Chancery calls out financial advisor over manipulated valuations

In re El Paso Pipeline Partners, L.P. Derivative Litigation, 2015 Del. Ch. LEXIS 116 (April 20, 2015)

A series of transactions in which the parent company off-loaded risky assets to a limited partnership that it controlled produced a spate of suits from the LP’s common unitholders. Many of the plaintiffs’ claims ended prematurely, but one proceeded to trial in front of the Delaware Court of Chancery.

In its recent decision on whether the special committee that approved the transactions breached the governing partnership agreement, the Chancery paid close attention to the valuations and fairness opinions of the financial firm that served as advisor to the committee members. The court found the appraiser’s performance lacking in credibility and noted instances of “nonfeasance” as well as “malfeasance.” The financial expert’s work was fee-driven, the court said. The firm was beholden to the parent entity, which aimed to sell the assets for as high a price as possible, causing the advisor to manipulate its various valuations in order to align them with the parent’s asking price.

At the same time, the Chancery had words of praise for the plaintiffs’ expert. His valuation was sound, the court found, and used it to determine the damages amount.

Find a more detailed description of the Chancery’s opinion here.