IN THE SUPREME COURT OF THE STATE OF DELAWARE
EMPLOYEES RETIREMENT §
SYSTEM OF THE CITY OF ST. LOUIS, § No. 291, 2016
§
Plaintiff Below, § Court Below: Court of
Appellant, § Chancery of the State of
§ Delaware
v. §
§
TC PIPELINES GP, INC., § No. 11603-VCG
TRANSCANADA AMERICAN §
INVESTMENTS, LTD., and §
TRANSCANADA CORPORATION, §
§
Defendant Below, §
Appellees, §
§
and §
§
TC PIPELINES, LP, §
§
Nominal Defendant Below, §
Appellee. §
Submitted: December 14, 2016
Decided: December 19, 2016
Before STRINE, Chief Justice; HOLLAND, VALIHURA, VAUGHN, and
SEITZ, Justices, constituting the Court en Banc.
ORDER
(1) The appellants challenge a drop-down transaction between a limited
partnership—TC Pipelines—and the ultimate owner of its general partner—
TransCanada Corporation. 1 The limited partnership agreement provides, in
relevant part, that conflicted transactions will be ―conclusively deemed fair and
reasonable‖ to the limited partnership if the general partner obtains ―Special
Approval‖2—approval by a Conflicts Committee made up of two or more directors
―who are neither security holders, officers nor employees of the General Partner
nor officers or employees of any Affiliate of the General Partner.‖ 3 When a
transaction has been deemed fair and reasonable by Special Approval or some
other method outlined in the limited partnership agreement, the agreement provides
that the transaction is conclusively: i) approved by the limited partners, ii) not a
breach of the limited partnership agreement, and iii) not a breach of ―any duty
stated or implied by law or equity.‖4 Below, the Court of Chancery dismissed the
complaint in a thorough written decision. The appellant‘s complaint focused
singularly on alleging: i) that the drop-down transaction was not economically fair
to the limited partnership, ii) that if the transaction could be thought unfair an
inference arose that the Conflicts Committee therefore must have acted in
subjective bad faith, iii) that it was implied in the limited partnership agreement
that the Conflicts Committee must act in good faith, and, therefore, iv) that this
1
Emps. Ret. Sys. of St. Louis v. TC Pipelines GP, Inc., 2016 WL 2859790, *1–2 (Del. Ch. May
11, 2016) (describing the transaction).
2
App. to Appellant‘s Opening Br. at A159 (Second Amended and Restated Agreement of
Limited Partnership of TC Pipelines, LP § 7.9(a)) [hereinafter Limited Partnership Agreement].
3
Id. at A122 (Limited Partnership Agreement § 1.1).
4
Id. at A159 (Limited Partnership Agreement § 7.9(a)).
2
bare allegation of economic unfairness thus supported a claim for breach of the
implied covenant of good faith and fair dealing. The Court of Chancery rejected
the viability of this theory, noting that the appellant had not pled any facts
supporting an inference that the Conflicts Committee had any improper motive or
other specific reason to act in bad faith, had not pled any specific acts of
misfeasance by the Conflicts Committee in its deliberation process, and that the
limited partnership agreement made the Conflicts Committee‘s judgment
conclusive, and thus allowing a complaint to proceed solely because the
transaction‘s economic merits were subject to reasonable questions would be
inconsistent with the evident purpose of the safe harbor created by Conflicts
Committee approval in the agreement. In so ruling, the Court of Chancery relied
upon earlier authority of this Court and the Court of Chancery itself5 and did not
rule out the possibility that specific circumstances could be pled regarding the
motives or other conduct of a Conflicts Committee that could give rise to an
5
See 2016 WL 2859790 at *5–6; see also Haynes Family Trust v. Kinder Morgan G.P., Inc., 135
A.3d 76, 2016 WL 912184, at *1–2 (Del. Mar. 10, 2016) (TABLE) (―[T]here was no room for a
substantive judicial review of the fairness of the transaction because the general partner had
complied with its contractual duties in the approval process of the merger and that compliance
conclusively established the fairness of the transaction, precluding the judicial scrutiny that the
unitholders now seek.‖); Gerber v. Enter. Prod. Holdings, LLC, 67 A.3d 400, 418 (Del. 2013)
(considering application of implied covenant in limited partnership context), aff’d in part rev’d
in part on other grounds, 68 A.3d 665, 2013 WL 1914714 (Del. 2013), overruled in part on
other grounds, 67 A.3d 808 (Del. 2013); Brickell Partners v. Wise, 794 A.2d 1, 4 (Del. Ch.
2001) (interpreting similar transaction approval provisions).
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implied covenant claim.6 In other words, we read the Court of Chancery as having
issued a careful, case-specific ruling that addressed the stark argument made by the
appellant, in which its sole basis for alleging an implied covenant claim was its
contention that the drop-down transaction was economically unfair to the limited
partnership.
(2) The Court of Chancery rejected that contention, holding that the
appellant could not escape the effect of the conflict of interest provisions of the
limited partnership agreement solely by contending that the Conflicts Committee
had approved an unfair transaction and must therefore have acted in bad faith. On
appeal, the appellant reiterates its arguments below that pleading facts supporting
an inference that a transaction is unfair creates an inference that the Conflicts
Committee acted in bad faith and thus states an implied covenant claim.7
(3) The appellant also sought to buttress that core argument by noting that
the limited partnership agreement required the Conflicts Committee to consider the
6
2016 WL 2859790 at *7 n.48 (observing that bribery of otherwise-independent directors by the
general partner would have been the sort of unanticipated situation meriting application of the
implied covenant).
7
We note that the appellant has not attempted to argue that it has pled facts that would suggest
that the drop-down transaction satisfied the stringent definition of waste, that no reasonable
person of good faith would have approved the transactions as fair to the limited partnership. See
STEPHEN A. RADIN, THE BUSINESS JUDGMENT RULE 388 (2009) (―A waste claim requires a
showing that the corporation has entered into a transaction in which it received consideration ‗so
inadequate in value that no person of ordinary, sound business judgment would deem it worth
what the corporation has paid.‘‖ (quoting Grobow v. Perot, 539 A.2d 180, 189 (Del. 1988))); see
also Harbor Fin. Partners v. Huizenga, 751 A.2d 879, 901 (Del. Ch. 1999) (―The test for waste
is whether any person of ordinary sound business judgment could view the transaction as fair.‖).
Rather, the plaintiff has simply argued that the transaction is not, in its view, fair, and pled some
facts to support that contention.
4
fairness and reasonableness of the drop down ―in the context of all similar or
related transactions,‖ 8 and that, because the drop down was, in the appellant‘s
view, less favorable than two previous drop downs, an inference arose that the
Conflicts Committee acted in conscious bad faith to approve an unfair transaction.
But, the appellant never pled that the Conflicts Committee did not know about
those transactions or consider them in its deliberations. In fact, at oral argument
before this Court, the appellant admitted that this was the case, that the Conflicts
Committee likely knew about the previous transactions, and that its argument was
that because the Committee members knew the earlier transactions were more
favorable, the Conflicts Committee could not have approved the drop-down
transaction at issue in good faith. Thus, the appellant‘s argument before the Court
of Chancery boiled down to saying that because the price was arguably less
favorable to the limited partnership in this drop down than in earlier drop downs,
the Conflicts Committee must have acted in bad faith—an argument the Vice
Chancellor rejected.
(4) We agree with the Court of Chancery‘s conclusion that the appellant‘s
arguments are without merit. As in analogous circumstances in the corporate
context, 9 the appellant cannot escape the conclusive effect given to Conflicts
8
See App. to Appellant‘s Opening Br. at A160 (Limited Partnership Agreement § 7.9(c)).
9
E.g., In re MFW Shareholders Litigation, 67 A.3d 496, 518 (Del. Ch. 2013), aff’d sub nom.,
Kahn v. M&F Worldwide Corp, 88 A.3d 635 (Del. 2014) (―For a court to determine whether a
5
Committee approval solely by attacking the fairness of the underlying transaction.
If that was the case, the safe harbor would be virtually no safe harbor at all as
every case would proceed to discovery so long as a plaintiff could plead facts
suggesting a rational person could deem the transaction unfair. Rather, as the
Court of Chancery explained, the implied covenant is narrowly applied, and if a
plaintiff is to invoke it, the plaintiff must plead some specific facts suggesting that
the Conflicts Committee process was tainted in some specific way by unanticipated
behavior, such as the example of bribery the Vice Chancellor pointed to, or other
factors bearing on whether the Conflicts Committee process fulfilled its evident
contractual purpose. Like the Court of Chancery, we do not rule out the possibility
that future plaintiffs may invoke the implied covenant successfully in this context,
but like the Court of Chancery, we agree that if a safe harbor provision such as the
limited partnership agreement‘s § 7.9(a) applies, plaintiffs may not invoke the
covenant solely by contending that a transaction is unfair to the limited partnership
and that the Conflicts Committee therefore must have acted in bad faith. Also, like
the Court of Chancery, we believe it is not the role of courts to identify future
situations in which the implied covenant may be invoked. Rather, it is up to
special committee was effective in obtaining a good economic outcome involves the sort of
second-guessing that the business judgment rule precludes. When a committee is structurally
independent, has a sufficient mandate and cannot be bypassed, and fulfills its duty of care, it
should be given standard-shifting effect.‖). This Court later reaffirmed that the pleading stage is
an appropriate point to determine if a transaction complied with MFW‘s procedural
requirements. Swomley v. Schlecht, 128 A.3d 992, 2015 WL 7302260 (Del. Nov. 19, 2015)
(TABLE) (affirming Swomley v. Schlecht, C.A. No. 9355-VCL (Del. Ch. Aug. 27, 2014)).
6
plaintiffs in specific cases to develop facts relevant to the situation they are
addressing and to plead how those facts support a claim.
NOW, THEREFORE IT IS ORDERED that the judgment of the Court of
Chancery is AFFIRMED.
BY THE COURT:
/s/ Leo E. Strine, Jr.
Chief Justice
7