In re El Paso Pipeline, L.P. Derivative Litig. - 132 A.3d 67 (Del. Del. Ch. 2015)

Rule:

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. 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.

Facts:

El Paso Pipeline Partners, L.P. was a publicly traded master limited partnership based in Texas, (the Partnership). Herein plaintiff, Peter R. Brinckerhoff was 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 herein defendant El Paso Pipeline GP Company LLC, subsidiary of its parent company, El Paso Corporation. Defendant owned all of the Partnership's general partner interest. The parent company also owned, either through the defendant or its affiliates, approximately 52% of the Partnership's outstanding common units plus all of its incentive distribution rights. In this case, it involved two transactions- the Spring and Fall Dropdown, in which ownership interests dropped down from the parent company to the Partnership. In August 2011, Kinder Morgan Inc. and the parent company entered into a merger agreement. After the merger, the parent company was no longer a separately traded public company, though the Partnership continued to be publicly traded. Plaintiff filed a verified derivative complaint challenging the Spring Dropdown, alleging breach of express and implied duties, aiding and abetting, tortious interference, and unjust enrichment. After hearing, the trial court dismissed the unjust enrichment claim. A derivative complaint challenging the Fall Dropdown followed alleging the same four claims. The cases were consolidated, and after discovery, the parties filed for cross-motions for summary judgment.  The court granted summary judgment in favor of all defendants with respect to the Spring Dropdown complaint and denied plaintiff’s cross-motion. The court also granted in part and denied in part the defendants' motion for summary judgment with respect to the Fall Dropdown. Lastly, the court held that plaintiff had standing to continue his claims following the Merger.

Issue:

Did the court err in holding that plaintiff had standing to continue his claims following the Merger?

Answer:

Yes.

Conclusion:

The court reversed the judgment. The court held that the court of chancery erred in granting judgment to defendant upon finding that a conflicts committee approved a conflict transaction that it did not believe was in the best interests of the limited partnership (LPS), as it was acquired by merger after the trial was completed and before any judicial ruling on the merits, such that plaintiff lacked standing under Del. Code Ann. tit. 6, § 17-211(h) because the claims were transferred to the buyer in the merger. The court further held that plaintiff’s claims could not be considered direct under the Tooley test, as the limited partnership agreement directed that it owned the claim and equitable principles did not control to determine that outcome, such that the plaintiff could only challenge the fairness of the merger through allegations that the value of his claims was not reflected in the merger consideration. In conclusion, the court held that plaintiff lacked standing as to the Fall Dropdown, the same reasoning applied to his claims challenging the Spring Dropdown, which was the subject of his cross-appeal. Thus, it was dismissed for being moot.