Gerber v. Enterprise Products Holdings, LLC
AI Case Brief
Generate an AI-powered case brief with:
Estimated cost: $0.001 - $0.003 per brief
Full Opinion
I. INTRODUCTION
The plaintiff, Joel A. Gerber, held limited partnership units (“LP units”) of Enterprise GP Holdings, L.P., a Delaware limited partnership (“EPE”). Gerber brought this action in the Court of Chancery on behalf of two classes of former public holders of LP units of EPE. On behalf of the first class (“Class I”), Gerber challenged the sale by EPE in 2009 of Texas Eastern Products Pipeline Company, LLC (“Tepp-co GP”) to Enterprise Products Partners, L.P. (“Enterprise Products LP”) (the “2009 Sale”). On behalf of the second class (“Class II”), Gerber challenged the triangular merger in 2010 of EPE into a wholly-owned subsidiary of Enterprise Products LP (the “2010 Merger”).
Gerber’s complaint asserted claims against Enterprise Products Holdings, LLC (“Enterprise Products GP” or “general partner”) — EPE’s general partner before the 2010 Merger. Other named defendants were Enterprise Products LP; certain members of Enterprise Products GP’s Board of Directors (the “Director Defendants”); the Estate of Dan L. Duncan (“Duncan”), who before his death controlled EPE, Enterprise Products LP, and Enterprise Products GP (“Duncan’s Estate”);
The Defendants moved to dismiss the Complaint in its entirety.
II. FACTUAL BACKGROUND AND PROCEDURAL HISTORY
A. The Parties
EPE was a Delaware limited partnership engaged in the oil and gas business. Plaintiff Gerber owned EPE LP units continuously from October 24, 2006 until the 2010 Merger in which his EPE LP units were converted into units of Enterprise Products LP.
Enterprise Products LP is a Delaware limited partnership engaged in the oil and gas business. Before the 2010 Merger, EPE and Enterprise Products LP were part of a two-tier limited partnership structure. EPE was the 100% owner of Enterprise Products LP’s general partner (Enterprise Products GP). Because EPE had no independent operations, the assets of Enterprise Products LP generated cash flows to both Enterprise Products LP and EPE.
EPCO is a privately-held Texas corporation whose stock was owned, at the time of the 2009 Sale, by Duncan and members of his family. EPCO’s principal business was to provide employees, management, and administrative services to Duncan’s companies, including Enterprise Products LP, Enterprise Products GP, and (until the 2010 Merger) EPE.
The Director Defendants — Randa Duncan Williams, O.S. (“Dub”) Andras, Charles E. McMahen, Edwin E. Smith, Thurmon Andress, Ralph S. Cunningham, Richard H. Bachmann, B.W. Waycaster, and W. Randall Fowler — were at all relevant times directors of Enterprise Products GP (the “Board”).
The somewhat labyrinthine relationships among these affiliated entities and their controllers before the 2009 Sale are shown in the following chart:
Chart A: Before 2009:
Chart A: Before 2009:
[[Image here]]
B. The Facts
In May 2007, EPE purchased Teppco GP from a Duncan affiliate in exchange for EPE LP units worth $1.1 billion.
In the 2009 Sale, as consideration for selling Teppco GP to Enterprise Products LP, (i) EPE received $89.95 million worth of Enterprise Products LP’s LP units, and (ii) Enterprise Products GP (then owned by EPE) received an approximately $60 million increase in the value of its general partner interest in Enterprise Products LP. The claim challenging the 2009 Sale is essentially that EPE acquired Teppco GP for $1.1 billion in 2007, but two years later was caused by the Defendants to sell Teppco GP to Enterprise Products LP for $100 million — only 9% of EPE’s original purchase price.
The 2009 Sale was first presented to the ACG Committee of Enterprise Products GP for its approval. That Committee hired the investment bank, Morgan Stanley & Co. (“Morgan Stanley”), to furnish an opinion on whether the transaction was fair from a financial point of view to EPE and the public holders of its LP units. Morgan Stanley opined that, as of the date of its June 28, 2009 fairness opinion (the “Morgan Stanley 2009 opinion”), “the Consideration to be paid pursuant to the [combined 2009 Sale and Teppco LP Sale] is fair from a financial point of view to EPE and accordingly, to the limited partners of EPE (other than Dan Duncan and his affiliates).” Morgan Stanley cautioned, however, that it expressed “no opinion with respect to ... the fairness to EPE or its limited partners of any particular component of the Consideration (as opposed to the Consideration, taken as a whole), in each case in connection with the [two Sales].” The ACG Committee approved the 2009 Sale and recommended its approval by the Board, and on June 28, 2009 the Board approved the 2009 Sale.
We pause to focus on the consideration that Morgan Stanley opined was fair in its 2009 opinion. The 2009 Sale closed on October 26, 2009, when EPE sold Teppco GP to Enterprise Products LP. As noted, that same day, EPE sold Teppco LP to Enterprise Products LP in a separate but related transaction — the “Teppco LP Sale.” The 2009 Sale and the Teppco LP Sale were separately negotiated and were the subjects of separate merger agreements.
As a result of the 2009 Sale, the relationships among the various entities became reconfigured as shown in the chart below:
Chart B: After the 2009 Sale:
*407 [[Image here]]
2. The 2010 Merger
In July 2010, Enterprise Products LP and the Board of Enterprise Products GP began discussing a merger between EPE and Enterprise Products LP. Between July 2010 and August 23, 2010, Enterprise Products LP made two offers to the Enterprise Products GP Board, which rejected both as inadequate. On August 23, 2010, Enterprise Products LP made a third offer. On August 25, 2010, the Board’s ACG Committee met with its legal advisors and discussed the EPE LP unit-holders’ legal claims pending in Gerber I, as well as the unitholders’ potential legal claims that might arise from the 2009 Sale (collectively, the “2007 and 2009 Claims”).
After the ACG Committee considered the 2007 and 2009 Claims, the Board made a counteroffer on August 30, 2010. That same day, the ACG Committee of Enterprise Products GP met with its counterpart ACG Committee of Enterprise Products LP. Both ACG Committees exchanged views and information in an effort to arrive at mutually acceptable terms. Later that day, Enterprise Products LP made its final offer: Each LP unit of EPE would be converted into a right to receive 1.5 LP units of Enterprise Products LP.
The Court of Chancery found that a primary purpose of the 2010 Merger was to eliminate the 2007 and 2009 Claims. On September 3, 2010, Morgan Stanley orally opined, and later confirmed in writing, that the 2010 Merger exchange ratio
On September 7, 2010, EPE and Enterprise Products LP announced that they had agreed upon a merger in which Enterprise Products LP would acquire all of EPE’s outstanding LP units. The proxy statement sent to the holders of EPE’s LP units did not disclose that the 2007 and 2009 Claims had not been considered or valued for purposes of fixing the 2010 Merger consideration.
Enterprise Products LP and certain privately-held entities controlled by Duncan’s Estate (including EPCO) collectively owned a combined 76% majority interest of EPE’s LP units. Those entities voted their 76% interest in favor of the 2010 Merger, thereby ensuring its approval. On November 22, 2010, EPE merged into a wholly-owned subsidiary of Enterprise Products LP.
As a result of the 2010 Merger, the configuration of the relationships among the entities was again altered, this time as depicted in the following chart:
Chart C: After the 2010 Merger:
Chart C: After the 2010 Merger:
[[Image here]]
C. The Complaint
In his March 2011 amended complaint (“Complaint”), Gerber challenged the 2009 Sale and the 2010 Merger on behalf of the two classes of EPE former public unithold-ers described above. Gerber’s claims are set forth in six Counts.
Count I alleges that because the 2009 Sale was neither fair nor reasonable to EPE and its LP unitholders, the Defendants breached their express contractual duties as well as the implied covenant of good faith and fair dealing, under EPE’s Limited Partnership Agreement (“LPA”).
In May 2011, the Defendants moved to dismiss the Complaint in its entirety for failure to state a cognizable claim for relief under Court of Chancery Rule 12(b)(6). In an opinion handed down on January 6, 2012, the Court of Chancery granted that motion.
D. The Court of Chancery Opinion
1. Relevant Statutory and LPA Provisions
In conducting its legal analysis, the Court of Chancery relied on certain provisions of the Delaware Revised Uniform Limited Partnership Act (“DRULPA”)
Section 17 — 1101(d) of the DRULPA provides that a general partner’s duties to a limited partnership or its unitholders, including fiduciary duties, “may be expanded or restricted or eliminated by provision in the [limited] partnership agreement; provided that the [limited] partnership agreement may not eliminate the implied contractual covenant of good faith and fair dealing.”
The Vice Chancellor determined that, under DRULPA § 1101(d), the LPA had supplanted the fiduciary duties to which EPE’s general partner and EPE’s other fiduciaries would otherwise have been subject. Section 7.9(b) of the LPA expressly provided that the conduct of the general partner or any of its “Affiliates” must be in “good faith,” defined as a “belie[f| that the determination or other action is in the best interests of the Partnership”:
Whenever the General Partner makes a determination or takes or declines to take any other action, or any of its Affiliates causes it to do so, ... then unless another express standard is provided for in this Agreement, the General Partner, or such Affiliates causing it to do so, shall make such determination or take or decline to take such other action in good faith, and shall not be subject to any other or different standards imposed by this Agreement, any other agreement contemplated hereby or under the Delaware Act or any other law, rule or regulation or at equity. In order*410 for a determination or other action to be in “good faith” for purposes of this Agreement, the Person or Persons making such determination or taking or declining to take such other action must believe that the determination or other action is in the best interests of the Partnership.14
In addition to changing the liability standard, the LPA also created two separate layers of protection designed to insulate the Defendants from judicial review of whether the general partner or its “Affiliates” had satisfied their contractual duty. The first layer of insulation is Section 7.9(a) of the LPA, which covered “conflict of interest” transactions. That provision created four “safe harbors”
Unless otherwise expressly provided in this Agreement, whenever a potential conflict of interest exists or arises between the General Partner or any of its Affiliates, on the one hand, and the Partnership or any Partner, on the other hand, any resolution or course of action by the General Partner or its Affiliates in respect of such conflict of interest shall be permitted and deemed approved by all Partners, and shall not constitute a breach of this Agreement ..., or of any duty stated or implied by law or equity, if the resolution or course of action in respect of'such conflict of interest is[:]
(i) approved by Special Approval,
(ii) approved by the vote of a majority of the Units excluding Units owned by the General Partner 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 the Partnership, taking into account the totality of the relationships between the parties involved (including other transactions that may be particularly favorable or advantageous to the Partnership).16
The first of those four enumerated safe harbors — “Special Approval” is implicated in this case. That term is defined in the LPA as “approval by a majority of the members of the [ACG] Committee.”
The second layer of insulation from judicial review was afforded by Section 7.10(b) of the LPA, which applied more broadly and was not limited to conflict of interest transactions. Section 7.10(b) created a “conclusive presumption” that the general partner acts in “good faith” where the following condition is satisfied:
The General Partner may consult with ... [experts or] investment bankers ..., and any act taken or omitted to be taken in reliance upon the opinion ... of such*411 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 and in accordance with such opinion.18
2. The Applicable Standard of Liability
In addressing the legal sufficiency of the Complaint, the Vice Chancellor determined preliminarily that: (1) the 2009 Sale was a “conflict of interest transaction,” because both the purchaser and seller had a common controller;
The court concluded, however, that the LPA had contractually modified the Defendants’ fiduciary duties, by eliminating and supplanting them with an express contractual duty to act in good faith. Additionally, the court concluded, even under that good faith standard, Duncan, EPCO, and the Director Defendants were not subject to any contractual liability, for two reasons. First, the 2009 Sale and 2010 Merger received “Special Approval” and therefore the transactions were “deemed approved” and did not breach the contractual duty of good faith. Second, those Defendants were not subject to the implied covenant, because they were not parties to the LPA.
Accordingly, the court focused its analysis primarily on the question of whether the Complaint cognizably alleged that Enterprise Products GP — as EPE’s general partner and the only Defendant that signed the LPA — breached the LPA’s contractual good faith standard or the implied covenant in connection with the two challenged transactions.
3. The 2009 Sale
The Vice Chancellor first analyzed the Counts relating to the 2009 Sale and concluded that they stated no legally cognizable claims for relief. The court reasoned as follows: The 2009 Sale had received valid Section 7.9(a) “Special Approval” by the ACG Committee of the Board of Enterprise Products GP, because that Committee’s three members all satisfied the independence, qualification, and experience requirements of the United States Securities & Exchange Commission (“SEC”) and the rules and regulations of the SEC and the New York Stock Exchange (“NYSE”).
Nor (the court held) did the Complaint state a cognizable claim for breach of the implied covenant. The court acknowledged that although the implied covenant “constrains the Special Approval process,” that covenant binds only the parties to the partnership contract.
The reason LPA Section 7.10(b) foreclosed contractual liability (the court ruled) was that the ACG Committee (and by logical inference EPE’s general partner) had relied upon the Morgan Stanley 2009 opinion, and the Complaint alleged no basis to infer that the general partner had any reason to doubt Morgan Stanley’s competence. The court premised its reasoning upon its apparent understanding that Morgan Stanley’s 2009 opinion addressed only the fairness of the 2009 Sale. As the court stated in its opinion, Morgan Stanley opined that “the Consideration to be paid pursuant to the [2009 Sale] is fair from a financial point of view to EPE and accordingly, to the limited partners of EPE (other than Dan Duncan and his affiliates).”
In so characterizing Morgan Stanley’s 2009 opinion, the court misquoted — and thus perhaps misread — that opinion. In fact, the “Consideration” that Morgan Stanley opined was fair to EPE was the total consideration for the combined, 2009 Sale and Teppco LP Sale — not just the component of the total consideration spe-
Because the Complaint did not allege a legally sufficient underlying primary claim for breach of a contractual duty or the implied covenant against Enterprise Products GP or its Affiliates regarding the 2009 Sale, the court determined that the secondary liability claims alleged against the remaining Defendants — tortious interference with the LPA and aiding and abetting the general partner’s claimed breaches of duty — were a fortiori also legally insufficient. Accordingly, the court dismissed those secondary liability claims as well.
A The 2010 Merger
The Court of Chancery next turned to the 2010 Merger claims. Their gist is that
Specifically, the court held that the Defendants could not have breached any express contractual duty of good faith in the 2010 Merger, because Section 7.9(a)’s Special Approval requirements were satisfied. Nor could the Defendants have breached the implied covenant, since Section 7.10(b)’s “conclusive presumption of good faith” precluded any implied covenant claim. Because the Complaint did not state a cognizable primary liability claim for an underlying contractual breach, it also failed, ipso facto, to state a claim of secondary liability for tortious interference and for aiding and abetting. Additionally, the court dismissed Gerber’s separate unjust enrichment claim without specifically addressing it.
This appeal followed.
III. THE CONTENTIONS, THE ISSUES, AND THE STANDARD OF REVIEW
A. The Parties’ Contentions on Appeal
On appeal, Gerber claims that in determining that his Complaint failed to state any legally sufficient claim for relief, the Court of Chancery reversibly erred. Gerber argues that his Complaint cognizably alleged that: (i) in carrying out the 2009 Sale and the 2010 Merger,' Enterprise Products GP and the Director Defendants were subject to both the express contractual duty to act in “good faith” and the implied covenant; and (ii) Enterprise Products GP — aided and abetted by one or more of the remaining Defendants— breached those duties. The Defendants respond that the court, properly concluded that they were not subject to, nor did they breach, any duties owed to the partnership or its LP unitholders.
Regarding the 2009 Sale specifically, Gerber claims that the Vice Chancellor erred for three separate reasons. First, he argues that as a matter of law Enterprise Products GP and the Director Defendants were contractually obligated to act in good faith — by both the express terms of the LPA and the implied covenant — and that the court erred in holding otherwise.
To these arguments the Defendants respond that the Director Defendants had no duties under the implied covenant, because the implied covenant applies only to Defendants) who signed the LPA — here, only Enterprise Products GP. Moreover, and in any event, the Defendants’ compliance with the LPA’s “Special Approval” provision relieved them of any liability under the LPA’s contractual good-faith standard. Alternatively, even if the implied covenant applies to the Defendants, they did not breach the implied covenant, because the Morgan Stanley 2009 opinion was a proper subject of reliance by Enterprise Products GP. Therefore, under Section 7.10 of the LPA, Enterprise Products GP was entitled to be “conclusively presumed” to have acted in good faith, and thereby insulated from any claim of liability asserted against the general partner or any other Defendant, even under the implied covenant.
Regarding the 2010 Merger, Gerber claims that the Court of Chancery erroneously held that the Defendants did not breach either their contractual duty of good faith or the implied covenant. In support, Gerber reiterates his earlier contentions in connection with the 2009 Sale,
To these arguments the Defendants reiterate their responses to Gerber’s 2009 Sale-related arguments, and advance new ones as well. The Defendants argue that the Court of Chancery correctly held that they breached no contractual duty to act in good faith, because the 2010 Merger was separately approved under Section 7.9(a)(i)’s “Special Approval” safe harbor process. In addition, Section 7.10(b)’s “conclusive presumption” precludes claims under the implied covenant, because: (i) the implied covenant is merely a “gap filler” that cannot override the Defendants’ express contractual right to rely upon the protections of Sections 7.9(a) and 7.10(b); and (ii) in any event, the implied covenant applies only to parties to the LPA (here, only Enterprises Products GP), which relied on the Morgan Stanley 2010 opinion and consequently became entitled to the LPA’s conclusive good faith presumption.
B. The Issues
Although these contentions raise a plethora of legal disputes, the issues that are dispositive of this appeal can be reduced to three. The first is whether the plaintiffs claims of liability are all precluded (as the court held) by the “conclusive presumption
That determination raises the second issue, which is whether, because the conclusive presumption does not bar Gerber’s claims, the Complaint adequately pleads that EPE’s general partner (Enterprise Products GP) breached the implied covenant. As for the 2009 Sale, the Court of Chancery answered that question in the affirmative.
Our disposition of the first two issues requires that the judgment of dismissal be reversed and that the case be remanded for further proceedings. For the guidance of the parties and the trial court on remand, we also identify a third set of issues. They are: (1) the conclusive presumption having been found not to bar a claim under the implied covenant, what Defendants (if any) other than the general partner are subject to claims of secondary liability for tortious interference and/or aiding and abetting a breach of contract; and (2) to the extent any Defendant is subject to those claims, does the Complaint adequately plead them?
C. The Standard of Review
Because we are asked to review the dismissal of a complaint for failure to state a claim under Court of Chancery Rule 12(b)(6), our review is de novo.
TV. ANALYSIS
A. The LPA’s Conclusive Presumption of Good Faith Does Not Bar a Claim Under the Implied Covenant
We begin our analysis by addressing LPA Section 7.10(b)’s conclusive presumption of good faith. We start there because the foundational premise of the Court of Chancery’s analysis is that Section 7.10(b) bars any claim under the implied covenant. With respect to the 2009 Sale, the Vice Chancellor explicitly held that:
The Complaint can fairly be read to allege that Enterprise Products GP acted in bad faith when it chose to use the [Section 7.9(a) ] Special Approval Process .... According to the Complaint, the 2009 Sale was a grossly unfair transaction that involved EPE selling an asset for $100 million that two years previously it had purchased for $1.1 billion. The Complaint can fairly be read to allege that because the terms of the 2009 Sale were so unfair to EPE, the 2009 Sale would not be able to meet the second, third or fourth standard established by Section 7.9(a). Thus, if Enterprise Products GP was going to be able to get EPE to undertake the 2009 Sale free from challenge, Enterprise Products GP would have to obtain Special Approval of the 2009 Sale. According to the Complaint, Enterprise Products GP decided that the 2009 Sale benefited its controller and, then, ... found a way to use one of Section 7.9(a)’s standards to prevent this Court or anyone else from reviewing it. That is an allegation that Enterprise Products GP exercised, in bad faith, the discretion it had to use the Special Approval process to take advantage of the LPA’s duty limitations.42
The Court of Chancery further concluded that “[although the well-pled facts of the Complaint may suggest that Enterprise Products GP breached the implied covenant, that claim is precluded by Section 7.10(b) of the LPA.”
With respect to the 2010 Merger claims — viz., that “the public holders of EPE LP units failed to receive value for certain of EPE’s unliquidated claims”
[T]he Merger received Special Approval. Therefore, any claim that the Defendants breached express duties by causing EPE to enter into the Merger fails, as a matter of law, under Section 7.9(a) of the LPA. Turning to the implied covenant, even if Gerber could, absent the LPA, plead a breach of it, that claim would be precluded by Section 7.10(b). Enterprise Products GP is conclusively presumed to have acted in good faith in entering into the Merger because “Morgan Stanley rendered to the ... ACG Committee its oral opinion, subsequently confirmed in writing, that, as of such date ... the [Merger] exchange ratio ... was fair from a financial point of*418 view to the holders of ... [EPE’s LP] units.45
We conclude, for the following reasons, that the foundational premise of the court’s reasoning is flawed. Specifically, insofar as Section 7.10(b) creates a conclusive presumption of good faith, that provision does not bar a claim under the implied covenant.
The flaw in the court’s reasoning stems from a decision by the LPA’s drafters to define a contractual fiduciary duty in terms of “good faith” — a term that is also and separately a component of the “implied covenant of good faith and fair dealing.” Although that term is common, the LPA’s contractual fiduciary duty describes a concept of “good faith” very different from the good faith concept addressed by the implied covenant. In ASB Allegiance Real Estate Fund v. Scion Breckenridge Managing Member, LLC, the Court of Chancery articulated the important differences between the implied covenant and the fiduciary duty concepts of good faith.
The implied covenant seeks to enforce the parties’ contractual bargain by implying only those terms that the parties would have agreed to during their original negotiations if they had thought to address them. Under Delaware law, a court confronting an implied covenant claim asks whether it is clear from what was expressly agreed upon that the parties who negotiated the express terms of the contract would have agreed to proscribe the act later complained of as a breach of the implied covenant of good faith — had they thought to negotiate with respect to that matter. While this test requires resort to a counterfactual world — what if — it is nevertheless appropriately restrictive and commonsensical.
The temporal focus is critical. Under a fiduciary duty or tort analysis, a court examines the parties as situated at the time of the wrong. The court determines whether the defendant owed the plaintiff a duty, considers the defendant’s obligations (if any) in light of that duty, and then evaluates whether the duty was breached. Temporally, each inquiry turns on the parties’ relationship as it existed at the time of the wrong. The nature of the parties’ relationship may turn on historical events, and past dealings necessarily will inform the court’s analysis, but liability depends on the parties’ relationship when the alleged breach occurred, not on the relationship as it existed in the past.
An implied covenant claim, by contrast, looks to the past. It is not a free-floating duty unattached to the underlying legal documents. It does not ask what duty the law should impose on the parties given their relationship at the time of the wrong, but rather what the parties would have agreed to themselves had they considered the issue in their original bargaining positions at the time of contracting. “Fair dealing” is not akin to the fair process component of entire fairness, ie., whether the fiducia*419 ry acted fairly when engaging in the challenged transaction as measured by duties of loyalty and care whose contours are mapped out by Delaware precedents. It is rather a commitment to deal “fairly” in the sense of consistently with the terms of the parties’ agreement and its purpose. Likewise “good faith” does not envision loyalty to the contractual counterparty, but rather faithfulness to the scope, purpose, and terms of the parties’ contract. Both necessarily turn on the contract itself and what the parties would have agreed upon had the issue arisen when they were bargaining originally.
The retrospective focus applies equally to a party’s discretionary rights. The implied covenant requires that a party refrain from arbitrary or unreasonable conduct which has the effect of preventing the other party to the contract from receiving the fruits of its bargain. When exercising a discretionary right, a party to the contract must exercise»its discretion reasonably. The contract may identify factors that the decision-maker can consider, and it may provide a contractual standard for evaluating the decision. Express contractual provisions always supersede the implied covenant, but even the most carefully drafted agreement will harbor residual nooks and crannies for the implied covenant to fill. In those situations, what is “arbitrary” or “unreasonable” — or conversely “reasonable” — depends on the parties’ original contractual expectations, not a “free-floating” duty applied at the time of the wrong.47
Although the court in ASB Allegiance was comparing the analysis under the implied covenant to the analysis under common law fiduciary duty precepts, its reasoning applies equally to contractual fiduciary duties, such as the LPA’s “good faith” standard. Under Section 7.9(b), Enterprise Products GP and its Affiliates must make all determinations and take or decline to take any action in “good faith.” The LPA defines “‘good faith’ for purposes of this Agreement” as a “belie[f] that the determination or other action is in the best interests of the Partnership.” Like a common law fiduciary duty, Section 7.9(b)’s contractual fiduciary duty analysis looks to the parties as situated at the time of the wrong, and inquires whether Enterprise Products GP or its Affiliates “believe[d] that the determination or other action [was] in the best interests of the Partnership.” That is different from the standard that is embedded in the implied covenant.
LPA Section 7.10(b)’s conclusive presumption must be read together with Section 7.9(b). Section 7.9(b) imposes a contractual fiduciary duty to act in “good faith,” and defines “good faith” for the “purposes of this [a]greement.” Under Section 7.10(b), Enterprise Products GP and its Affiliates are conclusively presumed to have met this standard if they rely upon the opinion of a qualified expert advisor. Nothing in Section 7.10(b) pertains to or addresses the implied covenant.
The reasoning in the Vice Chancellor’s opinion improperly conflates two distinct concepts — the implied covenant and the LPA’s contractual fiduciary duty — and ignores the temporal distinction between them.
Were we to adopt the Vice Chancellor’s construction of Section 7.10(b), that would lead to nonsensical results. Examples readily come to mind of cases where a general partner’s actions in obtaining a fairness opinion from a qualified financial advisor themselves would be arbitrary or unreasonable, and “thereby frustrate] the fruits of the bargain that the asserting party reasonably expected.”
Having so determined, we next analyze whether Gerber has pled facts that, if true, would establish that Enterprise Products GP breached the implied covenant.
According to the Complaint, the 2009 Sale was a grossly unfair transaction wherein the Defendants caused EPE to sell Teppco GP to Enterprise Products LP for only 9% of EPE’s original purchase price. Enterprise Products GP, acting through its ACG Committee, obtained the Morgan Stanley 2009 opinion to trigger Section 7.10(b)’s conclusive presumption that Enterprise Products GP satisfied its contractual duty of good faith. The Complaint pleads that the Morgan Stanley 2009 opinion did not address whether holders of EPE’s LP units received fair consideration
As the Vice Chancellor noted, the LPA’s “protections were minimal” and “did not provide EPE’s public investors with anything resembling the protections available at common law.”