Texas Supreme Court says buyout firms not liable for chemical plant explosion
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When a chemical plant in Port Neches, Texas, exploded on Thanksgiving eve in 2019, multiple people were injured, tens of thousands were evacuated from their homes and off-site property damage costs topped $150 million.
What's new: The plant's ultimate owners, private equity firms First Reserve and SK Capital Partners, will not be held liable, per a recent ruling by the Texas Supreme Court.
Why it matters: This was a failed attempt to pierce the corporate veil that private equity funds use to protect themselves from portfolio company misdeeds.
- Had it succeeded in Texas, the second-largest state for private equity investment, it could have opened the floodgates for future litigation.
What to know: The Port Neches facility was owned by TPC Group, which was taken private for $850 million in 2012 by First Reserve and SKCP.
- It mostly produced butadiene, a petrochemical used in the production of synthetic rubber.
- An investigation by federal authorities determined that the blast was caused by the buildup of a “popcorn polymer” inside of a pipe, and that TPC failed to identity what it should have known was a possible problem.
- TPC filed for Chapter 11 bankruptcy protection last summer, in a prepackaged deal that included money to compensate thousands of plaintiffs in lawsuits that had been consolidated into a state multidistrict case. Prior to the bankruptcy filing, TPC had already paid out $134.5 million to settle explosion-related claims.
Piercing the veil: Not all victims were satisfied with going after TPC. Some also wanted compensation from the company's private equity owners, who they believed had caused the company to cut safety corners in the pursuit of investment profits.
- Plaintiffs never really got to their substantive arguments, however, because the Texas Supreme Court effectively ruled that the PE firms' creation of limited liability structures gave them legal cover (absent of fraud, which wasn't alleged). By doing so at the pleadings stage, it likely sets precedent for future cases and make it less likely future lawsuits are attempted.
- Defense attorneys also successfully argued that neither First Reserve nor SK Capital Partners controlled the TPC board of directors from a mathematical perspective — First Reserve, for example, held two of five board seats —and thus no operational control.
The big picture: Private equity firms regularly tout their "value-added" operational skills when trying to raise funds or secure a deal, so it's fairly rich that First Reserve and SKCP successfully argued that they were little more than financiers.
- Moreover, it's not uncommon for a single fund to lack board control, if a buyout was done by multiple firms acting in concert.
- "I don't see an inconsistency," says Chris Popov, an attorney with Vinson & Elkins who represented the PE firms on this case. "It's one thing for an owner to market profitability or returns to raise a fund ... it's entirely different to suggest the owner is then personally liable for every debt of the underlying company ... I think the fundamental issue of limitation of liability in corporate law is what was at stake here."
The bottom line: Private equity firms spend lots of money on fund formation lawyers. This is why.
