Boardwalk Pipeline Partners, LP v. Bandera Master Fund LP

Boardwalk Pipeline Partners, LP v. Bandera Master Fund LP

No. 1, 2022 (Del. Dec. 19, 2022) | Supreme Court of Delaware (en Banc)

Relevant Facts

• Boardwalk Pipeline Partners, LP (BPP) is a publicly traded Delaware limited partnership that owns and operates natural gas pipelines.
• Loews Corporation indirectly controlled BPP's general partner, Boardwalk GP, LP.
• In 2018, Loews directed BPP's general partner to exercise a "call right" under the partnership agreement to purchase all outstanding limited partnership units at fair market value, taking BPP private.
• The call right required a determination by the general partner's board that the then-current law has or is reasonably likely to cause BPP to be treated as a corporation for federal income tax purposes.
• The IRS had proposed regulations in 2017 that could affect BPP's tax status, but the regulations were not final at the time of the call right exercise.
• Plaintiff Bandera Master Fund LP and other limited partners challenged the exercise of the call right, alleging it was a pretext by Loews to acquire BPP at a below-market price.

Legal Issues

• Whether the general partner's exercise of the call right complied with the partnership agreement's requirements.
• Whether the contractual standard of review (subjective good faith) or entire fairness applied to the general partner's decision.
• Whether the general partner acted in good faith in determining that then-current law was "reasonably likely" to cause corporate tax treatment.
• Whether Loews and the general partner breached the implied covenant of good faith and fair dealing.

Decision of the Court

The Delaware Supreme Court reversed the Court of Chancery's post-trial judgment that had found in favor of the defendants. The Supreme Court held that the general partner failed to satisfy the contractual prerequisites for exercising the call right.

Reasons for the Decision

The partnership agreement required the general partner to determine that "then-current law" would reasonably likely cause corporate tax treatment. The Supreme Court held that "then-current law" refers to enacted statutes, final regulations, and binding judicial or administrative interpretations — not proposed regulations that may never become final. The IRS proposed regulations had not been finalized at the time of the call right exercise, so they could not form the basis for the general partner's determination. The Court of Chancery erred by applying a purely subjective standard of review rather than examining whether the contractual prerequisites were objectively satisfied. The partnership agreement's good faith standard does not permit the general partner to manufacture a basis for exercising the call right that would not withstand objective scrutiny.