until the end of 2018 is "completely unreasonable and arbitrary" and ensures that "the ultimate buyout price will be manipulated towards a lower and lower price."

TAM — which owned 3,239,111, or 1.3%, of Boardwalk's units as of March 31 — wrote to the boards of Boardwalk and Loews on May 8. "Loews cannot circumvent this contractual protection by threatening to exercise the option, artificially driving down the stock price, and using the manufactured decline in the stock price to exercise the call on the cheap," Mishal said in the letter. "At a minimum, Boardwalk and Lowes breached both the MLP agreement and the implied covenant of good faith and fair dealing."

Loews did not immediately respond to a request for comment on the lawsuit, but it has pointed out in response to TAM's protest that the existence of its call option has been included in years of Boardwalk's quarterly and annual reports.

Mishal personally owned 529,938 common units of Boardwalk as of May 22, according to the complaint, while co-plaintiff Berger held 4,000 Boardwalk common units. They are asking the Delaware Chancery Court to award damages and legal costs to all plaintiffs.

Following the May 8 letter by TAM, Bandera Partners LLC on May 21 also accused Loews of stalling on its decision.

"I think there is some general outrage about it," Bandera Managing Director Jeff Gramm said in a May 21 interview. "If they really try to game the system with this call, I think the shareholders are going to have a winning case with regards to how they made this announcement that tanked the stock."