Allen v. El Paso Pipeline GP Company, L.L.C.

EFiled: Jun 20 2014 02:52PM EDT
Transaction ID 55623907
Case No. 7520-VCL

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

WILLIAM ALLEN, )
)
Plaintiff, )
)
v. ) C.A. No. 7520-VCL
)
EL PASO PIPELINE GP COMPANY, L.L.C., )
RONALD L. KUEHN, JR., JAMES C. YARDLEY, )
JOHN R. SULT, DOUGLAS L. FOSHEE, D. MARK )
LELAND, ARTHUR C. REICHSTETTER, )
WILLIAM A. SMITH, and EL PASO PIPELINE )
PARTNERS, L.P., )
)
Defendants, )
)
and )
)
EL PASO PIPELINE PARTNERS, L.P., )
)
Nominal Defendant. )

MEMORANDUM OPINION

Date Submitted: March 28, 2014
Date Decided: June 20, 2014

Jessica Zeldin, ROSENTHAL, MONHAIT & GODDESS, P.A., Wilmington, Delaware;
Samuel H. Rudman, Mark S. Reich, Michael G. Capeci, ROBBINS GELLER RUDMAN
& DOWD LLP, Melville, New York; Randall J. Baron, ROBBINS GELLER RUDMAN
& DOWD LLP, San Diego, California; Ethan D. Wohl, WOHL & FRUCHTER LLP,
New York, New York; Attorneys for the Named Plaintiff and the Class.

Peter J. Walsh, Jr., Brian C. Ralston, Berton W. Ashman, Jr., Gerard M. Clodomir,
Matthew R. Dreyfuss, POTTER ANDERSON & CORROON LLP, Wilmington,
Delaware; Attorneys for Defendants El Paso Pipeline GP Company, L.L.C. Douglas L.
Foshee, Ronald L. Kuehn, Jr., D. Mark Leland, Arthur C. Reichstetter, William A. Smith,
John R. Sult, and James C. Yardley.
Lewis H. Lazarus, Thomas E. Hanson, Jr., MORRIS JAMES LLP, Wilmington,
Delaware; Attorneys for Defendant and Nominal Defendant El Paso Pipeline Partners,
L.P.

LASTER, Vice Chancellor.
 On March 4, 2011, El Paso Pipeline Partners, L.P. (the “Partnership” or “El Paso

MLP”) bought a 25% interest in Southern Natural Gas Co. (“Southern”). The seller was

El Paso Corporation (“El Paso Parent”), the parent company of the Partnership‟s general

partner, El Paso Pipeline GP Company, L.L.C. (the “General Partner”). The plaintiffs

have challenged the transaction, claiming that the defendants violated their express

contractual obligations and the implied covenant of good faith and fair dealing or,

alternatively, aided and abetted those wrongful acts. After the close of fact and expert

discovery, the defendants moved for summary judgment. This decision grants their

motion.

I. FACTUAL BACKGROUND

The facts are drawn from the materials submitted in connection with the motion

for summary judgment. When considering the defendants‟ motion, conflicts in the

evidence must be resolved in favor of the plaintiffs and all reasonable inferences drawn in

their favor. At this stage of the case, the court cannot weigh the evidence, decide among

competing inferences, or make factual findings.

A. The Partnership

El Paso MLP is a Delaware limited partnership that operates as a publicly traded

master limited partnership (“MLP”). Headquartered in Houston, Texas, El Paso MLP

owns interests in companies that operate natural gas pipelines and storage facilities

throughout the United States.

El Paso Parent indirectly owns 100% of the General Partner, which in turn owns a

2% general partner interest in El Paso MLP. The general partner interest provides the

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General Partner with a 2% economic interest in El Paso MLP and, more importantly,

gives the General Partner control over El Paso MLP. The General Partner also owns all

of El Paso MLP‟s incentive distribution rights (“IDRs”), which are a class of non-voting

units authorized by the Partnership‟s First Amended and Restated Agreement of Limited

Partnership (the “LP Agreement” or “LPA”). The IDRs are a form of interest in El Paso

MLP distinct from the general partner interest, which is owned by the General Partner,

and the limited partner interest, which is represented by the common units.

The IDRs give the General Partner a preferential claim to cash flows generated by

El Paso MLP.

IDRs incentivize a general partner, whose economic general partner interest
in the MLP is otherwise fixed and relatively small, to manage the MLP to
maximize cash flow for the LP units. The IDRs are a form of pay for
performance, with performance measured in distributable cash. In MLP
lingo, as the operating partnership performs better, the general partner
“rides up the splits” and receives a greater share of the incremental cash
generated by its efforts. . . .

While helpful as a means of incentivizing general partner performance and
aligning interests, IDRs have downsides. Most obviously, the overhang of
the IDR claim on cash flows limits the distributions available to the LP
units. This reduces the attractiveness of LP units, resulting in a lower
trading price and making them less attractive as a source of new money or
as an acquisition currency. Equally important, as the operating partnership
performs better, the increasing IDR claim drives up its cost of equity
capital, which limits its ability to undertake new projects.

Lonergan v. EPE Hldgs., LLC, 5 A.3d 1008, 1012-13 (Del. Ch. 2010) (footnote omitted).

The LP Agreement establishes the terms of the IDRs, including the right to

preferential cash flows. Under Article VI of the LP Agreement, El Paso MLP must

distribute all “Available Cash” from the Partnership‟s operating and capital surplus

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within forty-five days of the end of each fiscal quarter. Section 6.4 of the LP Agreement

allocates the percentage share of the Available Cash among the General Partner, the

limited partners, and the IDRs. The percentage allocated to the IDRs escalates depending

on the level of quarterly distributions received by the limited partners on their common

units. The following table illustrates the allocation:

Quarterly Distribution Per Allocations of Incremental Available Cash
Common Unit General Partner IDRs Limited Partners
From Zero up to and including the 2% 0% 98%
Minimum Quarterly Distribution
($0.28750)
From the Minimum Quarterly 2% 0% 98%
Distribution up to and including the
First Target Distribution ($0.33063)
From the First Target Distribution up 2% 13% 85%
to and including the Second Target
Distribution ($0.35938)
From the Second Target Distribution 2% 23% 75%
up to and including the Third Target
Distribution ($0.43125)
Above the Third Target Distribution 2% 48% 50%

In the jargon of the MLP trade, the level at which 48% of each incremental dollar flows

to the IDRs is known as the “high splits.” Once at that level, because the General Partner

owns both the 2% general partner interest and all of the IDRs, the General Partner

receives 50% of each incremental dollar of available cash. When the General Partner

also owns common units, the take is even higher because the General Partner also

receives its pro rata share of the amounts distributed to the limited partner interests.

At the time of the transaction challenged in this litigation, El Paso Parent owned,

either through the General Partner or its affiliates, approximately 48.9% of El Paso

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MLP‟s outstanding common units. This meant that when El Paso MLP reached the high

splits, El Paso Parent would receive 74.45% of each incremental dollar of Available

Cash, broken down as follows: (i) 2.00% from the General Partner interest; (ii) 48.00%

from the IDRs, and (iii) 24.45% from its common units.

At the time of the challenged transaction, El Paso Parent was itself a publicly

traded Delaware corporation headquartered in Houston, Texas. In May 2012, El Paso

Parent was acquired and became a wholly owned subsidiary of Kinder Morgan, Inc.

B. The Southern Transaction

On February 8, 2011, El Paso Parent proposed to sell to El Paso MLP a 22%

general partner interest in Southern for a purchase price of $587 million, excluding debt.

This decision refers to the transaction as the “Drop-Down.”

Southern is a natural gas pipeline and storage company with a network of

approximately 8,000 miles of pipelines extending across the southeastern United States.

At the time of the proposal, El Paso MLP already owned a 60% general partner interest in

Southern that it had acquired from El Paso Parent through earlier drop-down transactions,

including 10% transferred to El Paso MLP upon its formation, 15% acquired in

September 2008, 20% acquired in June 2010, and 15% acquired in November 2010.

El Paso Parent‟s proposal contemplated that El Paso MLP would finance the

Drop-Down with proceeds from the public issuance of up to 12 million common units, a

draw on the Partnership‟s revolving credit facility, and a cash contribution from El Paso

Parent to maintain the General Partner‟s 2% general partner interest in El Paso MLP. El

Paso MLP had used the same financing structure for previous drop-down transactions.

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The proposal gave El Paso MLP the option to purchase an additional 3% interest in

Southern on the same terms, depending on the success of El Paso MLP‟s unit issuance. If

El Paso MLP exercised the option, it would acquire in total an additional 25% general

partner interest in Southern, for aggregate ownership of 85%.

C. The Contractual Approval Framework

Because El Paso Parent controlled El Paso MLP through its ownership of the

General Partner and also owned the interest in Southern that El Paso MLP would acquire,

the Drop-Down created a conflict of interest for the General Partner. The LP Agreement

establishes contractual requirements for such a transaction.

As authorized by the Delaware Limited Partnership Act, the LP Agreement

eliminates all common law duties, including fiduciary duties, that the General Partner, El

Paso Parent, or the directors might otherwise owe to El Paso MLP and its limited

partners. LPA § 7.9(e). In place of common law duties, the LP Agreement substitutes

contractual commitments. When the General Partner takes action in its capacity as the

General Partner, and when the decision involves a conflict of interest for the General

Partner, Section 7.9(a) of the LP Agreement establishes the governing standard. Section

7.9(a) provides that the action will be “permitted and deemed approved by all Partners”

and “not constitute a breach” of the LP Agreement or “any duty stated or implied by law

or equity” as long as the General Partner proceeds in one of four contractually specified

ways. Id. § 7.9(a). The relevant contractual language states:

Unless otherwise expressly provided in this Agreement . . . , whenever a
potential conflict of interest exists or arises between the General Partner
. . . , on the one hand, and the Partnership . . . , any Partner or any Assignee,

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 on the other, any resolution or course of action by the General Partner . . .
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 Outstanding Common Units (excluding Common 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).

Id.

For the Drop-Down, the General Partner elected to proceed by way of Special

Approval. The LP Agreement defined this form of approval as “approval by a majority

of the members of the Conflicts Committee acting in good faith.” Id. § 1.1. The LP

Agreement in turn defined the Conflicts Committee as

a committee of the Board of Directors of the General Partner composed of
two or more directors, each of whom (a) is not a security holder, officer or
employee of the General Partner, (b) is not an officer, director or employee
of any Affiliate of the General Partner, (c) is not a holder of any ownership
interest in the Partnership Group other than Common Units and awards that
may be granted to such director under the Long Term Incentive Plan and
(d) meets the independence standards required of directors who serve on an
audit committee of a board of directors established by the Securities
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. At El Paso MLP, the Conflicts Committee was not a standing committee of the GP

Board, but rather a committee constituted on an ad hoc basis to consider specific conflict-

of-interest transactions.

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 In February 2011, when El Paso Parent proposed the Drop-Down, the members of

the board of directors of the General Partner (the “GP Board”) were defendants Douglas

L. Foshee, James C. Yardley, John R. Sult, D. Mark Leland, Ronald L. Kuehn, Jr.,

William A. Smith, and Arthur C. Reichstetter. Foshee, Yardley, Sult, and Leland held

management positions with El Paso Parent or the General Partner. Foshee was the

President and CEO of El Paso Parent. Yardley served as an Executive Vice President of

El Paso Parent and as President and CEO of the General Partner. Sult served as CFO of

El Paso Parent and the General Partner. Leland served as an Executive Vice President of

El Paso Parent and president of El Paso Midstream Group, Inc., having previously served

as the CFO of El Paso Parent and the General Partner. Each of these members of the GP

Board beneficially owned equity stakes in El Paso Parent that dwarfed their equity stakes

in El Paso MLP.

The other three members of the GP Board were outside directors, although two

had past ties to El Paso Parent. Kuehn was Interim CEO of El Paso Parent in 2003 and

served as Chairman of the Board of El Paso Parent from 2003 until 2009, two years

before the challenged transaction took place. Smith was an Executive Vice President of

El Paso Parent and Chairman of El Paso Merchant Energy‟s Global Gas Group until

2002. Reichstetter was the only director without past ties to El Paso Parent.

To evaluate the Drop-Down, the GP Board established a Conflicts Committee

consisting of Kuehn, Reichstetter, and Smith. Reichstetter served as Chair. The

committee retained Tudor, Pickering, Holt & Co. (“Tudor”) as its financial advisor and

Akin Gump Strauss Hauer & Feld LLP (“Akin Gump”) as its legal advisor.

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D. The Special Approval Process

On February 9, 2011, the Conflicts Committee held its first formal meeting. After

the meeting, Tudor and Akin Gump began conducting due diligence.

The Conflicts Committee met for the second time on February 15, 2011. Tudor

summarized its initial due diligence, noting (i) the status of various developmental and

expansion projects involving Southern, (ii) adjustments made to El Paso MLP‟s financial

projections since the prior acquisition of an interest in Southern, and (iii) El Paso MLP‟s

strong financial performance since the earlier transaction. After the meeting, Reichstetter

asked Tudor to explore whether MLPs paid lower multiples when acquiring assets from

their sponsors if the sponsors were receiving higher splits under the IDRs. Reichstetter

also asked Tudor to research which sponsors of the fifteen largest MLPs had agreed to

reduce their share of the IDR cash flows.

The Conflicts Committee met again on February 24, 2011. Tudor made a

presentation that included (i) a financial overview of El Paso MLP and its market

performance, capital structure, and projected capital expenditures, (ii) a financial

overview of Southern and its projected EBITDA, distributable cash flows, and projected

capital expenditures, (iii) a comparison of El Paso Parent‟s prior financial projections for

Southern with its most recent projections, and (iv) a comparison of El Paso MLP‟s debt

levels with those of its competitors. Tudor advised that the transaction was expected to

be more accretive on a per-unit basis to El Paso MLP‟s common unitholders than

previous drop-down transactions. After the meeting, Reichstetter asked Tudor to analyze

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the growth rates for El Paso MLP‟s component businesses, for EL Paso MLP as a whole,

and on a pro forma basis assuming the Drop-Down took place.

The Conflicts Committee next met on February 28, 2011. The members and their

advisors discussed the anticipated timing of the transaction and the related public

offering.

On March 2, 2011, the Conflicts Committee met in person, and Tudor presented

an updated financial analysis. Tudor‟s presentation addressed the issues that Reichstetter

had raised, including the effect of the IDRs on the distribution of cash and precedent

transactions involving adjustments to IDRs. After the meeting, the Conflicts Committee

attempted unsuccessfully to convince El Paso Parent to take a lower price.

The next day, the Conflicts Committee met for the sixth and final time. Tudor

formally opined that the proposed transaction was fair from a financial point of view to

holders of El Paso MLP common units other than holders affiliated with El Paso Parent.

After receiving Tudor‟s opinion, the Conflicts Committee granted Special Approval for

the transaction. On March 4, the entire GP Board met and, relying on the Conflicts

Committee‟s grant of Special Approval, approved the Drop-Down.

On March 8, 2011, El Paso MLP publicly announced that it was acquiring a 22%

general partner interest in Southern with the option to acquire an additional 3% interest.

El Paso MLP also announced its plan to issue 12,000,000 common units to the public

with an underwriters‟ option to sell up to an additional 1,800,000 units. All 13,800,000

units were sold. On March 9, El Paso MLP exercised its option to acquire the additional

3% interest in Southern. The Drop-Down closed on March 14. The total purchase price

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paid by El Paso MLP to El Paso Parent in the Drop-Down was $895 million, consisting

of $667 million in cash and the assumption of $228 million of Southern‟s existing debt.

E. This Litigation

On October 24, 2011, the plaintiffs made a demand for books and records relating

to the Drop-Down. In January 2012, El Paso MLP provided the Conflicts Committee‟s

meeting minutes and Tudor‟s financial analyses.

On May 11, 2012, the plaintiffs filed their complaint. Counts I and II asserted

claims against the defendants for breaching the express terms of the LP Agreement and

the implied covenant of good faith and fair dealing. According to the plaintiffs, the IDRs

significantly reduced the economic benefit of the Drop-Down for limited partners

unaffiliated with the General Partner. The plaintiffs alleged that Tudor‟s financial

analysis failed to account for the IDRs and that the Conflicts Committee disregarded the

effects of the IDRs. According to the plaintiffs, after taking the IDRs into account, the

Drop-Down was dilutive, rather than accretive, for limited partners unaffiliated with the

General Partner. The plaintiffs contended that the Conflicts Committee consequently

acted in subjective bad faith when evaluating and approving the Drop-Down. Because

the Conflicts Committee could not have believed in good faith that the Drop-Down was

in the best interests of the Partnership, the plaintiffs asserted that the General Partner

breached Section 7.9(a) of the LP Agreement. Counts III and IV sought to impose

secondary liability on the members of the GP Board for aiding and abetting the General

Partner‟s purported breaches.

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 On November 5, 2012, this court denied the defendants‟ motion to dismiss the

complaint for failure to state a claim on which relief can be granted. The court found it

reasonably conceivable that the Conflicts Committee could be found at trial to have acted

in bad faith because the complaint alleged that the members of the Conflicts Committee

(i) disregarded the IDRs and (ii) approved a transaction that was not accretive to the

limited partners. At the same time, however, the court rejected the argument that the

members of the Conflicts Committee failed to meet the independence requirements set

forth in the LP Agreement such that they could not have given Special Approval. The

plaintiffs have not challenged or sought to revisit this ruling, which is law of the case.

Consequently, for purposes of this decision, it is undisputed that the Conflicts Committee

was duly constituted and met the requirements of the LP Agreement.

On May 19, 2014, this court granted the plaintiffs‟ motion to certify a class

consisting of all holders of El Paso MLP common units as of March 4, 2011, except the

defendants and their affiliates. In granting the motion, the court found that the claims

were not exclusively derivative and could support a direct characterization.

II. LEGAL ANALYSIS

Under Court of Chancery Rule 56, summary judgment “shall be rendered

forthwith” if “there is no genuine issue as to any material fact and . . . the moving party is

entitled to a judgment as a matter of law.” Ct. Ch. R. 56(c). The moving party bears the

initial burden of demonstrating that, even with the evidence construed in the light most

favorable to the non-moving party, there are no genuine issues of material fact. Brown v.

Ocean Drilling & Exploration Co., 403 A.2d 1114, 1115 (Del. 1979). If the moving

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party meets this burden, then to avoid summary judgment the non-moving party must

“adduce some evidence of a dispute of material fact.” Metcap Sec. LLC v. Pearl Senior

Care, Inc., 2009 WL 513756, at *3 (Del. Ch. Feb. 27, 2009), aff’d, 977 A.2d 899 (Del.

2009) (TABLE); accord Brzoska v. Olson, 668 A.2d 1355, 1364 (Del. 1995).

On an application for summary judgment, “the court must view the evidence in the

light most favorable to the non-moving party.” Merrill v. Crothall-American, Inc., 606

A.2d 96, 99 (Del. 1992). “Any application for such a judgment must be denied if there is

any reasonable hypothesis by which the opposing party may recover, or if there is a

dispute as to a material fact or the inferences to be drawn therefrom.” Vanaman v.

Milford Mem’l Hosp., Inc., 272 A.2d 718, 720 (Del. 1970).

[T]he function of the judge in passing on a motion for summary judgment
is not to weigh evidence and to accept that which seems to him to have the
greater weight. His function is rather to determine whether or not there is
any evidence supporting a favorable conclusion to the nonmoving party.
When that is the state of the record, it is improper to grant summary
judgment.

Cont’l Oil Co. v. Pauley Petroleum, Inc., 251 A.2d 824, 826 (Del. 1969). “The test is not

whether the judge considering summary judgment is skeptical that [the non-movant] will

ultimately prevail.” Cerberus Int’l, Ltd. v. Apollo Mgmt., L.P., 794 A.2d 1141, 1150

(Del. 2002). “If the matter depends to any material extent upon a determination of

credibility, summary judgment is inappropriate.” Id. When a party‟s state of mind is at

issue, a credibility determination is “often central to the case.” Johnson v. Shapiro, 2002

WL 31438477, at *4 (Del. Ch. Oct. 18, 2002).

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A. Breach Of The LP Agreement

Counts I and II of the Complaint contend that the defendants breached both their

express and implied contractual obligations under the LP Agreement. Summary

judgment is entered in favor of the defendants on these claims.

1. The Defendants Other Than The General Partner

As a threshold matter, summary judgment on Counts I and II of the Complaint is

granted in favor of all defendants other than the General Partner. Counts I and II assert a

claim for breach of contract. Count I asserts it as a direct claim; Count II asserts it

derivatively. “It is a general principle of contract law that only a party to a contract may

be sued for breach of that contract.” Gotham P’rs, L.P. v. Hallwood Realty P’rs, L.P.,

817 A.2d 160, 172 (Del. 2002). The General Partner is the only defendant that was a

party to the LP Agreement. The defendants other than the General Partner were not

parties to the LP Agreement and are entitled to summary judgment on Counts I and II.

2. The Express Contractual Standard

As noted in the Factual Background, supra, the General Partner chose to comply

with Section 7.9(a) of the LP Agreement by seeking and obtaining Special Approval. For

Special Approval to have been properly granted, the conflict-of-interest transaction must

have received “approval by a majority of the members of the Conflicts Committee acting

in good faith.” LPA § 1.1. The LP Agreement defines “good faith” for such purposes in

terms of the members‟ belief that the conflict-of-interest transaction is in the best

interests of El Paso MLP. The pertinent contractual language states: “In order for a

determination or other action to be in „good faith‟ for purposes of this Agreement, the

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Person or Persons making such determination or taking or declining to take such other

action must believe that the determinations or other action is in the best interests of the

Partnership.” Id. § 7.9(b). Two aspects of the resulting contractual test warrant

emphasis: (i) subjective belief and (ii) best interests of the Partnership.

a. Subjective Belief

The first aspect of the contractual test that merits further discussion is the standard

for good faith, which is subjective, not objective. The Delaware Supreme Court has held

that the definition of “good faith” in the LP Agreement is satisfied “if the actor

subjectively believes that it is in the best interests of [the partnership].” Allen v. Encore

Energy P’rs, L.P., 72 A.3d 93, 104 (Del. 2013). The high court stressed that this

language “eschews an objective standard when interpreting the unqualified term

„believes.‟” Id. When applying this test, “the ultimate inquiry must focus on the

subjective belief of the specific directors accused of wrongful conduct.” Id. at 107. The

Delaware Supreme Court admonished that “[t]rial judges should avoid replacing the

actual directors with hypothetical reasonable people.” Id.

Despite the subjective nature of the inquiry, trial judges confront cognitive

limitations inherent in the human condition. These limitations include a lack of psychic

powers. As the Encore Energy opinion trenchantly observed, “[d]espite their expertise,

the members of the Court of Chancery cannot peer into the hearts and souls of directors.”

Id. at 106 (internal quotation marks omitted).

Without the ability to read minds, a trial judge only can infer a party‟s subjective

intent from external indications. Objective facts remain logically and legally relevant to

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the extent they permit an inference that a defendant lacked the necessary subjective

belief. Id. In Encore Energy, the high court provided illustrations of this concept in

practice:

Some actions may objectively be so egregiously unreasonable . . . that they
“seem[] essentially inexplicable on any ground other than [subjective] bad
faith.” It may also be reasonable to infer subjective bad faith in less
egregious transactions when a plaintiff alleges objective facts indicating
that a transaction was not in the best interests of the partnership and that the
directors knew of those facts. Therefore, objective factors may inform an
analysis of a defendant‟s subjective belief to the extent they bear on the
defendant‟s credibility when asserting that belief.

. . . [T]he ultimate inquiry must focus on the subjective belief of the
specific directors accused of wrongful conduct. The directors‟ personal
knowledge and experience will be relevant to a subjective good faith
determination, which must focus on measuring the directors‟ approval of a
transaction against their knowledge of the facts and circumstances
surrounding the transaction.

Id. at 106-08 (first two alterations in original and footnote omitted).

The Encore Energy decision discussed the subjective good faith standard as

applied at the pleadings stage. The same legal principles apply at the summary judgment

stage, but instead of resting on allegations of objective facts, the plaintiff must provide

some evidence to support its position. See Ct. Ch. R. 56(c) (explaining that summary

judgment should be granted “if the pleadings, depositions, answers to interrogatories and

admissions on file, together with the affidavits, if any, show that there is no genuine issue

as to any material fact and that the moving party is entitled to a judgment as a matter of

law”). If the plaintiff can meet this burden, then the court must make a credibility

determination regarding the defendant‟s state of mind. Johnson, 2002 WL 31438477,

at *4. “In such cases, the court should evaluate the demeanor of the witnesses whose

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states of mind are at issue during examination at trial.” Id. “Even after a trial, a judge

may need to make credibility determinations about a defendant's subjective beliefs by

weighing witness testimony against objective facts.” Encore Energy, 72 A.3d at 106.

b. Best Interests Of The Partnership

The second aspect of the contractual test that deserves additional discussion is the

referent for the Conflicts Committee‟s good faith belief, namely that the conflict-of-

interest transaction is in the best interests of the Partnership. The contractual standard

does not require the Conflicts Committee to make a determination regarding the best

interests of the limited partners as a class. See Sonet v. Timber Co., 722 A.2d 319, 325

(Del. Ch. 1998) (“In any event, pursuant to § 6(b) of the agreement, in situations where

the General Partner is authorized to act according to its own discretion, there is no

requirement that the General Partner consider the interests of the limited partners in

resolution of a conflict of interest.”).

The contractual standard of “best interests of the Partnership” departs from the

fiduciary standard of conduct that applies in the corporate arena and which would apply

by default absent the contractual modification or elimination of fiduciary duties in an

alternative entity agreement. A board of directors owes fiduciary duties to the

corporation for the ultimate benefit of its residual risk bearers, viz. the class of claimants

represented by the undifferentiated equity. When exercising their authority, directors

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must seek “to promote the value of the corporation for the benefit of its stockholders.”1

“It is, of course, accepted that a corporation may take steps, such as giving charitable

contributions or paying higher wages, that do not maximize corporate profits currently.

They may do so, however, because such activities are rationalized as producing greater

profits over the long-term.” Leo E. Strine, Jr., Our Continuing Struggle with the Idea

that For-Profit Corporations Seek Profit, 47 Wake Forest L. Rev. 135, 147 n.34 (2012).

Decisions of this nature benefit the corporation as a whole and, by increasing the value of

the corporation, increase the share of value available for the residual claimants. The

resulting relationship is an instrumental one in which directors may promote the interests

of other corporate constituencies for the ultimate benefit of the entity‟s residual

claimants. “[S]tockholders‟ best interest must always, within legal limits, be the end.

Other constituencies may be considered only instrumentally to advance that end.” Id.

Because of the obligation to maximize the value of the corporation for the benefit

of the undifferentiated equity, directors must consider how their decisions affect the

common stockholders. When making decisions that have divergent implications for

different aspects of the capital structure, a board‟s fiduciary duties call for the directors to

1
eBay Domestic Hldgs., Inc. v. Newmark, 16 A.3d 1, 34 (Del. Ch. 2010); accord N. Am.
Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92, 101 (Del. 2007) (“The
directors of Delaware corporations have the legal responsibility to manage the business of a
corporation for the benefit of its shareholder[ ] owners.” (internal quotation marks omitted));
Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 955 (Del. 1985) (citing “the basic principle
that corporate directors have a fiduciary duty to act in the best interests of the corporation‟s
stockholders”); see also Leo E. Strine, Jr. et al., Loyalty’s Core Demand: The Defining Role of
Good Faith in Corporation Law, 98 Geo. L.J. 629, 634 (2010) (“[I]t is essential that directors
take their responsibilities seriously by actually trying to manage the corporation in a manner
advantageous to the stockholders.”).

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prefer the interests of the common stock, so long as that can be done in compliance with

the corporation‟s commitments to contractual claimants.2

The LP Agreement eliminates any analogous duty to prefer the interests of the

limited partners. Rather than requiring the Conflicts Committee to reach a subjective

belief that the Drop-Down was in the best interests of El Paso MLP and its limited

partners, the LP Agreement requires only that the Conflicts Committee believe

subjectively that the Drop-Down was in the best interests of El Paso MLP. When

2
See Gheewalla, 930 A.2d at 101 (“When a solvent corporation is navigating in the zone
of insolvency, the focus for Delaware directors does not change: directors must continue to
discharge their fiduciary duties to the corporation and its shareholders by exercising their
business judgment in the best interests of the corporation for the benefit of its shareholder
owners.”); LC Capital Master Fund, Ltd. v. James, 990 A.2d 435, 452 (Del. Ch. 2010) (“[I]t is
the duty of directors to pursue the best interests of the corporation and its common stockholders,
if that can be done faithfully with the contractual promises owed to the preferred.”); Prod. Res.
Gp., L.L.C. v. NCT Gp., Inc., 863 A.2d 772, 790 (Del. Ch. 2004) (“Having complied with all
legal obligations owed to the firm‟s creditors, the board would . . . ordinarily be free to take
economic risk for the benefit of the firm‟s equity owners, so long as the directors comply with
their fiduciary duties to the firm by selecting and pursuing with fidelity and prudence a plausible
strategy to maximize the firm‟s value.”); Blackmore P’rs, L.P. v. Link Energy LLC, 864 A.2d 80,
86 (Del. Ch. 2004) (“[T]he allegation that the Defendant Directors approved a sale of
substantially all of [the company‟s] assets and a resultant distribution of proceeds that went
exclusively to the company‟s creditors raises a reasonable inference of disloyalty or intentional
misconduct. Of course, it is also possible to infer (and the record at a later stage may well show)
that the Director Defendants made a good faith judgment, after reasonable investigation, that
there was no future for the business and no better alternative . . . . [I]t would appear that no
transaction could have been worse for the unit holders and reasonable to infer . . . that a properly
motivated board of directors would not have agreed to a proposal that wiped out the value of the
common equity and surrendered all of that value to the company‟s creditors.”); Equity-Linked
Investors, L.P. v. Adams, 705 A.2d 1040, 1042 (Del. Ch. 1997) (Allen, C.) (“[G]enerally it will
be the duty of the board, where discretionary judgment is to be exercised, to prefer the interests
of common stock—as the good faith judgment of the board sees them to be—to the interests
created by the special rights, preferences, etc., of preferred stock.”); see also Trenwick Am. Litig.
Trust v. Ernst & Young, L.L.P., 906 A.2d 168, 191-98 (Del. Ch. 2006) (applying business
judgment rule to dismiss claims that directors of solvent corporation breached their duties by
taking action to benefit subsidiary‟s sole stockholder at the expense of its creditors), aff’d, 931
A.2d 438 (Del. 2007) (TABLE).

18
considering that issue, the Conflicts Committee has discretion to consider the full range

of entity constituencies, including but not limited to employees, creditors, suppliers,

customers, the general partner, the IDR holders (here, one in the same with the general

partner), and of course the limited partners. In place of a single beneficiary of fiduciary

duties, the LP Agreement confers contractual discretion on the Conflicts Committee to

balance the competing interests of the Partnership‟s various entity constituencies when

determining whether a conflict-of-interest transaction is in the best interests of the

Partnership. To measure compliance with this standard of conduct, the Special Approval

provision establishes a standard of review that is not framed in terms of reasonableness,

fairness, arms‟-length pricing, or some other objective measure. Rather, the standard of

review asks only whether a majority of the Conflicts Committee subjectively believed

that they complied with the operative standard of conduct.

c. Applying The Contractual Standard

To earn summary judgment in their favor, the defendants must show that there is

no genuine issue of material fact about whether the members of the Conflicts Committee

believed subjectively, in good faith, that the Drop-Down was in the best interests of the

Partnership. If the evidence, viewed in the light most favorable to the plaintiffs, creates a

genuine issue of fact as to the subjective belief of the Conflicts Committee on this issue,

then summary judgment should be denied. Even under this plaintiff-friendly standard,

the defendants‟ motion for summary judgment is granted.

For purposes of evaluating the evidence about the subjective belief of the Conflicts

Committee, the plaintiffs have made important concessions. The plaintiffs do not claim

19
that El Paso MLP paid an excessive price in the Drop-Down or that the Drop-Down

otherwise harmed El Paso MLP as an entity. Each of the members of the Conflicts

Committee testified that they believed, subjectively, that the Drop-Down benefited El

Paso MLP as an entity. What the plaintiffs dispute is whether the Drop-Down was in the

best interests of the limited partners. Moreover, their argument is not that the Drop-

Down did not benefit the limited partners, because they now concede that the

distributions received by the holders of common units did increase. Rather, the plaintiffs

argue that the Drop-Down did not benefit the limited partners enough relative to what the

General Partner received.

If the General Partner owed fiduciary duties to the limited partners, and if the

standard of review was framed in terms of range-of-reasonableness or fairness, then the

plaintiffs‟ evidence would be sufficient to defeat summary judgment and require a trial.

But the LP Agreement eliminates all fiduciary duties, and the LP Agreement contains a

contractual standard that turns on whether a majority of the members of the Conflicts

Committee believed subjectively, in good faith, that the Drop-Down was in the best

interests of El Paso MLP. That contractual standard is dispositive.

Under the terms of the LP Agreement, the Conflicts Committee is presumed to

have acted in good faith, and the plaintiffs must rebut that presumption. LPA § 7.9(a).

The plaintiffs must therefore identify some evidence from which a fact-finder could

conclude that the Conflicts Committee did not believe that the Drop-Down was in the

best interests of El Paso MLP. There is no such evidence. The actions of the Conflict

Committee were consistent with individuals proceeding in subjective good faith. The

20
Conflicts Committee retained and consulted with financial and legal advisors who were

experienced in working with midstream MLPs and had specific familiarity with El Paso

MLP and Southern. The Conflicts Committee met formally six times. Tudor attended

each of the meetings and provided three presentations. The members of the Conflicts

Committee asked questions about the IDRs and transactions involving MLPs in the high

splits, and Tudor investigated the issues raised by the Conflicts Committee and provided

answers. As noted, the plaintiffs have conceded that the Drop-Down did not harm El

Paso MLP and recognized that the Drop-Down conferred some benefit on the limited

partners (albeit, say the plaintiffs, not enough).

Given the evidence and these concessions, the plaintiffs have failed to raise a

genuine issue of material fact about the Conflicts Committee‟s compliance with the

contractual standard. Construing the evidence in the plaintiffs favor, it supports at best

for the plaintiffs an inference that the Conflicts Committee performed its job poorly. The

evidence does not support a reasonable inference that the Conflicts Committee did not

subjectively believe that the Drop-Down was in the best interests of El Paso MLP. See

Encore Energy, 72 A.3d at 109 (“showing that the Conflict Committee members may

have negotiated poorly does not permit a reasonable inference that they subjectively

believed they were acting against [the Partnership‟s] best interests”). Summary judgment

is granted in favor of the remaining defendant—the General Partner—to the extent

Counts I and II assert a breach of the express provisions of the LP Agreement.

21
 3. The Implied Covenant Claim

Counts I and II of the Complaint also contend that the General Partner breached

implicit obligations in the LP Agreement created by the implied covenant of good faith

and fair dealing. In a recent decision, the Delaware Supreme Court held that a plaintiff

stated a claim that a Conflicts Committee had breached the implied covenant of good

faith and fair dealing by relying on fairness opinion that opined as to the fairness of the

consideration to the limited partners but “did not value the consideration that the LP

unitholders actually received.” Gerber v. Enter. Prods. Hldgs., LLC, 67 A.3d 400, 422

(Del. 2013), overruled in part on other grounds by Winshall v. Viacom Int’l, Inc., 76

A.3d 808 (Del. 2013). The plaintiffs attempt to apply Gerber to the current case by

arguing that Tudor‟s fairness opinion excluded the dilution resulting from the issuance of

additional common units to finance the Drop-Down.

a. The Standard For An Implied Covenant Claim

The implied covenant of good faith and fair dealing is the doctrine by which

Delaware law cautiously supplies terms to fill gaps in the express provisions of a specific

agreement. Despite the appearance in its name of the terms “good faith” and “fair

dealing,” the covenant does not establish a free-floating requirement that a party act in

some morally commendable sense. Gerber, 67 A.3d at 418. Nor does satisfying the

implied covenant necessarily require that a party have acted in subjective good faith.

ASB Allegiance Real Estate Fund v. Scion Breckenridge Managing Member, LLC, 50

A.3d 434, 442, 444 (Del. Ch. 2012) (observing that “[t]here are references in Delaware

case law to the implied covenant turning on the breaching party having a culpable mental

22
state” but finding that “[t]he elements of an implied covenant claim remain those of a

breach of contract claim” and that “[p]roving a breach of contract claim does not depend

on the breaching party‟s mental state”), rev’d on other grounds, 68 A.3d 665 (Del. 2013).

When used with the implied covenant, the term “good faith” contemplates “faithfulness

to the scope, purpose, and terms of the parties’ contract.” Gerber, 67 A.3d at 419;

accord Restatement (Second) of Contracts § 205 cmt. a (1981) (“Good faith performance

or enforcement of a contract emphasizes faithfulness to an agreed common purpose and

consistency with the justified expectations of the other party . . . .”). The concept of “fair

dealing” similarly refers to “a commitment to deal „fairly‟ in the sense of consistently

with the terms of the parties‟ agreement and its purpose.” Gerber, 67 A.3d at 419. The

parameters of both concepts turn not on a court‟s beliefs about what was morally or

equitably appropriate under the circumstances, but rather “on the contract itself and what

the parties would have agreed upon had the issue arisen when they were bargaining

originally.” Id.

When presented with an implied covenant claim, a court first must engage in the

process of contract construction to determine whether there is a gap that needs to be

filled. See Mohsen Manesh, Express Contract Terms and the Implied Contractual

Covenant of Delaware Law, 38 Del. J. Corp. L. 1, 19 (2013). During this phase, the court

decides whether the language of the contract expressly covers a particular issue, in which

case the implied covenant will not apply, or whether the contract is silent on the subject,

revealing a gap that the implied covenant might fill. Id. A court must determine whether

a gap exists because “[t]he implied covenant will not infer language that contradicts a

23
clear exercise of an express contractual right.” Nemec v. Shrader, 991 A.2d 1120, 1127

(Del. 2010). “[B]ecause the implied covenant is, by definition, implied, and because it

protects the spirit of the agreement rather than the form, it cannot be invoked where the

contract itself expressly covers the subject at issue.” Fisk Ventures, LLC v. Segal, 2008

WL 1961156, at *10 (Del. Ch. May 7, 2008). “[I]mplied covenant analysis will only be

applied when the contract is truly silent with respect to the matter at hand . . . .” Allied

Capital Corp. v. GC-Sun Hldgs., L.P., 910 A.2d 1020, 1032 (Del. Ch. 2006).

If a contractual gap exists, then the court must determine whether the implied

covenant should be used to supply a term to fill the gap. Not all gaps should be filled.

The most obvious reason a term would not appear in the parties‟ express
agreement is that the parties simply rejected that term ex ante when they
articulated their contractual rights and obligations. Perhaps, for example,
the parties . . . considered the term, and perhaps [after] some give-and-take
dickering, the parties agreed the term should not be made part of their
agreement. They thus rejected the term by purposefully omitting the term.

Manesh, supra, at 28 (footnote omitted). Under those circumstances, the implied

covenant should not be used to fill the gap with the omitted term. To do so would grant

parties “contractual protections that they failed to secure for themselves at the bargaining

table.” Aspen Advisors LLC v. United Artists Theatre Co., 843 A.2d 697, 707 (Del. Ch.),

aff’d, 861 A.2d 1251 (Del. 2004). A court must not use the implied covenant to “rewrite

[a] contract” that a party “now believes to have been a bad deal.” Nemec, 991 A.2d at

1126. “Parties have a right to enter into good and bad contracts, the law enforces both.”

Id.

24
 But a contractual gap may exist for other reasons. “No contract, regardless of how

tightly or precisely drafted it may be, can wholly account for every possible

contingency.” Amirsaleh v. Bd. of Trade of City of New York, Inc., 2008 WL 4182998, at

*1 (Del. Ch. Sept. 11, 2008). Even the most skilled and sophisticated parties will

necessarily “fail to address a future state of the world . . . because contracting is costly

and human knowledge imperfect.” Lonergan, 5 A.3d at 1018. “In only a moderately

complex or extend[ed] contractual relationship, the cost of attempting to catalog and

negotiate with respect to all possible future states of the world would be prohibitive, if it

were cognitively possible.” Credit Lyonnais Bank Nederland, N.V. v. Pathe Commc’ns

Corp., 1991 WL 277613, at *23 (Del. Ch. Dec. 30, 1991) (Allen, C.). And “parties

occasionally have understandings or expectations that were so fundamental that they did

not need to negotiate about those expectations.” Katz v. Oak Indus. Inc., 508 A.2d 873,

880 (Del. Ch. 1986) (Allen, C.) (quoting Corbin on Contracts § 570, at 601 (Kaufman

Supp. 1984)).

Under these or other circumstances, it may be appropriate to fill a gap using the

implied covenant. The Delaware Supreme Court has provided guidance in this area by

admonishing against a free-wheeling approach. Invoking the doctrine is a “cautious

enterprise.” Nemec, 991 A.2d at 1125. Implying contract terms is an “occasional

necessity . . . to ensure [that] parties‟ reasonable expectations are fulfilled.” Dunlap v.

State Farm Fire & Cas. Co., 878 A.2d 434, 442 (Del. 2005) (internal quotation marks

omitted). Its use should be “rare and fact-intensive, turning on issues of compelling

25
fairness.” Cincinnati SMSA Ltd. P’ship v. Cincinnati Bell Cellular Sys. Co., 708 A.2d

989, 992 (Del. 1998).

Assuming a gap exists and the court determines that it should be filled, the court

must determine how to fill it. At this stage, a reviewing court does not simply introduce

its own notions of what would be fair or reasonable under the circumstances. “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.” Gerber, 67 A.3d at 418. To supply an implicit term, the court

“looks to the past” and asks “what the parties would have agreed to themselves had they

considered the issue in their original bargaining positions at the time of contracting.” Id.

The court seeks to determine “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.” Id. “Terms are to be implied

in a contract not because they are reasonable but because they are necessarily involved in

the contractual relationship so that the parties must have intended them . . . .” Cincinnati

SMSA Ltd. P’ship v. Cincinnati Bell Cellular Sys. Co., 1997 WL 525873, at *5 (Del. Ch.

Aug. 13, 1997), aff’d, 708 A.2d 989 (Del. 1998).

b. The Rulings In Gerber

The plaintiffs rely on Gerber to establish their implied covenant claim. Assessing

the implications of Gerber requires an understanding of what was at issue in that case.

26
 The plaintiff in Gerber owned common units in Enterprise GP Holdings, L.P.

(“Enterprise Parent”), a publicly traded limited partnership that owned (i) 100% of the

general partners of two other publicly traded limited partnerships, Enterprise Products

Partners, L.P. (“Enterprise Sub”) and Teppco Partners LP (“Teppco Sub”), and

(ii) limited partner interests in both Enterprise Sub and Teppco Sub. The plaintiff in

Gerber challenged two separate transactions in which Enterprise Parent and its affiliates

engaged.

The first transaction took place in 2009, when Enterprise Parent sold the entity that

served as the general partner of Teppco Sub to Enterprise Sub, allegedly for less than

10% of the entity‟s actual value. The consideration had two components: (i) Enterprise

Sub issued common units valued at $39.95 million to Enterprise Parent, and (ii) the

general partner of Enterprise Sub, which Enterprise Parent owned, received an increase in

its general partner interest valued at $60 million. The Delaware Supreme Court referred

to this transaction as the “2009 Sale.” Gerber, 67 A.3d at 406. Contemporaneously with

the 2009 Sale, Enterprise Parent caused Teppco Sub to merge with a wholly-owned

subsidiary of Enterprise, with each common unit of Teppco Sub converted into the right

to receive 1.24 common units of Enterprise Sub. The Delaware Supreme Court referred

to this transaction as the “Teppco LP Sale.” Id. The trial court opinion does not mention

the Teppco LP Sale, which was addressed in a separate decision of this court that

approved a settlement of the litigation challenging that transaction. Compare Gerber v.

Enter. Prods. Hldgs., LLC (Gerber Trial), 2012 WL 34442 (Del. Ch. Jan. 6, 2012)

(discussing only 2009 Sale), with Brinckerhoff v. Tex. E. Prods. Pipeline Co., 986 A.2d

27
370 (Del. Ch. 2010) (discussing 2009 Sale and Teppco LP Sale). In Gerber, the

Delaware Supreme Court noted that the 2009 Sale and the Teppco LP Sale closed on the

same day and were cross-conditioned on each other. Gerber, 67 A.3d at 406 & n.10.

In Gerber Trial, the court understood Morgan Stanley & Co. to have opined that

the consideration that Enterprise Parent received in the 2009 Sale was fair from a

financial point of view to Enterprise Parent and the public holders of the common units.

Gerber Trial, 2012 WL 34442, at *2. Morgan Stanley “expressed no opinion with

respect to . . . the fairness . . . of any particular component of the Consideration (as

opposed to the Consideration, taken as a whole).” Id. (internal quotation marks omitted).

On appeal, the Delaware Supreme Court held that the Court of Chancery “misquoted—

and thus perhaps misread” Morgan Stanley‟s opinion, which in fact addressed in unitary

fashion the fairness of the consideration received in both the 2009 Sale and the Teppco

LP Sale. Gerber, 67 A.3d at 412-13.

The second transaction took place in 2010, when Enterprise Parent merged with

and into a wholly owned subsidiary of Enterprise Sub and each common unit of

Enterprise Parent was converted into the right to receive 1.5 common units of Enterprise

Sub. The Gerber decision referred to this transaction as the “2010 Merger.” Gerber, 67

A.3d at 404. At the time of the transaction, Enterprise Parent possessed valuable

derivative claims against Enterprise Sub and its affiliates arising out of the 2009 Sale and

certain other conflict-of-interest transactions that took place in 2007. The plaintiff

alleged, and the trial court accepted for purposes of decision, that a primary purpose of

the 2010 Merger was to eliminate the threat posed by the derivative claims by depriving

28
the public holders of common units of Enterprise Parent of standing to assert the claims.

Gerber Trial, 2012 WL 34442, at *7. Morgan Stanley opined that the exchange ratio in

the 2010 Merger was fair from a financial point of view to the public holders of common

units of Enterprise Parent. Morgan Stanley did not value the derivative claims and did

not take the derivative claims into account when rendering its fairness opinion. Id. at *3;

accord Gerber, 67 A.2d at 408.

The limited partnership agreement of Enterprise Parent established contractual

paths for approving conflict-of-interest transactions that parallel those in this case. Both

the 2009 Sale and the 2010 Merger received Special Approval. The plaintiff challenged

both transactions, alleging that the defendants breached the express contractual

requirements of the conflict-of-interest provision and the implied covenant of good faith

and fair dealing. The defendants moved to dismiss the complaint, arguing among other

things that the claims could not succeed in light of the following five-step argument.

First, Enterprise Parent‟s limited partnership agreement eliminated all fiduciary duties.

Second, under the contractual standard, Enterprise Parent could proceed with a conflict-

of-interest transaction if a majority of the members of a committee of the board of

directors of the general partner of Enterprise Parent (“Enterprise GP”) believed in good

faith that the transaction was in the best interests of Enterprise Parent. Third, Section

7.10(b) of Enterprise Parent‟s limited partnership agreement provided that Enterprise GP

would be conclusively presumed to have acted in good faith if Enterprise GP relied on an

opinion from an expert, such as a fairness opinion from a financial advisor (the

“Conclusive Presumption Provision”). Fourth, the committee obtained fairness opinions

29
from Morgan Stanley for the 2009 Sale and the 2010 Merger. Fifth, the General Partner

was entitled to rely on the fairness opinions obtained by the committee for purposes of

the Conclusive Presumption Provision. The Court of Chancery granted the motion to

dismiss. See Gerber Trial, 2012 WL 34442, at *14. This court agreed with the

contractual analysis advanced by the defendants and held that the implied covenant of

good faith and fair dealing could not be used to contradict the Conclusive Presumption

Provision. Id. at *13.

On appeal, the Delaware Supreme Court reversed, holding that the plaintiff had

pled a breach of the implied covenant as to both transactions. See Gerber, 67 A.2d at

418, 422-23. As to the 2009 Sale, the Delaware Supreme Court read Morgan Stanley‟s

fairness opinion differently than the Court of Chancery:

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
[Enterprise Parent] sold [the general partner of Teppco Sub] to [Enterprise
Sub]. As noted, that same day, [Enterprise Parent] sold [Teppco Sub] to
[Enterprise Sub] in a separate but related transaction—the “Teppco LP
Sale.” . . . Importantly, in its 2009 opinion, Morgan Stanley opined on the
fairness of the total consideration paid for both the 2009 Sale and the
Teppco LP Sale. Morgan Stanley did not opine, however, on the fairness of
the portion of the total consideration specifically allocable to the 2009 Sale.

67 A.3d at 406. The Delaware Supreme Court noted that the Court of Chancery had

understood the opinion to apply only to the 2009 Sale, but stressed that “the

„Consideration‟ that Morgan Stanley opined was fair to [Enterprise Parent] was the total

consideration for the combined 2009 Sale and Teppco LP Sale—not just the component

of the total consideration specifically allocable to the 2009 Sale.” Id. at 412-13.

30
 The nature of Morgan Stanley‟s opinion raised a question as to whether the

general partner could rely on such an opinion for purposes of the Conclusive Presumption

Provision. For understandable reasons, the Conclusive Presumption Provision did not

establish parameters for a fairness opinion or identify analyses that a financial advisor

would have to conduct, doubtless because it would have been costly and difficult (at best)

or impossible (at worst) for the drafters to specify all of the potential transactions to

which the Conclusive Presumption Provision might apply and the different analyses that

should be conducted. This left a gap for the implied covenant to fill.

After considering what the parties would have agreed to had the issue been raised

at contract formation, the Delaware Supreme Court held that the parties would not have

agreed that the Conclusive Presumption Provision could insulate the 2009 Sale from

challenge when the underlying fairness opinion lumped it together with the Teppco LP

Sale, thereby avoiding rendering any opinion about what appeared to be a sale of an asset

to a related party for less than 10% of its actual value. Id. at 421-22. In the words of the

Delaware Supreme Court,

When Gerber purchased EPE LP units, he agreed to be bound by the LPA‟s
provisions . . . . At the time of contracting, however, Gerber could hardly
have anticipated that Enterprise Products GP would rely upon a fairness
opinion that did not fulfill its basic function—evaluating the consideration
the LP unitholders received for purposes of opining whether the transaction
was financially fair. Although Section 7.10(b) does not prescribe specific
standards for fairness opinions, we may confidently conclude that, had the
parties addressed the issue at the time of contracting, they would have
agreed that any fairness opinion must address whether the consideration
received for [the general partner of Teppco Sub] in 2009 was fair . . . .

31
Id. at 422 (footnote omitted). The high court held that the plaintiff had stated a claim for

breach of the implied covenant as to the 2009 Sale because “the parties would not have

agreed that the [general partner] could obtain and rely on a fairness opinion so flawed.”

Id. at 424.

The Delaware Supreme Court‟s analysis of the 2010 Merger proceeded along

similar lines. This time, the plaintiff argued that the fairness opinion failed to consider

the value of the derivative claims when opining that the consideration received by the

holders of common units of Enterprise Parent was fair. Id. at 422-23. As before, the

Conclusive Presumption Provision did not specify whether the fairness opinion had to

consider the value of derivative litigation, creating a gap for the implied covenant to fill.

The Delaware Supreme Court again agreed with the plaintiff:

Gerber could not fairly be charged with having anticipated that [Enterprise
GP] would merge [Enterprise Parent] for the purpose of eliminating
[Enterprise Parent‟s] derivative claims, but then rely on a fairness opinion
that did not even consider those claims‟ value. Although Section 7.10(b)
does not explicitly so require, we conclude that the parties would certainly
have agreed, at the time of contracting, that any fairness opinion
contemplated by that provision would address the value of derivative
claims where (as here) terminating those claims was a principal purpose of
a merger.

Id. at 423. The high court “analyze[d] the Complaint independently and conclude[d] that

it state[d] legally sufficient claims that [Enterprise GP] breached the implied covenant in

carrying out the 2010 Merger.” Id. at 425.

As this discussion shows, the analysis in Gerber turned on the Conclusive

Presumption Provision. The limited partnership agreement of Enterprise Parent did not

attempt to anticipate and specify all of the matters that a fairness opinion might need to

32
address, leaving gaps. The Delaware Supreme Court used the implied covenant to fill the

gaps in the Conclusive Presumption Provision as it applied to the transactions in question.

At least as I understand Gerber, the high court‟s analysis cannot be divorced from the

Conclusive Presumption Provision that was at issue.

c. The Scope Of The Fairness Opinion In This Case

If Gerber stands for the proposition that a limited partner states a viable implied

covenant claim whenever a Conflicts Committee obtains and relies on a fairness opinion

that does not consider all elements of the consideration from the standpoint of the limited

partners, then this court must deny the defendants‟ motion for summary judgment on the

implied covenant claim. The evidence for purposes of the motion for summary judgment

supports the contention that Tudor excluded from its analysis the dilution that the limited

partners would suffer, which was a critical element of the transaction from the limited

partners‟ perspective. Tudor‟s fairness opinion stated: “[W]e express no view or opinion

with respect to the amount or level of ownership dilution to the current holders of

Common Units as a result of the [Drop-Down].” Transmittal Affidavit of Gerard M.

Clodomir dated Nov. 14, 2013 (the “Clodomir Aff.”) Ex. 44 at EPP000003. Tudor‟s

Rule 30(b)(6) witness testified that this language meant what it says:

It was speaking to the fact that—and again, this was more broadly in our
opinion language—that a unitholder or shareholder in a transaction—prior
to the transaction may own X percent of the company and post-transaction,
Y percent and that—that our fairness analysis doesn‟t directly address that
point.

It is not saying we‟re not focused on accretion/dilution to cash flows. It is
strictly looking at that ownership dilution.

33
Simmons Tr. 197-98. The defendants have offered competing evidence, but given the

summary judgment standard, this decision assumes for purposes of analysis that Tudor‟s

fairness opinion did not take the possibility of excessive dilution into account.

The plaintiffs have introduced evidence sufficient to support an inference at the

summary judgment stage that when opining on the fairness of the Drop-Down to the

limited partners, Tudor should have considered the effects of dilution. Although IDRs

provide an incentive to acquire assets to grow LP distributions, they also give the General

Partner an incentive to use common units to fund the acquisitions. A Tudor analyst

report on the midstream MLP sector, issued four months after the Drop-Down was

approved, explained that IDRs “can incentivize the general partner to overfund projects

with equity financing.” Affidavit of Jessica Zeldin dated Dec. 10, 2013 (the “Zeldin

Aff.”) Ex. 59 at EL007493. This incentive exists because once the Partnership is in the

high splits, the General Partner will receive 50% of the incremental cash flows from its

IDRs and general partner interest, while the limited partners suffer the dilution from the

issuance of additional common units. In the words of the Tudor report, the positive

incentive to grow cash flows “can serve as a negative incentive from the LP unitholders‟

perspective, who can be diluted by unit issuances which increase GP cash flows.” Id.

The plaintiffs observe that by February 24, 2011, two weeks after El Paso Parent

proposed the Drop-Down and less than a week before the Conflicts Committee approved

it, El Paso MLP‟s quarterly distributions crossed into the high splits. Tudor‟s own

models indicate that both in dollar terms and on a percentage basis, El Paso Parent‟s

share of El Paso MLP‟s cash flows would increase dramatically as a result of reaching

34
the high splits. In dollar terms, before the Drop-Down, the IDRs generated $8 million in

distributions in 2010. The plaintiffs‟ expert, using Tudor‟s model and inputs, projected

that after the Drop-Down, the IDRs would generate an additional $4 million in

distributions in 2011, and that figure would grow to $16 million by 2015. On a

percentage basis, the growth in distributions received by El Paso Parent would far

outstrip the growth in distributions to the limited partners. A slide from Tudor‟s

February 24, 2011 presentation to the Conflicts Committee titled “GP & IDR Accretion,”

projected that from 2011 to 2015, the Drop-Down would result in 2-3% annual growth of

the distributions to the limited partners and 19-24% annual growth of the distributions to

the General Partner. The IDRs actually received $49 million in distributions in 2011,

well in excess of the projections.

The plaintiffs observe that the differential allocation of cash flows changed the

effective pricing of the Drop-Down when viewed as a multiple of EBITDA, a standard

valuation metric. Because a sizable portion of the EBITDA generated by the Drop-Down

would flow back to El Paso Parent through the IDRs, the effective EBITDA multiple paid

by El Paso MLP was higher than if the multiple were calculated without considering the

differential allocation of cash flows. The plaintiffs cite an internal analysis that El Paso

Parent prepared in January 2010, before proposing the Drop-Down. When the Drop-

Down was analyzed without giving effect to the differential allocation of cash flows, the

analysis shows that the price paid by El Paso MLP and received by El Paso Parent would

be the same and imply an EBITDA multiple of 9.2x. But when the transaction was

evaluated solely from the standpoint of the EBITDA available to the limited partners, i.e.

35
subtracting the cash that would flow back to the General Partner, the adjusted EBITDA

multiple at which the asset was purchased increased to 10.6x. The adjusted EBITDA

multiple at which the asset was sold increased to 11.1x when the transaction was

evaluated solely from the standpoint of El Paso Parent. In an accompanying explanation

for the board of directors of El Paso Parent, management explained the effect as follows:

We are proposing the sale of the interests in SNG using the same
equivalent multiple agreed to in the June 2010 and November 2010
drop downs of interests in SNG (9.2x multiple of enterprise value to
EBITDA). We are asking for approval at this level as we believe that
it constitutes appropriate value for the quality of assets offered
(given the quality of the cash flow stream and organic growth
profile). Comparable transactions, including previous drop downs,
have been executed between a range of 8-10x multiple. We are
cognizant that the financial benefit of this drop to El Paso is higher
than the nameplate multiple on this deal. Due to El Paso’s
continued significant ownership interest in EPB, El Paso
participates in EPB’s accretion through its existing limited partner
units and also through its incentive distribution rights. Therefore
the net impact to El Paso of the contribution is closer to an 11.1x
multiple.

Zeldin Aff. Ex. 55 at EL130894 (emphasis added).

In September 2011, after the market reacted poorly to the Drop-Down, Tudor

performed a similar analysis at the request of the Conflicts Committee. Starting with the

“nameplate” 9.2x EBITDA multiple, Tudor adjusted what El Paso Parent sold to reflect

the incremental cash flow to the General Partner from the 2% GP interest and the IDRs

($209 million) and the value of incremental cash flow to the General Partner‟s common

units ($73 million), resulting in an effective EBITDA multiple of 12.1x.

The plaintiffs contend that Tudor knew when rendering its fairness opinion how to

perform the type of analysis that El Paso Parent conducted internally before proposing

36
the Drop-Down and that Tudor actually prepared months after the Drop-Down. The

plaintiffs argue that if Tudor had conducted such an analysis, it could not have opined

that the Drop-Down was fair to the limited partners. From the plaintiffs‟ perspective, by

failing to consider these aspects of the transaction, the Tudor fairness opinion “did not

value the consideration that the LP unitholders actually received.” Gerber, 67 A.3d at

422. As previously noted, if the plaintiffs are correct that Gerber stands for the

proposition that a limited partner states a viable implied covenant claim whenever a

Conflicts Committee obtains a fairness opinion that does not consider all elements of the

consideration from the standpoint of the limited partners, then summary judgment on the

implied covenant claim should be denied.

d. Gerber Does Not Govern This Case.

In my view, the plaintiffs cannot rely on Gerber to state an implied covenant claim

in the current case. As I read Gerber, that decision turned on the Conclusive

Presumption Provision and its gaps. Although the LP Agreement contains a section

identical to the Conclusive Presumption Provision, this decision does not rely on it. This

decision instead rests on the terms for Special Approval. Consequently, rather than

unreflectively expanding Gerber beyond the Conclusive Presumption Provision, this

court must conduct an implied covenant analysis that focuses on the Special Approval

provision. This is, of course, the interpretation of one trial judge, and it may not

accurately reflect the Delaware Supreme Court‟s view of Gerber.

As noted, the implied covenant analysis begins with contract construction, which

is the phase when the court determines whether the express language of the agreement

37
addresses the issue presented. In this case, the implied covenant analysis need not

continue beyond this initial phase. Section 7.9(a) is controlling, leaving no fairness-

opinion-related gap to fill.

Section 7.9(a) plainly applies to the Drop-Down. The express language of Section

7.9(a) authorizes the General Partner to proceed with a conflict-of-interest transaction by

obtaining Special Approval. To meet the Special Approval requirement, the Conflicts

Committee must believe in good faith that the transaction is in the best interests of the

Partnership. To hold such a belief, the Conflicts Committee need not have retained a

financial advisor or obtained a fairness opinion. Nor must the Conflicts Committee reach

a determination about the fairness of the transaction to the limited partners. When

evaluating what is in the best interests of the Partnership, the members of the Conflicts

Committee can consider and balance all of the various interests of the Partnership, not

just the interests of the limited partners. Under the LP Agreement, the standard of review

for evaluating the Conflicts Committee‟s decision is a deferential subjective good faith

standard.

It would, in my view, conflict fundamentally with the plain language and structure

of Section 7.9(a) to invoke the implied covenant to require that the Conflicts Committee

follow a particular course by obtaining an opinion from a financial advisor that addressed

the fairness of the Drop-Down to the limited partners in a judicially proscribed manner.

Deploying the implied covenant in this fashion would rewrite Section 7.9(a) by changing

both the nature of the Conflicts Committee‟s inquiry (from best interests of the

Partnership to fairness to the limited partners) and the scope of judicial review (from the

38
subjective good faith of a majority of the committee to compliance with an obligation to

obtain an opinion that analyzed fairness with a sufficient level of methodological rigor to

satisfy a court after the fact). Rather than filling a gap, this application of the covenant

would alter the terms of the LP Agreement. The implied covenant cannot do that.

Assuming for the sake of argument that the analysis proceeded to the next stage

and the court considered what the parties would have agreed to in a hypothetical original

bargaining position, the outcome is the same. The prospectus from El Paso MLP‟s initial

public offering in November 2007 provides helpful context regarding what the sponsor

contemplated in the original bargaining position and what the public unitholders accepted

by purchasing through the IPO. The prospectus disclosed that El Paso MLP anticipated

entering into numerous relationships with El Paso Parent that could give rise to conflicts

of interests. One obvious relationship was that “[a]ll of [El Paso MLP‟s] executive

management personnel will be employees of our general partner or another subsidiary of

El Paso [Parent],” and that “[w]e will also utilize a significant number of employees of El

Paso [Parent] to operate our business and provide us with general and administrative

services.” Clodomir Aff. Ex. 2 at 130. The prospectus also listed a series of significant

agreements between El Paso MLP and the entities in which it owned interests, on the one

hand, and El Paso Parent, the General Partner, and their affiliates, on the other hand. See

id. at 140-45.

The prospectus disclosed that El Paso MLP anticipated acquiring properties from

El Paso Parent. The prospectus stated that one of the four components of El Paso MLP‟s

business strategy would be “[g]rowing our business through strategic asset acquisitions

39
from third parties, El Paso or both.” Id. at 101. The prospectus explained that “[i]n

addition to making acquisitions from third parties, we may also have additional

opportunities to . . . acquire assets or partial interests in assets directly from El Paso

[Parent], although we cannot predict whether any such opportunities will be made

available to us and El Paso [Parent] is under no obligation to offer us such opportunities.”

Id. at 101-02. The prospectus noted that as of September 30, 2007, “El Paso [Parent]

owned or had interests in approximately 43,000 miles of interstate pipeline and 233 Bcf

of working natural gas storage capacity that connect many of the major domestic natural

gas producing basins to the major domestic consuming markets.” Id. at 98. These were

the types of assets that El Paso MLP planned to pursue. The prospectus also noted that

because of significant net operating loss carry forwards, El Paso Parent would have

“increased flexibility with respect to asset selection for future transfers to us” and would

have “the ability to offer assets to us in the future without incurring substantial cash taxes

on the transfer.” Id. at 103. The prospectus warned that actions taken by the General

Partner “may affect the amount of cash available to pay distributions to unitholders.” Id.

at 146. The prospectus also explained that the amount of cash available would be

affected by, among other things, the “amount and timing of asset purchases and sales”

and the “issuance of additional units.” Id.

To address El Paso MLP‟s expansive web of interrelationships with El Paso

Parent, the drafters of the LP Agreement plainly sought to create a method for resolving

the numerous and readily foreseeable conflicts of interest that would minimize the

potential for litigation and after-the-fact judicial review. Section 7.9(a) provides four

40
methods of resolution, including the option of Special Approval. As noted, Special

Approval requires only that the members of the Conflicts Committee believe subjectively

in good faith that the transaction is in the best interests of the Partnership. The Special

Approval structure seeks to channel conflict-of-interest decisions to the Conflicts

Committee for an up-or-down decision that can be reviewed only for subjective good

faith, thereby minimizing the potential for litigation. An entity can have a legitimate

interest in internal dispute resolution mechanisms designed to avoid litigation. See ATP

Tour, Inc. v. Deutscher Tennis Bund, --- A.3d ---, 2014 WL 1847446, at *4 (Del. Ch.

May 8, 2014) (“The intent to deter litigation, however, is not invariably an improper

purpose.”).

Assuming that a question had been raised in the original bargaining position as to

whether limited partners should have the ability to challenge the Special Approval

process by litigating whether the Conflicts Committee obtained a fairness opinion that

satisfied a test of reasonableness, met certain requirements, or otherwise complied with

some form of objective standard, the LP Agreement provisions and the discovery record

suggest that the parties would have rejected such an approach. In light of the pervasive

nature of the conflicts of interest presented by El Paso MLP‟s governance structure, an

approach that incorporated objective standards for judicial review would have made

litigation against the General Partner and its affiliates inevitable, frequent, and risky for

the defendants. The drafters of the LP Agreement chose a framework that maximized the

General Partner‟s freedom and minimized the opportunities for litigation and judicial

oversight. They generally deployed the contractual freedom provided by the Delaware

41
Limited Partnership Act to expand the General Partner‟s discretion and carve back on

protections that otherwise would exist under the common law. Most notably, the drafters

of the LP Agreement eliminated all fiduciary duties, resulting in a fully contractual

relationship. The drafters then crafted contractual standards for conflict-of-interest

transactions in Section 7.9(a) that included the option of Special Approval. Within the

Special Approval path, they eschewed any type of objective review of the Conflicts

Committee‟s decisions in favor of a purely subjective test. Taken together, these factors

lead to the conclusion that if the issue had been raised in a hypothetical original

bargaining position, the parties would not have agreed to incorporate in the Special

Approval process a requirement that the Conflicts Committee obtain a fairness opinion

that would be subject to judicial review for the sufficiency of its contents and analytical

rigor.

When the General Partner chose to proceed with the Drop-Down by means of

Special Approval, the sole inquiry became the actual, subjective good faith of the

members of the Conflicts Committee. The scope and details of the fairness opinion and

Tudor‟s analysis were fair game for the plaintiffs to use in an effort to support an

inference of bad faith, but there is not room in the subjective good faith standard to read

into the Special Approval provision a requirement that the Conflicts Committee obtain a

fairness opinion that addressed the dilution to be suffered by the limited partners. On this

basis, judgment is entered in favor of the General Partner on the implied covenant claim.

42
B. Aiding And Abetting

In Counts III and IV, the plaintiffs assert claims for aiding and abetting a breach of

contract against defendants other than the General Partner. Count III asserts the claim

directly; Count IV asserts it derivatively. Delaware law generally does not recognize a

claim for aiding and abetting a breach of contract. See Gotham P’rs, 817 A.2d at 172.

“Limited partnership agreements are a type of contract.” Norton v. K-Sea Transp. P’rs

L.P., 67 A.3d 354, 360 (Del. 2013).

Because the alternative entity statutes permit the entity‟s governing agreement to

modify, alter, or expand fiduciary duties, there are situations involving alternative entities

where a party could owe fiduciary duties, the scope of the fiduciary duty would be

established by contract, and a third party could aid and abet a breach of the contractually

measured fiduciary duty. One example is where the entity agreement restricts or limits

fiduciary duties, or supplies a contractual standard for measuring compliance, but does

not fully eliminate fiduciary duties.3 Another example might be if the entity agreement

3
Id. at 172-73; see In re Atlas Energy Res., LLC, 2010 WL 4273122, at *9 (Del. Ch. Oct.
28, 2010) (noting that although LLC agreement did not eliminate fiduciary duties of controlling
member, it could have “contractually define[d] the standard under which a merger between [the
controlling member] and [the LLC] should be assessed”); Flight Options Int’l, Inc. v. Flight
Options LLC, 2005 WL 6799224, at *7-8 (Del. Ch. July 11, 2005) (holding that contractual
standard requiring that interested transactions “be on arms‟ length terms and conditions,
including fair market values” established standard for measuring fiduciary duties owed by
controlling member); Gelfman v. Weeden Investors, L.P., 792 A.2d 977, 987, 992 n.24 (Del. Ch.
2001) (interpreting limited partnership agreement that did not eliminate fiduciary duties but
rather supplied a contractual standard for measuring compliance); Fitzgerald v. Cantor, 1999
WL 182573, at *1 (Del. Ch. Mar. 25, 1999) (addressing a claim for aiding and abetting a “breach
of a fiduciary duty created by a contract”); see also Gatz Props., LLC v. Auriga Capital Corp.,
59 A.3d 1206, 1214, 1216 (Del. 2012) (holding that LLC agreement imposed “contractually
adopted fiduciary duties” and finding a breach of controller‟s “contracted-for fiduciary duty”).

43
expands fiduciary duties beyond what the common law would impose.4 A third example

might be an agreement that selects a different fiduciary metric than otherwise would

apply, such as by specifying that the conduct of a fiduciary of a Delaware entity would be

judged by the law of a different jurisdiction or the principles that would govern a

different type of entity.5 The Delaware Supreme Court has referred to these hybrid

situations as involving “contractual fiduciary duties” and confirmed that, under these

circumstances, a party can aid and abet a breach of the contractually measured fiduciary

duty. Gotham P’rs, 817 A.2d at 172-73, 178; accord Gerber, 67 A.3d at 425-26.

But the Delaware Limited Partnership Act, like Delaware‟s other alternative entity

statutes, authorizes limited partnership agreements to eliminate completely all common

law duties, including fiduciary duties, that otherwise would exist. 6 Del. C. § 17-1101(d).

The public policy expressed in the Delaware Limited Partnership Act is “to give

maximum effect to the principle of freedom of contract and to the enforceability of

partnership agreements.” Id. § 17-1101(c). A provision of a limited partnership

agreement might turn on a particular state of mind, but the inclusion of requisite mental

4
6 Del. C. § 17-1101(d). While theoretically possible, scholars have yet to find a real-
world example of a publicly traded alternative entity agreement that expands fiduciary duties.
See generally Brent J. Horton, The Going-Private Freeze-Out: A Unique Danger for Investors in
Delaware Non-Corporate Business Associations, 38 Del. J. Corp. L. 53 (2013); Mohsen Manesh,
Contractual Freedom Under Delaware Alternative Entity Law: Evidence from Publicly Traded
LPs and LLCs, 37 J. Corp. L. 555 (2012).
5
See, e.g., In re Seneca Invs. LLC, 970 A.2d 259, 261 (Del. Ch. 2008) (interpreting LLC
operating agreement where parties agreed contractually that the entity would be governed as if it
were a Delaware corporation); Douzinas v. Am. Bureau of Shipping, Inc., 888 A.2d 1146, 1148
(Del. Ch. 2006) (interpreting operating agreement of Delaware LLC where parties agreed that
agreement would be governed by Texas law).

44
state for compliance with a provision is not the same as creating a fiduciary relationship

or re-introducing fiduciary duties that have been eliminated.6 When parties establish a

purely contractual relationship, they have chosen to limit themselves to pursuing

contractual remedies against their contractual counterparties. Under those circumstances,

a claim for aiding and abetting cannot be used to expand the possible range of defendants.

Gerber v. EPE Hldgs., LLC, 2013 WL 209658, at *11 (Del. Ch. Jan. 18, 2013) (holding

that defendants could not aid and abet a breach of a limited partnership agreement where

the agreement eliminated fiduciary duties).

In this case, the LP Agreement eliminates all fiduciary duties and replaces them

with contractual obligations. The LP Agreement requires that the Conflicts Committee

believe in good faith that proceeding with a conflict-of-interest transaction is in the best

interests of the Partnership. Because the LP Agreement establishes a purely contractual

relationship, a theory of aiding and abetting a breach of contract is unavailable in this

case. Judgment is entered in favor of all defendants named in Counts III and IV.

III. CONCLUSION

The defendants‟ motion for summary judgment is granted.

6
See, e.g., DV Realty Advisors LLC v. Policemen’s Annuity & Benefit Fund of Chi., 75
A.3d 101, 109 (Del. 2013) (distinguishing between a contractually required mental state and the
different concepts of good faith incorporated in the implied covenant of good faith and fair
dealing and in the fiduciary duty of loyalty); Encore Energy, 72 A.3d at 106 (declining to use
either corporate or tort law principles to give meaning to contractual duty of subjective good
faith); Hexion Specialty Chems., Inc. v. Huntsman Corp., 965 A.2d 715, 746-48 (Del. Ch. 2008)
(applying provision in third-party merger agreement that imposed a cap on damages except for a
“knowing and intentional breach” and declining to use corporate or tort law principles to give
meaning to the contractual term).

45