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Brinckherhoff v. Texas Eastern Products Pipeline Co., LLC, Consol. C.A. 4548-VCL (Del. Ch. Jan. 15, 2010) (Laster, V.C.)

January 15, 2010

In this opinion, Vice Chancellor Laster approved a settlement resolving two representative actions brought by holders of limited partnership units against Teppco Partners, L.P. (“Teppco”), its affiliates and directors. The Court awarded $10 million in fees and expenses to plaintiffs’ counsel and offered its views on the role played by special committees in both “the Cox Communications minuet” and in valuing derivative actions.

The claims resolved by the settlement included a derivative action challenging two transactions between Teppco and Enterprise Products Partners, L.P. (“Enterprise”), where plaintiffs alleged that defendant director Daniel L. Duncan controlled both entities and the transactions unfairly favored Enterprise (the “Derivative Action”). The second action (the “Merger Action”) challenged a subsequent proposal by Enterprise to merge with Teppco. Finding that the merger between Enterprise and Teppco was orchestrated for the primary purpose of extinguishing plaintiffs’ standing to maintain the Derivative Action, the Vice Chancellor nonetheless approved a settlement of both the Derivative Action and the Merger Action, based in part upon supplemental information presented to the Court by Delaware counsel retained by Teppco’s special committee (the “Special Committee”). Specifically, supplemental information provided to the Court showed that the Special Committee, on the advice of legal counsel and in consultation with financial advisors, engaged in a fulsome valuation process that took into account the value of the Derivative Action in negotiations with Enterprise.

The Vice Chancellor characterized the instant case as “a Cox Communications settlement,” where a special committee engages in simultaneous “two-track negotiations” with both the controlling stockholder, with respect to the transaction, and plaintiffs’ counsel, with respect to the litigation. See In re Cox Communications, Inc. Shareholders Litigation, 897 A.2d 604 (Del. Ch. 2005). Noting that the “problematic dynamics” of a Cox Communications settlement are amplified when the settlement resolves not only transactional claims but also pending derivative actions, the Court nonetheless found on an expanded record that the Special Committee used the Derivative Action to increase the merger consideration offered by Enterprise to Teppco unitholders. While defendants agreed not to oppose the award of $17.5 million in fees and $1.5 million in expenses requested by plaintiffs’ counsel, the Vice Chancellor, utilizing factors articulated in Sugarland Industries, Inc. v. Thomas, awarded an all-in sum to plaintiffs’ counsel of $10 million, which represented approximately 10% of the benefits conferred to Teppco unitholders by the Derivative Action.

The Vice Chancellor also discussed the process employed by the Special Committee in valuing the Derivative Action, noting with approval that the Special Committee: (i) spent considerable time assessing the merits of the Derivative Action with its legal advisors; (ii) incorporated expert opinions regarding the potential value of the Derivative Action into a counteroffer made by Teppco to Enterprise; and (iii) secured a fulsome litigation decision-tree valuation analysis of the Derivative Action from Houlihan Lokey that both the Special Committee and Delaware counsel scrutinized carefully before deciding upon a likely range of damages. Based on the supplemental record provided by the Special Committee, the Court determined for purposes of approving the settlement that the Special Committee used the Derivative Action as an effective negotiation tool to increase the merger consideration. As a result, the Court approved the settlement as fair and reasonable.

The full opinion is available here