A recent Delaware Supreme Court decision that made it easier for investors to show possible bad faith in corporate drop-downs could inspire companies to modify the language of limited partnership agreements.
The state's highest court found on March 21 that a public investor made a viable claim that Enbridge Energy Co. Inc. might have acted in bad faith in a $1 billion sale of its interest in the Alberta Clipper oil pipeline to Enbridge Energy Partners LP. The decision reversed an April 2016 decision by the Delaware Court of Chancery dismissing the complaint by Peter Brinckerhoff, who holds 73,080 class A common units in Enbridge Energy Partners, a master limited partnership formed in Delaware. The Delaware Supreme Court sent the case back to the lower court for further proceedings.
"The new pleading standard is that the allegations must support an inference that the general partner did not reasonably believe its decision to be in the partnership's best interests," Morris James LLP attorneys Albert Carroll and Edward McNally wrote in a March 28 brief. "This is a lesser standard than the former test of whether the transaction essentially constituted 'waste' — a test that required the deal be so bad that no rational person would have done it."
Enbridge Energy Partners repurchased the Alberta Clipper interest from Enbridge for $1 billion on Jan. 2, 2015, and Enbridge put in place a special tax allocation the same day. Brinckerhoff filed a complaint in the Court of Chancery in July 2015. He said the defendants had violated the limited partnership agreement by approving the transaction in spite of provisions that required contracts with affiliates to be "fair and reasonable to the partnership" and prohibitions against enlarging unit holders' obligations. The sale and the special tax allocation, Brinckerhoff said, allowed Enbridge to shift a large tax burden from it to the public unit holders.
The Delaware Supreme Court found that Brinckerhoff met a bad faith standard because he had introduced facts that supported the possibility that the leaders of Enbridge could not reasonably have thought the company was acting in the best interest of the partnership. Widener University Delaware Law School professor Lawrence Hamermesh said he thinks the court's decision could convince companies to change how limited partnership agreements are worded.
"Will people drafting these agreements just say, 'let's take out the word 'reasonably' in the future so we don't get ourselves into this position'? Or will people who invest in these things say, 'no, we're not ... going to buy that stuff unless we have the word 'reasonably' in the partnership agreement'? My money is on the former, but you never know," he said in an interview.
The Delaware Supreme Court did agree with defendants Enbridge, Enbridge Partners and their officers that the special tax allocation for the Alberta Clipper pipeline, designed to transport petroleum from the Alberta oil sands to the U.S., was not a breach of the Enbridge Energy Partners limited partnership agreement. (Supreme Court of the State of Delaware docket 273, 2016)