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US court reins in the questioning of the intent of corporate lawyers

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Are corporate lawyers subject to the frailties of mere mortals? It is a question the Delaware Supreme Court is apparently unwilling to ponder. In a December ruling, the five-person body reversed a $690mn judgment that the lower Chancery Court had entered against Loews Corporation.

The Chancery decided that Loews had short-changed shareholders of an energy pipeline subsidiary, Boardwalk Pipeline Partners LP, when it acquired Boardwalk for $1.5bn in 2018. The key finding of the judge in the case, vice-chancellor Travis Laster, was that a required external legal opinion for the deal to proceed had been influenced by pressure from Loews management.

Laster has become a polarising jurist in Delaware after a series of rulings in which he criticised what he believed was the eroding norms of corporate law firms that deploy hyper-aggressive tactics and advice.

In its reversal, the Delaware Supreme Court decided that challenging the professional judgment of lawyers was something that judges should almost always avoid doing — even when the record indicated that a lawyer’s client was leaning hard for a particular result. “Delaware case law regarding opinions of counsel does not permit a trial court to substitute its legal interpretation for one reached by counsel in good faith,” the court wrote.

It seems reasonable that advisers should not easily be liable for professional advice. But as one person who followed this case and judgments closely told the Financial Times, the ruling signifies it would be very difficult to prove the bad faith of a lawyer in court “short of a witness stand confession”. 

Boardwalk was organised, like many energy infrastructure companies, as a limited partnership. From a corporate governance perspective, Loews as its manager, or general partner, did not owe the Boardwalk public investors fiduciary duties typically associated with corporations. Under US law, it is assumed shareholders in such partnerships appreciate the risk that they could be taken advantage of.

Loews had a provision in its agreement with Boardwalk that allowed it to buy out its shareholders if federal regulations changed in a way that severely hurt the rates it could charge for its pipeline. Such a regulatory change arose in 2018 and Loews sought to exercise this “call right”. All it needed then were legal opinions that the possible regulatory changes were severely negative for Boardwalk.

The law firm it chose, Baker Botts, however, had trouble immediately blessing such a conclusion. In one meeting, a Baker Botts lawyer’s handwritten notes read that relative to regulatory change, there would be “no actual change — no effect yet screw min[ority shareholders]”. Laster went on to conclude that “Baker Botts strived to conclude that the General Partner could exercise the Call Right because that is what its client wanted”.

In its reversal of Laster, the Delaware Supreme Court noted that Loews could be absolved of wrongdoing simply because it had relied on another opinion from the law firm Skadden which said that Loews could reasonably accept the original Baker Botts decision on the regulatory change.

Two Supreme Court justices, however, went further with a concurring opinion to absolve the original Baker Botts opinion, insisting that the firm, had still rendered its verdict in good faith even if its substance was wrong.

The judicial debate over divining the mind of lawyers has echoes in another seminal dispute. In 2016, a multibillion-dollar merger between two companies, Williams and Energy Transfer Equity failed to close after outside lawyers for ETE at Latham & Watkins refused to deliver what was thought to be a perfunctory but required tax opinion. Williams sued ETE to enforce the deal. Yet, like in Boardwalk, the Delaware Supreme Court did not want to second guess the lawyers. The then-Chief Justice of the Delaware Supreme Court, Leo Strine, in a dissent undertook an analysis of the mindset of the Latham lawyers noting that its client, ETE, very much wanted the deal to die.

“By the time of trial, ETE had put the Latham Tax Lawyer as far out on a professional tree limb as it could without causing him to literally plummet to earth,” wrote Strine. Strine went on to wonder why ETE’s behaviour towards closing the deal was not viewed through a critical “gimlet-eyed lens” where the company would have to prove it did not cause Latham to avoid issuing the tax approval.

Strine retired from the bench in 2019. He has since joined the powerhouse law firm Wachtell, Lipton. It is the same firm, by coincidence, that just successfully represented Loews in the Boardwalk reversal. According to people familiar with the case, Strine did not work on the Boardwalk matter.

sujeet.indap@ft.com

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