El Paso Pipeline GP Company, LLC v. Brinckerhoff , 152 A.3d 1248 ( 2016 )

IN THE SUPREME COURT OF THE STATE OF DELAWARE
EL PASO PIPELINE GP COMPANY, L.L.C., §
§ No. 103, 2016
Defendant Below, §
Appellant/Cross-Appellee, §
§
and § Court Below:
§ Court of Chancery of the
EL PASO CORPORATION, DOUGLAS L. § State of Delaware
FOSHEE, JOHN R. SULT, RONALD L. §
KUEHN, JR., D. MARK LELAND, ARTHUR § Consolidated C.A. No. 7141-VCL
C. REICHSTETTER, WILLIAM A. SMITH §
and JAMES C. YARDLEY, §
§
Defendants Below, §
Cross-Appellees, §
§
and §
§
EL PASO PIPELINE PARTNERS, L.P., §
§
Nominal Defendant Below, §
§
v. §
§
PETER R. BRINCKERHOFF, TRUSTEE OF §
THE PETER R. BRINCKERHOFF REV. TR. §
U/A DTD 10/17/97, §
§
Plaintiff Below, §
Appellee/Cross-Appellant. §
Submitted: October 19, 2016
Decided: December 20, 2016
Before STRINE, Chief Justice; HOLLAND, VALIHURA and VAUGHN, Justices; and
RENNIE, Judge, constituting the Court en Banc.
Upon appeal from the Court of Chancery. REVERSED.

Sitting by designation pursuant to Del. Const. Art. IV § 12 and Supreme Court Rules 2(a) and
4(a) to fill up the quorum as required.
Peter J. Walsh, Jr., Esquire, Brian C. Ralston, Esquire, and Berton W. Ashman, Jr.,
Esquire, Potter Anderson & Corroon LLP, Wilmington, Delaware. Bradley R. Aronstam,
Esquire, S. Michael Sirkin, Esquire, Ross Aronstam & Moritz LLP of Wilmington,
Delaware. Of Counsel: Joseph S. Allerhand, Esquire (argued), Seth Goodchild, Esquire,
Amanda K. Pooler, Esquire, and Nikolei M. Kaplanov, Esquire, Weil, Gotshal & Manges
LLP, New York, New York; Christine T. Di Guglielmo, Esquire, Weil, Gotshal &
Manges LLP, Wilmington, Delaware, for Defendant Below, Appellant/Cross-Appellee El
Paso Pipeline GP Company, L.L.C. and Defendants Below, Cross-Appellees El Paso
Corporation, Douglas L. Foshee, John R. Sult, Ronald L. Kuehn, Jr., D. Mark Leland,
Arthur C. Reichstetter, William A. Smith, and James C. Yardley.
Jessica Zeldin, Esquire, Rosenthal, Monhait & Goddess, P.A., Wilmington, Delaware.
Of Counsel: Jeffrey H. Squire, Esquire (argued), Lawrence P. Eagel, Esquire, and David
J. Stone, Esquire, Bragar Eagel & Squire, P.C., New York, New York, for Plaintiff
Below, Appellee/Cross-Appellant Peter R. Brinckerhoff, Trustee of the Peter R.
Brinckerhoff Rev. Tr. U/A DTD 10/17/97.
VALIHURA, Justice:
2
I. INTRODUCTION
In a detailed, well-reasoned decision, the Court of Chancery held that a conflicts
committee approved a conflict transaction that it did not believe was in the best interests
of the limited partnership it was charged with protecting. In fact, the court found that the
committee—and the committee‟s financial advisor in particular—knew the transaction
was unduly favorable to the limited partnership‟s general partner. In its post-trial
opinion, the Court of Chancery undertook a detailed analysis explaining why $171
million was a conservative estimate of the overpayment approved by the committee and
used that figure as the basis for its damages award.
But the problem for the derivative plaintiff who won at trial is that, after the trial
was completed and before any judicial ruling on the merits, the limited partnership was
acquired in a merger. Under 6 Del. C. § 17-211(h)1 and analogous judicial authority
governing these situations,2 the claims brought by the plaintiff on behalf of the limited
partnership were transferred to the buyer in the merger. The plaintiff‟s standing was
1
6 Del. C. § 17-211(h) (“When any merger or consolidation shall have become effective under
this section, for all purposes of the laws of the State of Delaware, all of the rights, privileges and
powers of each of the domestic limited partnerships and other business entities that have merged
or consolidated, and all property, real, personal and mixed, and all debts due to any of said
domestic limited partnerships and other business entities, as well as all other things and causes
of action belonging to each of such domestic limited partnerships and other business entities,
shall be vested in the surviving or resulting domestic limited partnership or other business
entity . . . .” (emphasis added)).
2
See, e.g., Lewis v. Anderson, 477 A.2d 1040, 1049 (Del. 1984) (“A plaintiff who ceases to be a
shareholder, whether by reason of a merger or for any other reason, loses standing to continue a
derivative suit.”); Ark. Teacher Ret. Sys. v. Countrywide Fin. Corp., 75 A.3d 888, 894 (Del.
2013) (en banc) (“[T]he derivative claim—originally belonging to the acquired corporation—is
transferred to and becomes an asset of the acquiring corporation as a matter of statutory law.”
(citations omitted)).
3
extinguished, and his only recourse was to challenge the fairness of the merger by
alleging that the value of his claims was not reflected in the merger consideration.
The Court of Chancery, however, rejected the defendants‟ argument to this effect
and issued a thoughtful opinion arguing that the derivative plaintiff‟s claims, although
always treated by him as derivative before the merger was announced, could also be
considered direct, or, even if derivative, should survive the merger for the core policy
reason that dismissal would leave the unaffiliated limited partners without recompense
for the general partner‟s prior unfair dealing.
In this troubling case, we reverse. We find that the derivative plaintiff‟s claims
were and remain derivative in nature. That a limited partner is often, as is the case here,
required to look to the entity‟s foundational agreement rather than to default principles of
equity law for protection does not mean that every claim for breach of those foundational
agreements is direct. Rather, to determine if a claim is derivative or direct requires the
usual examination of who owns the claim.
Here, it is plain under the limited partnership agreement that the limited
partnership itself was entitled in the first instance to sue and obtain recovery against the
general partner and its co-defendants for any claim that the transaction was economically
unfair to the limited partnership. That individual limited partners might press the limited
partnership‟s rights as derivative plaintiffs does not make the claims ones belonging to
them individually. In addition, the claims of the derivative plaintiff here were not dual in
nature. We agree that some recent case law can be read as undercutting the traditional
4
rule that dilution claims are classically derivative.3 We decline to further expand that
case law in the limited partnership context, especially in a case like this when there was
no plausible argument that the transaction had the effect of increasing the voting power or
control of the general partner at the expense of the unaffiliated unitholders. From the
start, the derivative plaintiff has sought only monetary relief for the limited partnership.
Likewise, we part company with the Court of Chancery on its determination that
the merger did not extinguish the derivative claims. We understand an equity court‟s
reluctance to countenance the possible extinguishment of claims when there is record
evidence suggesting bad faith conduct by persons controlling the limited partnership and
by a financial advisor, and when those persons knew that the public limited partners were
relying on their good faith as their only protection from overreaching by the general
partner. But, the question here is whether to change our settled law in a substantial way,
a question that requires us to have confidence that the benefits of departure will outweigh
the costs. In most situations, permitting pending derivative claims to survive a merger
would be inefficient and overly costly for public investors. Useful transactions would be
deterred or priced at a lower value because third-party acquirers would find themselves
having bought into litigation morasses, the persistence of which they cannot control.
Under our law, equity holders confronted by a merger in which derivative claims
will pass to the buyer have the right to challenge the merger itself as a breach of the
3
See, e.g., Gentile v. Rossette, 906 A.2d 91 (Del. 2006); In re Tri-Star Pictures, Inc., Litig., 634
A.2d 319 (Del. 1993), as corrected (Dec. 8, 1993).
5
duties they are owed.4 In many cases, it might be difficult to allege that the value they
are receiving in the merger is unfair simply as a result of the failure to consider value
associated with their derivative suit. But that reality may also suggest that, even
according full value to the potential recovery in the derivative suit (rarely a guarantee),
the plaintiffs still received fair value in the merger. To make the general rule one where
derivative plaintiffs can continue to sue after a merger would thus raise overall
transaction costs and barriers to mergers, with obvious costs to public investors, with no
gain substantial enough to compensate them. Thus, we adhere to Lewis v. Anderson5 and
its progeny and reverse. Along with the rest of the partnership‟s assets, ownership of the
claim passed to the partnership‟s successor by operation of law in the merger. The
derivative plaintiff‟s recourse was to file a money damages challenge to the merger and
prove that the failure to accord value to the limited partnership in the merger was
somehow violative of his rights.
We conclude that the plaintiff lost standing to continue this derivative action when
the merger closed—both as to the direct appeal and cross-appeal. Because our holding
terminates the litigation, we do not reach the other issues raised by the parties.
4
See Parnes v. Bally Entm’t Corp., 722 A.2d 1243, 1245 (Del. 1999) (“In order to state a direct
claim with respect to a merger, a stockholder must challenge the validity of the merger itself,
usually by charging the directors with breaches of fiduciary duty resulting in unfair dealing
and/or unfair price.” (citing Lewis, 477 A.2d at 1046 n.10; Kramer v. W. Pac. Indus., Inc., 546
A.2d 348, 352 (Del. 1988) (additional citation omitted))).
5
477 A.2d 1040 (Del. 1984).
6
II. BACKGROUND
El Paso Pipeline Partners, L.P. was a publicly traded Delaware master limited
partnership based in Houston, Texas (the “Partnership”). The plaintiff, Peter R.
Brinckerhoff (“Brinckerhoff”), is the Trustee of the Peter R. Brinckerhoff Rev. Tr. U/A
DTD 10/17/97, which was a limited partner of the Partnership. The Partnership‟s sole
general partner was El Paso Pipeline GP Company, L.L.C., a Delaware limited liability
company (the “General Partner”) and subsidiary of El Paso Corporation, a publicly traded
Delaware corporation (the “Parent”). The Parent indirectly owned 100% of the General
Partner. The General Partner in turn owned all of the Partnership‟s general partner
interest, representing a 2% economic interest in the Partnership. The Parent also owned,
either through the General Partner or its affiliates, approximately 52% of the
Partnership‟s outstanding common units plus all of its incentive distribution rights. The
Parent controlled the Partnership through the General Partner and through the individuals
who managed the Partnership‟s operations, all of whom were Parent employees.
A. The Dropdown Transactions and the First Kinder Morgan Merger
This litigation involves two transactions in which ownership interests “dropped
down” from the Parent to the Partnership (the “Dropdowns”). Dropdown transactions
support the typical master limited partnership (“MLP”) scheme, in which a corporation
“sponsors” an MLP by contributing assets to the MLP, which then issues public securities
to maximize the market value of those assets. Over time, an MLP‟s sponsor sells
additional assets to the MLP in transactions known as dropdowns.
7
The first dropdown at issue in this appeal (the “Spring Dropdown”) involved the
sale of 51% of the Parent‟s interests in Southern LNG Company, L.L.C. (“Southern
LNG”) and El Paso Elba Express Company, L.L.C. (“Elba Express”). Because of the
conflict presented by the Parent‟s control of the Partnership, the General Partner formed a
conflicts committee (the “Spring Committee”) to seek special approval of the transaction
pursuant to Section 7.9(a) of the Limited Partnership Agreement governing the
Partnership (the “LPA”). The Spring Committee met five times, obtaining legal advice
from Akin Gump Strauss Hauer & Feld LLP (“Akin Gump”) and valuation analyses from
its financial advisor, Tudor, Pickering, Holt & Co. (“Tudor”).
On March 24, 2010, the Spring Committee unanimously approved the Spring
Dropdown as “fair and reasonable to the Partnership” and recommended that the General
Partner consummate the transaction. That same day, the General Partner adopted the
Spring Committee‟s recommendation. On March 25, 2010, the Partnership announced
the Spring Dropdown, and the transaction closed shortly thereafter.
The second transaction involved the Parent‟s remaining 49% interests in Southern
LNG and Elba Express and a 15% interest in Southern Natural Gas Company (the “Fall
Dropdown”). On October 14, 2010, the General Partner reconstituted the conflicts
committee to seek special approval of the Fall Dropdown (the “Fall Committee”). On
November 12, 2010, the Fall Committee approved the Fall Dropdown. The Parent
announced the transaction on November 15, 2010, and it closed shortly thereafter.
In August 2011, Kinder Morgan, Inc. (“Kinder Morgan”) offered to acquire the
Parent. Kinder Morgan and the Parent entered into a merger agreement on October 16,
8
2011, which closed on May 24, 2012. After the merger, the Parent was no longer a
separately traded public company, though the Partnership continued to be publicly traded.
Brinckerhoff‟s units in the Partnership were not affected.
B. Initial Proceedings in the Court of Chancery
On December 22, 2011, Brinckerhoff filed a verified derivative complaint
challenging the Spring Dropdown (the “Spring Complaint”), naming as defendants the
Parent, the General Partner, and members of the General Partner‟s board of directors,
including the members of the Spring Committee (the “Defendants”). Brinckerhoff,
“derivatively on behalf of [the Partnership],” alleged breach of express and implied
duties, aiding and abetting, tortious interference, and unjust enrichment. After a hearing
on October 26, 2012, the trial court dismissed the unjust enrichment claim. On March 6,
2012, Brinckerhoff filed a verified derivative complaint against Defendants challenging
the Fall Dropdown (the “Fall Complaint”). As with the Spring Complaint, Brinckerhoff
brought suit “derivatively on behalf of [the Partnership],” alleging the same four claims.
The Court of Chancery consolidated the two actions on March 4, 2013. Following
discovery, the parties filed cross-motions for summary judgment. On June 12, 2014, the
court granted summary judgment in favor of all Defendants with respect to the Spring
Dropdown and denied Brinckerhoff‟s cross-motion.6 The court also granted in part and
denied in part the Defendants‟ motion for summary judgment with respect to the Fall
6
In re El Paso Pipeline Partners, L.P. Derivative Litig., 2014 WL 2768782 (Del. Ch. June 12,
2014).
9
Dropdown.7 The only surviving claim was against the General Partner for breach of the
LPA.8 The court ordered that the case proceed to trial on the remaining claims, and
Brinckerhoff moved for a final order pursuant to Court of Chancery Rule 54(b) to appeal
the dismissal of his implied covenant of good faith and fair dealing claims.
C. The Second Kinder Morgan Merger Followed By Trial
In July 2014, Kinder Morgan met with members of the General Partner‟s board of
directors and offered to acquire the Partnership (the “Merger”). The General Partner
formed a conflicts committee to consider the Merger (the “Merger Committee”). The
Merger Committee was comprised of the same directors as the Spring and Fall
Committees and advised by Akin Gump and Tudor.
The evening before voting to approve the Merger, the Merger Committee
considered what impact Brinckerhoff‟s derivative litigation would have on the Merger.
The Merger Committee assumed that the claim would be extinguished by the Merger and
decided that its value was “not sufficiently material” to impact the merger consideration.
On August 10, 2014, Kinder Morgan and the Partnership jointly announced the Merger.
Brinckerhoff chose not to challenge the Merger in court.9
7
In re El Paso Pipeline Partners, L.P. Derivative Litig., 2014 WL 2641304 (Del. Ch. June 12,
2014) (ORDER).
8
Although Brinckerhoff‟s secondary liability theories also survived summary judgment,
Brinckerhoff failed to “devote meaningful effort to presenting” these claims in post-trial briefing,
and the Court of Chancery deemed them waived. In re: El Paso Pipeline Partners, L.P.
Derivative Litig. (Liability Op.), 2015 WL 1815846, at *14 (Del. Ch. Apr. 20, 2015).
9
Other unaffiliated unitholders in the Partnership challenged the Merger, specifically with regard
to the Merger Committee‟s failure to consider the value of Brinckerhoff‟s derivative litigation.
See Verified Class Action Compl. at 27 ¶ 87, Edwards v. El Paso Pipeline Partners, L.P., No.
10160-VCL (Del. Ch. Sept. 23, 2014). They voluntarily dismissed that suit. See Stipulation &
10
Within days of the Merger‟s announcement, Brinckerhoff withdrew his Rule 54(b)
motion and requested a prompt trial. The Defendants responded that Brinckerhoff‟s
standing would be extinguished by the Merger, but requested that the court defer decision
on the standing question. Instead, the Defendants asked the court to “set a trial date, if at
all, cognizant of the reality that the claims may be extinguished by year-end.”
At a hearing on September 9, 2014, Defendants reiterated that Brinckerhoff‟s
standing would be extinguished by the Merger, but stated that the standing question was
not “properly teed up.” After noting that a November trial date was “consistent with [its]
expectations” for scheduling, the court deferred decision on the standing question,
suggesting that if Defendants were to win, resolution of the complex direct versus
derivative issue would be obviated. At trial in November 2014, Brinckerhoff “focused on
proving damages by showing that [the Partnership] overpaid in the Fall Dropdown[.]”10
He did not introduce evidence of individual harm to himself or any other limited partner.
D. Post-Trial Proceedings
Shortly after trial, on November 26, 2014, the Merger closed after approval by
holders of a majority of the Partnership‟s outstanding common units. On December 2,
2014, Defendants moved to dismiss Brinckerhoff‟s claims as moot on the grounds that
the Merger had extinguished his ownership and that he therefore lacked derivative
standing. Defendants sought to defer briefing on the motion, arguing that they did not
Order of Dismissal, In re Kinder Morgan, Inc. Corporate Reorganization Litig., No. 10093-VCL
(Del. Ch. Apr. 2, 2015).
10
In re El Paso Pipeline Partners, L.P. Derivative Litig. (Standing Op.), 132 A.3d 67, 80 (Del.
Ch. 2015).
11
believe it was necessary to brief the motion unless any party indicated an intent to notice
an appeal following the court‟s post-trial ruling. The Court of Chancery did not respond
to or rule on the Defendants‟ motion to dismiss at that time, and the parties proceeded
with post-trial briefing during December 2014 and January 2015.
On April 20, 2015, the Court of Chancery issued a detailed opinion in which it
held the General Partner liable for breach of the LPA (the “Liability Opinion”).11 In so
holding, the court found that the Fall Committee “went through the motions” and “did not
subjectively believe that approving the Fall Dropdown was in the best interests of the
Partnership.”12 The court found the Partnership suffered $171 million in damages.
On December 2, 2015, the Court of Chancery denied Defendants‟ motion to
dismiss (the “Standing Opinion”). The court held that, because the claim for breach of
the LPA was not exclusively derivative, Brinckerhoff could enforce the liability award
irrespective of the Merger. In so holding, the court formed two principal conclusions.
First, the court stated that if Delaware law required it to choose between an
exclusively direct characterization and an exclusively derivative characterization, then the
court‟s holding was that Brinckerhoff asserted a direct claim for breach of contract.13
The court distinguished Brinckerhoff‟s claims from Tooley,14 stating that, in its view,
11
Liability Op., 2015 WL 1815846, at *14.
12
Id. at *16.
13
Standing Op., 132 A.3d at 95.
14
Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004).
12
“Tooley does not apply to contract rights[,]”15 and that limited partners can sue directly to
enforce contractual constraints in the limited partnership agreement.16
Second, the Court of Chancery nevertheless applied Tooley and held that
Brinckerhoff had asserted a “dual-natured” claim, allowing him to litigate the claim
directly post-Merger. The trial court concluded that, even apart from the “contractual
angle,” the Fall Dropdown had inflicted injury on both the Partnership and the
unaffiliated unitholders.
As to the first prong of Tooley—who suffered the alleged harm—the court
acknowledged that the “most obvious consequence of the Fall Dropdown was the
infliction of harm on the Partnership.”17 The court also found injury to the limited
partners in the “reallocat[ion] [of] value from the unaffiliated limited partners to the
General Partner[,]” which “injured all of the investors in the Partnership
proportionately.”18 The court determined that “both” the Partnership and the limited
partners were harmed by the General Partner‟s alleged breach. It distinguished between
third-party and insider transfers where “[t]he insider gains at the expense of the other
15
Standing Op., 132 A.3d at 99.
16
Id. at 95 (citing Allen v. El Paso Pipeline GP Co., L.L.C., 90 A.3d 1097, 1109 (Del. Ch. 2014);
Brinckerhoff v. Tex. E. Prods. Pipeline Co., 986 A.2d 370, 383 (Del. Ch. 2010); Anglo Am. Sec.
Fund, L.P. v. S.R. Global Int’l Fund, L.P., 829 A.2d 143, 151, 154 (Del. Ch. 2003); In re
Cencom Cable Income Partners, L.P. Litig., 2000 WL 130629, at *6 (Del. Ch. Jan. 27, 2000)).
17
Id. at 104.
18
Id.
13
investors.”19 The court reasoned that, because the insider received benefits to the
exclusion of the other investors, the other investors suffered a distinct injury.
As to Tooley‟s second prong—who would receive the benefit of a recovery—the
Court of Chancery stated that recovery by the limited partnership was the “most obvious”
remedy. However, the Court of Chancery decided that, because the Partnership and the
limited partners were both harmed, “either” could recover for the alleged breach. The
court expressed concern that, absent a direct recovery, Brinckerhoff would have to “start
all over again” to hold the General Partner accountable. The court allowed a pro rata
recovery by all unaffiliated limited partners, even though Brinckerhoff had litigated the
claim derivatively from the beginning, no other limited partners were joined as plaintiffs,
and no class had been certified.
III. ANALYSIS
A. Standing is a Threshold Issue
“The concept of standing, in its procedural sense, refers to the right of a party to
invoke the jurisdiction of a court to enforce a claim or redress a grievance.”20
Accordingly, “[a]s a preliminary matter, a party must have standing to sue in order to
invoke the jurisdiction of a Delaware court.”21 Standing is therefore properly viewed as a
threshold issue to “ensure that the litigation before the tribunal is a „case or controversy‟
19
Id. at 105.
20
Schoon v. Smith, 953 A.2d 196, 200 (Del. 2008) (en banc) (quoting Stuart Kingston, Inc. v.
Robinson, 596 A.2d 1378, 1382 (Del. 1991)) (internal quotation marks omitted).
21
Ala. By-Prods. Corp. v. Cede & Co., 657 A.2d 254, 264 (Del. 1995) (citing Stuart Kingston,
596 A.2d at 1382).
14
that is appropriate for the exercise of the court‟s judicial powers.”22 Whether a party has
standing is a question of law that is subject to de novo review.23
Derivative standing is a “creature of equity”24 that was created to enable a court of
equity to exercise jurisdiction over corporate claims asserted by stockholders “to prevent
a complete failure of justice on behalf of the corporation.”25 We have observed that “[a]
change in the parties‟ standing may result from a myriad of subsequent legal or factual
causes that occur while the litigation is in progress.”26 For instance, in corporate
derivative litigation, loss of a plaintiff‟s status as shareholder generally extinguishes the
plaintiff‟s standing.27 Once standing is lost, the court lacks the power to adjudicate the
matter,28 and the action will be dismissed as moot unless an exception applies.29
Accordingly, the question of derivative standing is “properly a threshold question that the
[c]ourt may not avoid.”30
22
Dover Historical Soc’y v. City of Dover Planning Comm’n, 838 A.2d 1103, 1110 (Del. 2003).
23
Schoon, 953 A.2d at 200 (“Because the Court of Chancery‟s decision on director standing
implicates rulings of law, we review it de novo.” (citation omitted)).
24
Id. at 202 (quoting 13 Fletcher Cyclopedia of the Law of Private Corporations § 5940).
25
Id. at 208 (footnote omitted).
26
Gen. Motors Corp. v. New Castle Cnty., 701 A.2d 819, 824 (Del. 1997) (citations omitted).
27
See Lewis, 477 A.2d at 1049.
28
See Ala. By-Prods., 657 A.2d at 264 (citing Stuart Kingston, 596 A.2d at 1382); Gerber v.
EPE Holdings, LLC, 2013 WL 209658, at *12 (Del. Ch. Jan. 18, 2013) (“If there is no standing,
there is no justiciable substantive controversy.” (citation omitted)).
29
See Gen. Motors, 701 A.2d at 823 (“A proceeding may become moot in one of two ways: if
the legal issue in dispute is no longer amenable to a judicial resolution; or, if a party has been
divested of standing.”).
30
Gerber, 2013 WL 209658, at *12.
15
B. Under the Partnership Agreement, the Partnership Owned the Claim
In the context of conflicted transactions involving master limited partnerships,
many of the cases involve “Conflicts of Interest” provisions which may contain common
features, but are often different in nuanced ways. Thus, the prevalence of entity-specific
provisions in an area of law defined by expansive contractual freedom requires a nuanced
analysis and renders deriving “general principles” a cautious enterprise.
The Court of Chancery has characterized Brinckerhoff‟s allegation as a breach of
the LPA‟s conflicts-of-interest provision (“Section 7.9(a)”).31 Section 7.9(a) provides in
relevant part:
Unless otherwise expressly provided in this Agreement or any Group
Member Agreement, whenever a potential conflict of interest exists or
arises between the General Partner or any of its Affiliates, on the one hand,
and the Partnership, any Group Member, any Partner or any Assignee, on
the other, any resolution or course of action by the General Partner or its
Affiliates in respect of such conflict of interest shall be permitted and
deemed approved by all Partners, and shall not constitute a breach of this
Agreement, of any Group Member Agreement, of any agreement
contemplated herein or therein, 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, . . . . The General Partner
shall be authorized but not required in connection with its resolution of
such conflict of interest to seek Special Approval of such resolution, and
the General Partner may also adopt a resolution or course of action that has
not received Special Approval. If Special Approval is sought, then it shall
be presumed that, in making its decision, the Conflicts Committee acted in
good faith, . . . in any proceeding brought by any Limited Partner or
Assignee or by or on behalf of such Limited Partner or Assignee or any
other Limited Partner or Assignee or the Partnership challenging such
31
Standing Op., 132 A.3d at 97.
16
approval, the Person bringing or prosecuting such proceeding shall have the
burden of overcoming such presumption. . . .32
Section 7.9(b) is also relevant and provides that “[w]henever the General Partner
makes a determination or takes or declines to take any other action” in its capacity as
General Partner, “then, unless another express standard is provided for in this Agreement,
the General Partner . . . shall make such determination or take or decline to take such
other action in good faith and shall not be subject to any other or different standards
(including fiduciary standards imposed by this Agreement . . . or under the Delaware Act
or any other law, rule or regulation or at equity.”33 Likewise, “[w]henever the Conflicts
Committee makes a determination or takes or declines to take any other action, it shall
make such determination or take or decline to take such other action in good faith and
shall not be subject to any other or different standards (including fiduciary standards)
imposed by this Agreement . . . .”34 Importantly, Section 7.9(b) defines “good faith” as
follows:
In order for a determination or other action to be in “good faith” for
purposes of this Agreement, the Person or Persons making such
determination or taking or declining to take such other action must believe
that the determination or other action is in the best interests of the
Partnership.35
The Court of Chancery concluded that Section 7.9(a) “barred the General Partner
from causing [the Partnership] to engage in any transaction that (i) involved a potential
32
El Paso Pipeline Partners, L.P., First Amended and Restated Agreement of Limited
Partnership at § 7.9(a), A922-23 [hereinafter LPA].
33
Id. at § 7.9(b), A923.
34
Id.
35
Id.
17
conflict of interest and (ii) failed to comply with one of the four contractual paths.”36 In
its view, if the General Partner failed to satisfy one of four “contractually specified
routes” for handling a conflict of interest (e.g., Special Approval) set forth in Section
7.9(a), “then the General Partner would breach the [LPA].” 37 Accordingly, the court
concluded that Brinckerhoff‟s “claim that the General Partner proceeded with the Fall
Dropdown without complying with [Section 7.9(a)] is thus a direct claim for breach of
contract.”38 The court then relied on this Court‟s decision in NAF Holdings39 to support
its view that the Tooley test for distinguishing between direct and derivative claims “does
not apply to contract rights.”40
Although the Vice Chancellor‟s analysis of Section 7.9(a) and (b) presents
interesting interpretive issues,41 we need not address them here. Instead, we focus on the
narrow question of whether the plaintiff had standing post-merger.
36
Standing Op., 132 A.3d at 97.
37
Id. at 77.
38
Id. at 97.
39
NAF Holdings, LLC v. Li & Fung (Trading) Ltd., 118 A.3d 175 (Del. 2015).
40
Standing Op., 132 A.3d at 99 (citing NAF Holdings, 118 A.3d at 179).
41
Cf. Allen v. Encore Energy Partners, L.P., 72 A.3d 93, 102 (Del. 2013) (en banc) (describing a
nearly identical provision to that set forth in Section 7.9(a) as “establish[ing] four „safe harbors‟
that the [d]efendants can use to discharge their contractual duty of good faith when confronted
with a conflict of interest”) (quoting Norton v. K-Sea Transp. Partners L.P., 67 A.3d 354, 364-65
(Del. 2013) (en banc)); Norton, 67 A.3d at 365 (rejecting an argument that failing to meet a
similar procedure for addressing conflicts “automatically put [the general partner] in breach” of
the limited partnership agreement” (footnote omitted)); In re Kinder Morgan, Inc. Corporate
Reorganization Litig., 2015 WL 4975270, at *6 (Del. Ch. Aug. 20, 2015) (applying Norton to
determine that “the [g]eneral [p]artner is not obligated to comply with [a similar safe harbor
provision]; it has the choice whether or not to do so”), judgment entered sub nom. In re Kinder
Morgan, Inc., 2015 WL 5032517 (Del. Ch. Aug. 24, 2015), and aff’d sub nom. Haynes Family
Trust v. Kinder Morgan G.P., Inc., 2016 WL 912184 (Del. Mar. 10, 2016).
18
The standing analysis centers on the LPA‟s contractual duty of good faith. In its
Liability Opinion, the Court of Chancery observed that, “[i]n this case, Section 7.9(b)
established a known duty: the Committee members had to form a subjective belief that
the Fall Dropdown was in the best interests of the Partnership.”42 More specifically, to
comport with Section 7.9(b), the General Partner and the Conflicts Committee had to
“believe that [their] determination or other action [was] in the best interest of the
Partnership.”43 Accordingly, the contractual duty of good faith was owed to the
Partnership, not the individual limited partners.44 But the source of the duty owed—the
entity‟s constitutive agreement, i.e., the LPA—does not alone answer the question as to
whether Brinckerhoff‟s claim was derivative, direct, or both.45
The Court of Chancery read our discussion in NAF Holdings to suggest that
Tooley does not apply where the alleged harm involves contract rights. 46 We believe the
trial court reads NAF Holdings too broadly. In NAF Holdings, we held that “a suit by a
42
Liability Op., 2015 WL 1815846, at *16.
43
LPA, supra note 32, at § 7.9(b), A923 (emphasis added).
44
See Kinder Morgan, 2015 WL 4975270, at *8 (“[T]he members of the [c]ommittee did not
have to believe that the MLP [m]erger was in the best interests of the limited partners. They
rather had to believe in good faith that the MLP [m]erger was in the best interests of the
[p]artnership.”); Allen v. El Paso Pipeline GP Co., L.L.C., 113 A.3d 167, 181 (Del. Ch. 2014)
(“Rather than requiring the [c]onflicts [c]ommittee to reach a subjective belief that the
Drop[d]own was in the best interests of [the partnership] and its limited partners, the LP
[a]greement requires only that the [c]onflicts [c]ommittee believe subjectively that the
Drop[d]own was in the best interests of [the partnership].”), judgment entered, (Del. Ch. July 8,
2014), aff’d, 2015 WL 803053 (Del. Feb. 26, 2015).
45
Brinckerhoff reads Section 7.9(a)‟s reference to “any proceeding brought by any Limited
Partner” as creating a direct cause of action for limited partners. However, this reference is
better viewed as addressing the manner in which a limited partner‟s own rights can be
enforced—which importantly includes derivative claims challenging conflicted transactions.
46
Standing Op., 132 A.3d at 99.
19
party to a commercial contract to enforce its own contractual rights is not a derivative
action under Delaware law.”47 We explained that:
Tooley and its progeny do not, and were never intended to, subject
commercial contract actions to a derivative suit requirement. That body of
case law was intended to deal with a different subject: determining the line
between direct actions for breach of fiduciary duty suits by stockholders
and derivative actions for breach of fiduciary duty suits subject to the
demand excusal rules set forth in § 327 of the Delaware General
Corporation Law, Court of Chancery Rule 23.1, and related case law.48
In NAF Holdings, we rejected the defendant‟s contention that Tooley was “intended to be
a general statement requiring all claims, whether based on a tort, contract, or statutory
cause of action (e.g., antitrust), to be brought derivatively whenever the corporation of
which the plaintiff is a stockholder suffered the alleged harm.”49 Thus, in NAF Holdings,
the Tooley analysis was not needed to determine whether the commercial-contract claim
was direct or derivative. As we explained there, when a plaintiff asserts a claim based
upon the plaintiff‟s own right, such as a claim for breach of a commercial contract,
Tooley does not apply.
NAF Holdings does not support the proposition that any claim sounding in
contract is direct by default, irrespective of Tooley. Nor does it mean that Brinckerhoff‟s
status as a limited partner and party to the LPA enable him to litigate directly every claim
arising from the LPA. Such a rule would essentially abrogate Tooley with respect to
47
NAF Holdings, 118 A.3d at 182.
48
Id. at 179 (footnotes omitted).
49
Id. at 180.
20
alternative entities merely because they are creatures of contract. 50 Limited partnerships
are governed by their partnership agreements and by the Delaware Revised Uniform
Limited Partnership Act (the “DRULPA”). The partnership agreement sets forth the
rights and duties owed by the partners. The trial court treated the governing instrument
of the Partnership as if it were a separate commercial contract, rather than it being the
constitutive contract of the Partnership under the DRULPA itself. The reality that limited
partnership agreements often govern the territory that in corporate law is covered by
equitable principles of fiduciary duties does not make all provisions of a limited
partnership agreement enforceable by a direct claim.
Because Brinckerhoff‟s claim sounds in breach of a contractual duty owed to the
Partnership, we employ the two-pronged Tooley51 analysis to determine whether the
claim “to enforce the [Partnership‟s] own rights must be asserted derivatively” 52 or is
dual in nature such that it can proceed directly. 53 We have observed that “[t]he Tooley
direct/derivative test is „substantially the same‟ for claims involving limited
partnerships.”54 While the test may be substantially the same, cases involving limited
partnerships often present unique facts relating to the provisions and structure of the
50
See Norton, 67 A.3d at 360 (“Limited partnership agreements are a type of contract.”).
51
845 A.2d at 1033.
52
Citigroup Inc. v. AHW Inv. P’ship, 140 A.3d 1125, 1127 (Del. 2016).
53
See Loral Space & Commc’ns, Inc. v. Highland Crusader Offshore Partners, L.P. (Loral
Space II), 977 A.2d 867, 868 (Del. 2009) (stating that “[b]oth [direct and derivative] claims may
be litigated” where a claim is dual-natured).
54
Culverhouse v. Paulson & Co., 133 A.3d 195, 198 n.9 (Del. 2016) (quoting Elf Atochem N.
Am., Inc. v. Jaffari, 727 A.2d 286, 293 n.40 (Del. 1999)) (citations omitted).
21
limited partnership agreement and how it defines the rights and responsibilities of the
limited partners.55
Under Tooley, whether a claim is solely derivative or may continue as a dual-
natured claim “must turn solely on the following questions: (1) who suffered the alleged
harm (the corporation or the suing stockholders, individually); and (2) who would receive
the benefit of any recovery or other remedy (the corporation or the stockholders,
individually)?”56 In addition, to prove that a claim is direct, a plaintiff “must demonstrate
that the duty breached was owed to the stockholder and that he or she can prevail without
showing an injury to the corporation.”57
Applying the first prong of Tooley, the harm alleged in Brinckerhoff‟s complaint
solely affected the Partnership. The Fall Complaint alleged injury to Brinckerhoff only in
terms of the alleged harm to the Partnership.58 The “core theory” of Brinckerhoff‟s
complaint “was that „the Partnership was injured‟ when the defendants caused [the
55
Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304, 306 n.3 (Del. 2015) (“[I]n cases involving
[alternative] entities, distinctive arguments often arise due to the greater contractual flexibility
given to those entities under our statutory law.”); see Haynes Family Trust, 2016 WL 912184, at
*1 (rejecting limited partnership unitholders‟ “contention that they ought to be able to litigate
this case as if they were investors in a corporation”).
56
Tooley, 845 A.2d at 1033 (emphasis in original).
57
Id. at 1039. “The party invoking the jurisdiction of a court bears the burden of establishing the
elements of standing.” Dover Historical Soc’y, 838 A.2d at 1109 (citing Lujan v. Defenders of
Wildlife, 504 U.S. 555, 561 (1992)).
58
See Verified Derivative Compl. at A118 ¶ 6, Brinckerhoff v. El Paso Pipeline GP Co., No.
7141-VCL (Del. Ch. Mar. 5, 2012) (alleging that the Fall Dropdown benefited the Parent “at the
expense of [the Partnership], including at the expense of [Brinckerhoff] and the other
nonaffiliated limited partners”); id. at A144 ¶ 100 (alleging that the Fall Dropdown‟s terms
“were not fair and reasonable to [the Partnership]”); id. at A145 ¶ 102 (seeking damages “on
behalf of [the Partnership]”); id. at A147 (requesting that the court order the “defendants to
account to” the Partnership).
22
Partnership] to pay too much” in the Fall Dropdown.59 Such claims of corporate
overpayment are normally treated as causing harm solely to the corporation and, thus, are
regarded as derivative.60 In Tooley terms, the harm is to the corporation, because such
claims “naturally assert that the corporation‟s funds have been wrongfully depleted,
which, though harming the corporation directly, harms the stockholders only derivatively
so far as their stock loses value.”61 The recovery—“restoration of the improperly reduced
value”—flows to the corporation.62
At trial, Brinckerhoff sought to prove “how [the Partnership] was harmed[,]” and
he presented evidence of harm only as to the Partnership, not to the individual
unitholders.63 The Defendants, at trial, were required to respond to the proof presented.
59
Standing Op., 132 A.3d at 78 (quoting Verified Derivative Compl., supra note 58, at A119
¶ 8). See also Pre-Trial Stipulation & Order at A529, In re El Paso Pipeline Partners, L.P.
Derivative Litig., C.A. No. 7141-VCL (Nov. 10, 2014) (contending that the Partnership “paid
[the Parent] an unfairly high price” in the Fall Dropdown); see also Verified Derivative Compl.,
supra note 58, at A144 ¶ 100 (alleging that “the terms of the [Fall Dropdown] were not fair and
reasonable to [the Partnership]” because the General Partner caused the Partnership to pay
“hundreds of millions of dollars more than the value of those assets”).
60
Gentile, 906 A.2d at 99; see also Caspian Select Credit Master Fund Ltd. v. Gohl, 2015 WL
5718592, at *5 (Del. Ch. Sept. 28, 2015) (noting the general rule that “claims of corporate
overpayment are derivative”).
61
Protas v. Cavanagh, 2012 WL 1580969, at *6 (Del. Ch. May 4, 2012) (citing Gentile, 906
A.2d at 99).
62
Gentile, 906 A.2d at 99.
63
Standing Op., 132 A.3d at 80 (“Brinckerhoff focused on proving damages by showing that [the
Partnership] overpaid in the Fall Dropdown, and the General Partner sought to rebut that theory.
The parties did not present evidence at trial regarding specific harm to the unaffiliated limited
partners.”); see Liability Op., 2015 WL 1815846, at *25 (stating that Brinckerhoff argued in
support of damages that, due to the General Partner‟s breach of the LPA, the Partnership paid too
much in the Fall Dropdown); id. at *26-27 (discussing Brinckerhoff‟s trial expert, who presented
a calculation of the overpayment that occurred in the Fall Dropdown at the Partnership level);
see also A653 (Tr. 289:17-24) (testimony of Brinckerhoff‟s damages expert agreeing that his
opinion was “limited to a determination of whether the purchase price paid by [the Partnership]
23
Based on the evidence presented at trial, the Court of Chancery found that the alleged
overpayment “left the Partnership $171 million poorer.”64 Any economic harm to
Brinckerhoff devolved upon him as an equity holder in the form of the proportionally
reduced value of his units—a classically derivative injury. “Where all of a corporation‟s
stockholders are harmed and would recover pro rata in proportion with their ownership
of the corporation‟s stock solely because they are stockholders, then the claim is
derivative in nature.”65
The Court of Chancery‟s analysis in Gerber v. EPE Holdings, LLC66 is persuasive.
In Gerber, the Court of Chancery considered a limited partner‟s claim that an MLP‟s
general partner caused the partnership to purchase an asset for hundreds of millions of
dollars more than its fair value. The limited partnership agreement provided a
mechanism for resolving conflicts using a safe harbor provision.67 Following a merger,
the defendants challenged the plaintiff‟s standing. The Court of Chancery, applying
Tooley, held that the plaintiff‟s claims were derivative, reasoning that the plaintiff had
was fair and reasonable to the [P]artnership and no less favorable to the [P]artnership than those
generally being provided to or available from unrelated third parties”).
64
Standing Op., 132 A.3d at 104 (emphasis added).
65
Feldman v. Cutaia (Feldman II), 951 A.2d. 727, 733 (Del. 2008) (citing Gentile, 906 A.2d at
99).
66
2013 WL 209658 (Del. Ch. Jan. 18, 2013).
67
Id. at *2 (“A conflict of interest between the [g]eneral [p]artner and the limited partners „shall
be permitted and deemed approved by all [p]artners, and shall not constitute a breach of [the
LPA] . . . , 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 [s]pecial [a]pproval.‟” (alteration in
original and added)).
24
“not identified any independent harm suffered by the limited partners. Instead, [the
MLP] suffered all the harm at issue—it paid too much.”68
Notably, the court in Gerber declined to distinguish Tooley based on the
contractual aspect of the plaintiff‟s claims, reasoning that, “unless Tooley does not apply
to limited partnerships, it is difficult to see how [the plaintiff‟s] claims are anything other
than derivative.”69 It observed that “[i]f the contractual rights of the limited partners are
„independent‟ of the partnership‟s rights, then the claims will be considered direct.”70
However, the court saw “no separation” between the plaintiff‟s claim and a claim
belonging to the MLP, noting that the effect of the MLP‟s payment of too much was
“immediately and discretely upon” the MLP.71 Thus, the claim was derivative.
Like the plaintiff in Gerber, Brinckerhoff asserts an overpayment claim. The
alleged overpayment resulted in immediate harm to the Partnership—a reduction in the
Partnership‟s overall value. Here the contract right asserted was not separate and distinct
from the rights of the entity. The “best interests of the Partnership” standard provided
“no separation” between the Partnership‟s contractual rights and any rights of the limited
partners.
In unique circumstances, this Court has recognized that some claims can be dual-
natured—that is, both direct and derivative.72 Again, we caution that simply because
68
Id. at *12.
69
Id.
70
Id. (quoting Anglo Am., 829 A.2d at 150).
71
Id.72
See, e.g., Gentile, 906 A.2d at 99.
25
limited partners are parties to the LPA, and duties and rights could potentially flow to
either the limited partners or the Partnership, does not mean that every breach of any
provision of the LPA is “dual.”
Here, the Court of Chancery noted that “the decisions in which the Delaware
Supreme Court has recognized dual-natured claims have been controversial and stand in
tension with other decisions that have characterized similar claims as purely
derivative.”73 It identified this Court‟s decision in Gentile as one such case. In Gentile, a
corporation‟s CEO and controlling stockholder forgave a portion of the company‟s $3
million debt to him in exchange for additional equity. The applicable contractual
conversion rate was $0.50 of debt per share, but the CEO and the company‟s board of
directors (which included himself and one other person) agreed to $0.05 of debt per
share. Without disclosing the underlying transaction, the board secured a stockholder
vote authorizing the shares needed to issue the additional equity. The share issuance
increased the CEO‟s equity position from 61.19% to 93.49%, thereby decreasing the
minority stockholders‟ interest from 38.81% to 6.51%. When the CEO later negotiated a
merger between the corporation and its only competitor, the CEO received a generous put
agreement that was not disclosed to other stockholders. The trial court dismissed the
ensuing stockholder litigation after determining that the claims were exclusively
derivative and that the plaintiff stockholders lost standing after the merger.
On appeal, this Court recognized two independent aspects of the plaintiffs‟
complaint—the overpayment claim and the minority‟s significant loss of cash value and
73
Standing Op., 132 A.3d at 82 (footnote omitted).
26
voting power. These claims constituted “a species of corporate overpayment claim” that
is “both derivative and direct in character.”74 This Court concluded that “[u]nlike the
typical „overpayment‟ transaction,”75 a dual-natured claim “arises where: (i) a
stockholder having majority or effective control causes the corporation to issue
„excessive‟ shares of its stock in exchange for assets of the controlling stockholder that
have a lesser value; and (2) the exchange causes an increase in the percentage of the
outstanding shares owned by the controlling shareholder, and a corresponding decrease in
the share percentage owned by the public (minority) shareholders.” 76 This Court
reversed, allowing the plaintiffs to proceed with direct claims.
Gentile concerned a controlling shareholder and transactions that resulted in an
improper transfer of both economic value and voting power from the minority
74
Gentile, 906 A.2d at 99; see also Gatz v. Ponsoldt, 925 A.2d 1265, 1280-81 (Del. 2007).
75
Gentile, 906 A.2d at 100 n.21.
76
Id. at 100. In Feldman II, this Court reiterated that “dilution claims are „not normally regarded
as direct, because any dilution in value of the corporation‟s stock is merely the unavoidable
result (from an accounting standpoint) of the reduction of the value of the entire corporate entity,
of which each share of equity represents an equal fraction.‟” Feldman II, 951 A.2d at 732
(quoting Gentile, 906 A.2d at 99). We commented further that “[i]n order to state a direct claim,
the plaintiff must have suffered some individualized harm not suffered by all of the stockholders
at large.” Id. at 733 (citing Gentile, 906 A.2d at 99) (citation omitted). We decline to extend
Gentile further to say that a direct claim arises wherever a controlling stockholder extracts
economic value from an entity to its benefit and to the detriment of the minority stockholders.
Any broader interpretation would swallow the general rule that equity dilution claims are
derivative. See Feldman v. Cutaia, 956 A.2d 644, 657 (Del. Ch. 2007) (seeking to avoid an
interpretation of Gentile that “would swallow the general rule that equity dilution claims are
solely derivative”), aff’d Feldman II, 951 A.2d 727. Here, the Partnership was already
controlled by the General Partner, and there is no suggestion that the transaction increased the
General Partner‟s or Parent‟s control at the expense of the limited partners, or that the transaction
affected the limited partners‟ voting rights in any way.
27
stockholders to the controlling stockholder.77 Brinckheroff‟s claim does not satisfy the
unique circumstances presented by the Gentile “species of corporate overpayment
claim[s][.]”78 Brinckerhoff never alleged and did not prove that the Partnership‟s
overpayment increased the General Partner‟s or the Parent‟s control at the expense of the
limited partners. Brinckerhoff argues that, when the Partnership overpaid for the assets
involved in the Fall Dropdown, the Parent was enriched at the expense of the unaffiliated
unitholders. He contends that this “expropriation” constituted a direct injury to the
unaffiliated limited partners.
Although Brinckerhoff concedes that this expropriation of economic value to a
controller was not coupled with any voting rights dilution, he argues that this distinction
is “immaterial.” We decline the invitation to further expand the universe of claims that
can be asserted “dually” to hold here that the extraction of solely economic value from
the minority by a controlling stockholder constitutes direct injury. To do so would
deviate from the Tooley framework and “largely swallow the rule that claims of corporate
77
Gentile, 906 A.2d at 100 (“[T]he end result of this type of transaction is an improper
transfer—or expropriation—of economic value and voting power from the public shareholders to
the majority or controlling stockholder.” (emphasis added)); id. (noting that “a separate harm”
results, namely, an “extraction from the public shareholders, and a redistribution to the
controlling shareholder of a portion of the economic value and voting power embodied in the
minority interest” (emphasis added); see also Gatz, 925 A.2d at 1280-81 (determining that a
claim was dual in nature where “the fiduciary exercise[d] its stock control to expropriate, for its
benefit, economic value and voting power from the public shareholders”); Feldman II, 951 A.2d
at 732 n.26 (noting that “Gentile and Gatz both involved situations with a controlling shareholder
and transactions that resulted in an improper transfer of both economic value and voting power
from the minority stockholders to the controlling stockholder”).
78
Gentile, 906 A.2d at 99.
28
overpayment are derivative” by permitting stockholders to “maintain a suit directly
whenever the corporation transacts with a controller on allegedly unfair terms.”79
As to the second prong of Tooley, the benefit of any recovery must flow solely to
the Partnership. The Court of Chancery recognized that “returning the full amount [of
the overpayment] to the entity” was the “most obvious” remedy,80 and that Brinkerhoff
sought to recover damages “on behalf of” the Partnership.81 Were Brinckerhoff to
recover directly for the alleged decrease in the value of the Partnership‟s assets, the
damages would be proportionate to his ownership interest. The necessity of a pro rata
recovery to remedy the alleged harm indicates that his claim is derivative.82
In deviating from an entity-level remedy, the Court of Chancery relied on cases
involving “insider transfers” of stock and “stock dilution cases[,]” which it read to permit
remedies “at the stockholder level, without any payment to the corporation, such as an
order adjusting the rights of the stock or invalidating a portion of the shares.”83 As
discussed above, these cases are inapposite, as Brinckerhoff does not claim that the Fall
Dropdown affected his voting rights or the Parent‟s relative control of the Partnership.84
79
Gohl, 2015 WL 5718592, at *5 (citing Teamsters Union 25 Health Servs. & Ins. Plan v.
Baiera, 119 A.3d 44, 55-56 (Del. Ch. 2015)).
80
Standing Op., 132 A.3d at 111.
81
Verified Derivative Compl., supra note 58, at A145 ¶ 102.
82
See Feldman II, 951 A.2d at 733 (citing Gentile, 906 A.2d at 99)).
83
Standing Op., 132 A.3d at 111-12 (citing Carsanaro v. Bloodhound Techs., Inc., 65 A.3d 618,
656-57 (Del. Ch. 2013); In re Loral Space & Commc’ns Inc. (Loral Space I), 2008 WL 4293781,
at *32 (Del. Ch. Sept. 19, 2008), aff’d Loral Space II, 977 A.2d 867; Linton v. Everett, 1997 WL
441189, at *7 (Del. Ch. July 31, 1997)).
84
Cf. Loral Space I, 2008 WL 4293781, at *32 (after agreeing with minority shareholders in a
derivative action that a controlling stockholder locked up majority ownership of the company in
29
Finally, Brinckerhoff never presented evidence at trial of specific harm suffered by
the limited partners, as the Court of Chancery stated. It follows that the General Partner
should not be penalized for failing to defend at trial an element of a claim (e.g., that the
unitholders were directly harmed by the Fall Dropdown) that the plaintiff never attempted
to prove.85
Thus, Brinckerhoff‟s overpayment claim is exclusively derivative under Tooley.
C. The Merger Extinguished Brinckerhoff’s Claim
In Lewis v. Anderson,86 this Court set forth the continuous ownership
requirement.87 We held that “[a] plaintiff who ceases to be a shareholder, whether by
reason of a merger or for any other reason, loses standing to continue a derivative suit.”88
This rule flows from the fact that, following a merger, “the derivative claim—originally
belonging to the acquired corporation—is transferred to and becomes an asset of the
acquiring corporation as a matter of statutory law.”89
an unfair, conflicted stock purchase transaction, reforming the agreement to convert the
controller‟s new shares into nonvoting common stock, thereby preserving its previous degree of
voting power); Linton, 1997 WL 441189, at *7 (invalidating stock issuance after the court
determined director defendants did not establish that the transaction was entirely fair).
85
See Standing Op., 132 A.3d at 80 (stating that “[t]he parties did not present evidence at trial
regarding specific harm to the unaffiliated limited partners”).
86
477 A.2d 1040 (Del. 1984).
87
Id. at 1049. The statutory foundation for the continuous ownership requirement in the
corporate realm is echoed in the limited partnership context. Compare 8 Del. C. § 259, with 6
Del. C. § 17-211(h).
88
Lewis, 477 A.2d at 1049.
89
Ark. Teacher, 75 A.3d at 894 (citing Lewis, 477 A.2d at 1049-50; 8 Del. C. § 259 (2013)).
30
Here, Brinckerhoff‟s claims were an asset of the Partnership. The claims passed
by operation of law to Kinder Morgan as a result of the Merger. The Merger therefore
extinguished Brinckerhoff‟s standing to assert these claims. Brinckerhoff‟s remedy was
to challenge the Merger, but he elected not to do so.
D. The Cross-Appeal
Given our holding that Brinckerhoff lacks standing as to the Fall Dropdown, the
same reasoning applies to his claims challenging the Spring Dropdown—the subject of
his cross-appeal. We therefore dismiss Brinckerhoff‟s cross appeal.
IV. CONCLUSION
For the reasons set forth above, we reverse the Court of Chancery‟s decision that
Brinckerhoff had standing to continue his claims following the Merger. We do not reach
Brinckerhoff‟s cross-appeal, which is mooted by his lack of standing.
31
STRINE, Chief Justice, concurring:
I join fully in the majority‟s well-reasoned opinion. I write separately just to
highlight a reality that this case exemplifies. Gentile v. Rossette1 is a confusing decision,
which muddies the clarity of our law in an important context. As the majority opinion
makes clear, a claim that an entity has issued equity in exchange for inadequate
consideration—a so-called dilution claim—is a quintessential example of a derivative
claim.2 But, Gentile purported to recognize a direct dilution claim when additional equity
was issued to a company‟s CEO who was already the controlling stockholder.3 The
reasoning was that this diminution in the voting power of minority stockholders somehow
gave rise to a direct injury even though they were already stockholders in a controlled
company.
But, that decision is difficult to reconcile with traditional doctrine. All dilution
claims involve, by definition, dilution. To suggest that, in any situation where other
investors have less voting power after a dilutive transaction, a direct claim also exists
turns the most traditional type of derivative claim—an argument that the entity got too
little value in exchange for shares—into one always able to be prosecuted directly.
Gentile cannot be reconciled with the strong weight of our precedent and it ought to be
1
906 A.2d 91 (Del. 2006).
2
See, e.g., Green v. LocatePlus Holdings, Corp., 2009 WL 1478553, at *2 (Del. Ch. May 15,
2009) (“Classically, Delaware law has viewed as derivative claims by shareholders alleging that
they have been wrongly diluted by a corporation‟s overpayment of shares.”); see also, e.g.,
Feldman v. Cutaia, 951 A.2d 727, 732-33 (2008); In re J.P. Morgan Chase & Co. S’holder
Litig., 906 A.2d 766, 774-75 (2006).
3
Gentile, 906 A.2d at 99.
1
overruled, to the extent that it allows for a direct claim in the dilution context when the
issuance of stock does not involve subjecting an entity whose voting power was held by a
diversified group of public equity holders to the control of a particular interest. But, even
in that situation, there is no gap in our law for Gentile to fill. Revlon4 already accords a
direct claim to stockholders when a transaction shifts control of a company from a
diversified investor base to a single controlling stockholder.5 I agree with the majority
that this case does not require us to consider Gentile‟s ongoing viability in the corporate
law context. Sufficient for today is that we refuse to extend Gentile further, to a situation
where a limited partnership was already firmly under the control of the general partner
and where the transaction under attack had no effect whatsoever on limited partner voting
rights. But, by refusing to extend Gentile to the alternative entity arena, we implicitly
recognize that Gentile undercuts the clarity and coherence that Tooley brought to the
determination of what claims are derivative. The lucid majority decision therefore is a
big step in the right direction.
4
Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986).
5
See Paramount Commc’ns Inc. v. QVC Network Inc., 637 A.2d 34, 43 (Del. 1994).
2