In Re El Paso Pipeline Partners, L.P. Derivative Litigation

Facts

In August 2007, El Paso Corporation (Parent) formed El Paso MLP (MLP) and contributed assets. El Paso MLP owns interests in companies that operate LNG terminals, and storage facilities. MLP was taken public, and the prospectus cautioned that Parent had no additional obligations to drop down additional assets. But it was clear that Parent was creating a sponsored company that over time would acquire assets from Parent. Parent indirectly owns 100% of El Paso Pipeline who also happens to be the General Partner of MLP. The General Partner owns a 2% general partner interest in MLP. MLP has no employees of its own. Employees of Parent manage and operate the business. Parent offered to sell MLP 49% interests in Southern LNG and Elba Express. Demand at the Elba Island facility as less than 10% of capacity. The principal sources of revenue for Southern LNG and Elba Express were existing service agreements with subsidiaries of Shell and British Gas. Despite their lengthy terms and firm pricing, the Service Agreements were not sure things. Shell and British Gas could walk away from their subsidiaries, leaving Southern LNG and Elba Express to collect from judgment-proof shells. Ps in their derivative lawsuit argue that through the Drop-Down, Parent sought to off-load these now-risky assets onto MLP at an inflated price. Parent controlled MLP through the General Partner, and because Parent owned the assets that MLP would be acquiring, the Drop-Down created a conflict of interest for the General Partner. MLP's limited partnership agreement modified the fiduciary duties and allowed MLP to proceed with a transaction that presented a conflict of interest for the General Partner if MLP followed one of four contractual paths. A conflict-of-interest transaction could proceed if it received 'Special Approval' by a majority of the members of the Conflicts Committee acting in good faith.' MLP's Conflicts Committee was not a standing committee but was constituted on an ad hoc basis to consider specific conflict-of-interest transactions. The General Partner Board established a limited-duration Conflicts Committee to perform an analysis of the proposed transaction and to evaluate and assess whether the Drop-Down transaction is fair and reasonable to the Partnership and make recommendations. The committee retained Akin Gump as its legal advisor and Tudor as its financial advisor. The Conflicts Committee met five times. Tudor advised that 'a 10.8x EBITDA multiple tended to be higher than the average multiples applicable to more recent M&A transactions in [the] midstream sector' but that 'such a multiple was consistent with the lower risk profile of [Southern LNG and Elba Express].' The chair of the committee met with Parent and negotiated a price.  Tudor's final updated analysis showed that Parent's offer price for Southern LNG and Elba Express fell within or below the range of values established by Tudor's chosen valuation metrics. Tudor opined that the proposed transaction was 'fair, from a financial point of view to the holders of the Common Units of MLP. The Conflicts Committee then unanimously approved resolutions recommending that El Paso MLP enter into the Drop-Down. The transaction closed shortly thereafter. Unbeknownst to the Conflicts Committee, Parent was proposing to sell LNG assets to MLP it was turning down an opportunity to buy LNG assets for itself. Parent has a first right of refusal, and it let GE Capital pay a multiple of 9.1x. The Conflicts Committee did not know about this other transaction nor the lower multiple. Members of the General Partner Board who knew about the proposed transaction did not disclose its existence or any of its details to the Conflicts Committee. Ps claim that this secret information should have been provided to the Conflicts Committee because it illustrated arms-length pricing for a comparable LNG asset. Ps sued for violation of express contractual obligations and the implied covenant of good faith and fair dealing. Eventually, Ds moved for summary judgment. 

Issues

Rule of Law

Holding and Decision

Legal Analysis

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