A judge in Delaware Chancery Court on Monday dismissed a derivative lawsuit brought by a class of Spectra Energy Partners shareholders after the company’s 2015 reverse dropdown with Spectra Energy Corp.
The ruling marks a win for a group of Houston and Delaware lawyers from Skadden Arps Slate Meagher & Flom, who are representing defendant Spectra Energy Partners (DE) GP, LP (SEP GP), the named defendant in the lawsuit and the general partner of Spectra Energy Partners (SEP).
The lawsuit surfaced after Houston-based Spectra Energy Corp. acquired certain pipeline interests from SEP in exchange for the redemption of approximately 21 million limited partner units. The named plaintiff, SEP minority shareholder Paul Morris, alleged SEP GP failed to secure sufficient value for the pipeline interests in violation of its contractual duty of good faith.
Although the lawsuit survived a motion to dismiss, Delaware Vice Chancellor Sam Glasscock dismissed the suit in 2018 after Enbridge purchased all of SEP’s common units in a roll-up transaction, since Delaware law said the plaintiff had lost standing to bring it.
Morris brought a new lawsuit in February 2019, which challenged the merger with Enbridge and alleged SEP GP agreed to it in bad faith. He alleged that SEP GP failed to appropriately value the assets at issue in the first lawsuit, which were in turn sold to Enbridge at a bad price — $554 million less than what they should have been sold for.
The question the court had to answer in the new case was whether the plaintiff’s new complaint remained derivative in nature (which would cause the plaintiff to lose standing to bring the suit) or whether the new lawsuit represented a direct attack on the merger itself.
The question is related to a standard set in a May 2013 Court of Chancery decision in a shareholder suit brought against Primedia, Inc., which determined that a plaintiff has standing to pursue derivative claims, which would otherwise be extinguished through a merger transaction only if the plaintiff establishes that the derivative claim was both viable and material in the context of the transaction as a whole.
The defendant argued that the lawsuit did not pass the Primedia test. In a 35-page ruling issued Monday, Vice Chancellor Glasscock agreed.
“I find that the value of the derivative claim here was not material in light of the merger transaction,” Vice Chancellor Glasscock wrote. “Upon consideration, I find the amount at issue not material to the partnership.”
The Skadden team representing SEP in the lawsuit includes partner Noelle Reed and counsel Wallis Hampton and Daniel Mayerfeld from the firm’s Houston office, as well as partner Rob Saunders, counsel Ron Brown and associate Ryan Lindsay from the firm’s Wilmington, Delaware office. They declined to comment on the ruling.
Morris’ legal team included lawyers from Delaware firms Grant & Eisenhofer and Andrews & Springer, as well as New York firm Oster & Tejtel. They did not immediately respond to a request for comment.