(Reuters) - A Delaware judge found an affiliate of El Paso Corp liable for $171 million for overpaying in a pipeline deal, a ruling that could bolster the legal power of investors in an increasingly popular investment vehicle used in the energy sector.
The judgment is one of the largest from the Delaware Court of Chancery, which is among the country’s busiest venues for investor lawsuits.
The opinion blasted directors and advisors for showing indifference to the investors in a master limited partnership (MLP) controlled by El Paso.
Energy companies have used MLPs to hold assets with steady cash flows, like pipelines. The structures are popular with investors because they deliver higher dividends but have also been far more insulated from investor lawsuits than a corporation.
“You might have thought they were impregnable,” said Larry Hamermesh of the Widener University School of Law in Wilmington.
For that reason, the ruling and any possible appeal will be closely watched to see if investors in publicly traded MLPs gain more protections akin to shareholders in corporations.
The lawsuit centered on the sale of two natural gas-related subsidiaries of El Paso to El Paso Pipeline Partners, an MLP controlled by the parent company.
The 2011 lawsuit was brought by a holder of common units of the MLP. The unitholder alleged the MLP overpaid for the subsidiaries for the benefit of the parent company.
Judge Travis Laster found the directors for the MLP caved to parent company demands and approved a deal they had criticized in private.
“Their actions evidenced conscious indifference to their responsibilities to El Paso MLP,” Laster wrote in Monday’s opinion.
El Paso and the MLP were acquired by Kinder Morgan Inc after the deals at the center of the lawsuit were completed. Kinder Morgan said it was disappointed by the ruling and it continued to believe the deals were in the best interest of the MLP.
It said it was considering an appeal once outstanding issues in the cases were resolved.
Attorneys for the general partner, which controlled the MLP, and the general partner’s directors did not respond to a request for comment. Nor did attorneys for the plaintiff.
The directors had argued the deal was fair because it would increase the distributions to holders of common units.
Laster also criticized the work of the investment bank, Tudor, Pickering, Holt & Co, which advised the three-member committee of the general partner that controlled the MLP.
“Instead of helping the committee develop alternatives, identify arguments, and negotiate with the controller, Tudor sought to make the price that parent proposed look fair,” Laster wrote.
Tudor, which was not a defendant, did not respond to a request for a comment.
The El Paso case was what is known as a derivative lawsuit, meaning any judgment is generally for the benefit of the company, not investors.
Reporting by Tom Hals in Wilmington, Delaware; Editing by Ted Botha