In Re: El Paso Pipeline Partners, L.P. Derivative Litigation
90 A.3d 1097 (2014)
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Rule of Law:
A claim by limited partners alleging a breach of specific protective provisions in a limited partnership agreement, which constrain the general partner's authority in conflict-of-interest transactions, is a direct claim, not a derivative one, because the harm is to the limited partners' individual contractual rights.
Facts:
- El Paso Corporation ('El Paso Parent') created and controlled El Paso Pipeline Partners, L.P. ('El Paso MLP'), a master limited partnership, through its 100% ownership of the General Partner.
- The El Paso MLP Limited Partnership Agreement (LPA) eliminated all common law fiduciary duties and substituted specific contractual procedures for handling conflict-of-interest transactions.
- One such procedure, under Section 7.9(a) of the LPA, allowed for 'Special Approval' by a Conflicts Committee of disinterested directors for transactions between El Paso MLP and its parent.
- In February 2011, El Paso Parent proposed to sell a 25% interest in Southern Natural Gas Co. to El Paso MLP, a transaction which created a conflict of interest for the General Partner.
- The General Partner's board of directors formed a Conflicts Committee to evaluate the proposal and potentially grant Special Approval.
- After several meetings and consultation with financial and legal advisors, the Conflicts Committee approved the transaction on March 3, 2011, and the full board approved it the next day.
- The transaction was completed, with El Paso MLP acquiring the 25% interest in Southern from El Paso Parent.
Procedural Posture:
- A unitholder (plaintiff) filed a complaint in the Delaware Court of Chancery against El Paso MLP's General Partner, its parent company, and its directors (defendants).
- The complaint asserted both direct class claims (Counts I and III) for breach of the Limited Partnership Agreement and derivative claims (Counts II and IV) based on the same conduct.
- The plaintiff moved to certify a class action for the direct claims under Court of Chancery Rule 23.
- The defendants opposed the motion for class certification, arguing that the plaintiff's claims were exclusively derivative in nature and therefore could not be certified as a class action.
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Issue:
Do claims by limited partners alleging that a general partner violated specific conflict-of-interest procedures required by the limited partnership agreement constitute a direct claim that can be brought as a class action?
Opinions:
Majority - Laster, Vice Chancellor
Yes, claims by limited partners alleging that a general partner violated specific conflict-of-interest procedures in the limited partnership agreement constitute a direct claim. The court determined that when a limited partnership agreement replaces fiduciary duties with specific contractual protections, a breach of those protections constitutes a direct injury to the limited partners' contractual rights. Applying the two-prong test from Tooley v. Donaldson, the first prong—who suffered the harm—is met because the injury alleged is the violation of the limited partners' express contractual rights under the LPA, not a general harm to the partnership such as overpayment. The court rejected the argument that because all unitholders were harmed equally, the claim must be derivative, citing Tooley's clarification that a direct, individual claim can fall on all stockholders equally. For the second prong—who receives the benefit of recovery—the court found that while a monetary payment to the partnership is a possible remedy, other remedies could be structured to benefit the unitholders directly, and thus this prong does not mandate a derivative characterization.
Analysis:
This decision clarifies the application of the Tooley direct vs. derivative test in the context of alternative entities like Master Limited Partnerships. It reinforces the principle that when a partnership agreement contractually eliminates fiduciary duties and replaces them with specific procedural safeguards, a breach of those safeguards injures the partners' contractual rights directly. This empowers investors to bring direct class actions to enforce the explicit terms of the governing agreement, rather than being forced to navigate the higher procedural hurdles of derivative litigation, such as the pre-suit demand requirement. The ruling is significant for the governance and litigation of entities that rely heavily on freedom of contract to define the relationship between managers and investors.
