December 21, 2016
In its December 20, 2016 decision in El Paso Pipeline GP Company, L.L.C. v. Brinckerhoff, No. 103, 2016, the Delaware Supreme Court reversed a trial verdict of $171 million issued by the Delaware Court of Chancery. The Supreme Court held that the plaintiff – a limited partner in a partnership who alleged that the partnership overpaid for certain assets – lost standing to pursue derivative claims challenging the transaction when the partnership later merged with a third party.
The Supreme Court applied the two-pronged analysis adopted in Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004), to determine that the claim was derivative, and not direct, rejecting the argument that Tooley does not apply to claims alleging a breach of a limited partnership agreement. The Supreme Court held that the partnership owned the claim because any harm caused by the overpayment would have been to the entity itself, not to the individual limited partners. The Supreme Court further noted that plaintiff never alleged or proved at trial any injury to the limited partners (focusing all of his evidence on the alleged harm to the partnership itself) and rejected the contention that any entity-level injury should be recast to authorize a damages award to a class of individual investors. Because the claim belonged to the partnership, it accordingly “passed to the partnership’s successor by operation of law in the merger,” and plaintiff lost standing to pursue it derivatively. As a result, plaintiff’s sole remedy was to challenge the merger itself. And the Supreme Court declined to apply the dual-claim analysis that has been invoked in cases such as Gentile v. Rossette, 906 A.2d 91 (Del. 2006), and its progeny, to find standing.
The decision reconfirms that Tooley and the continuous ownership rule apply in the alternative entity context as they do in the corporate context. The decision also reaffirms the long-standing continuous ownership rule that reflects the strong Delaware policy that buyers should have certainty that they will acquire all the assets of a target – including derivative claims – in a merger and will not “find themselves having bought into litigation morasses, the persistence of which they cannot control.” And it makes clear that an investor’s post-closing standing is extinguished by a merger even in cases where the underlying derivative claims may potentially have some merit.
Joseph Allerhand, co-head of Weil’s Securities Litigation practice, counsel Seth Goodchild, and associates Christine Di Guglielmo, Amanda Pooler, Nikolei Kaplanov, and Alexandria Swette were retained post-trial to represent the defendants on the appeal, and partnered with Kinder Morgan in-house counsel on the engagement.