In re Kinder Morgan, Inc. Corporate Reorg. Litig., C.A. No. 10093-VCL (Del. Ch. Nov. 5, 2014) (Laster, V.C.)
In this memorandum opinion, the Court of Chancery denied plaintiffs’ motion for a preliminary injunction and held that a provision in a partnership agreement imposing a higher voting threshold with respect to certain mergers involving amendments to the partnership agreement did not apply to a merger in which the partnership would be the surviving entity and the merger agreement would not affect any amendments to the partnership agreement.
At issue in the opinion was the proposal by Kinder Morgan, Inc. (“Parent”) to simplify its entity structure by engaging in a series of mergers that would result in Parent emerging as the only publicly traded entity. In connection with the restructuring, Kinder Morgan Energy, L.P., an indirect publicly traded subsidiary of the Parent (the “Partnership”), entered into a merger agreement pursuant to which a wholly owned subsidiary of the Parent would be merged with and into the Partnership, with the Partnership as the surviving entity in the merger. Pursuant to the terms of the merger agreement, each of the Partnership’s common units would be converted into the right to receive, at the election of the holders, cash consideration, shares of the Parent common stock, or a mix of cash and Parent common stock.
Plaintiffs, holders of the Partnership’s common units, sought a preliminary injunction against the closing of the merger on the grounds that the merger would violate the requisite vote under the terms of the partnership agreement. Section 16.2 of the Partnership Agreement specifies the requisite vote and provides that a merger agreement would need to be approved by a majority of the outstanding units of the Partnership’s three classes of units, voting together as a single class, subject to the following exception: “unless the Merger Agreement contains any provision which, if contained in an amendment to this Agreement, the provisions of this Agreement or the Delaware Act would require the vote or consent of a greater percentage of the Outstanding Units or of any class of Limited Partners.” The Court refers to this exception as the “Amendment-By-Merger Exception.”
The Court noted that the “Amendment-By-Merger- Exception” altered the statutory default and ensured that if an amendment to the partnership agreement would have required a higher voting standard, then the higher voting standard would apply to the merger. Without the exception, an amendment to the limited partnership agreement could be implemented through a merger and circumvent a higher voting requirement that would otherwise apply to a stand-alone amendment.
The Court found, however, that the Amendment-By-Merger Exception did not apply to the transaction at issue because the partnership agreement would not be amended in the merger. In so holding, the Court rejected plaintiffs’ argument that the Amendment-By-Merger Exception requires consideration of whether a substantially similar result could be accomplished through an amendment to the Partnership Agreement. The Court rejected plaintiffs’ argument because of plaintiffs’ failure to explain how any amendment to the partnership agreement could accomplish a substantially similar result to the merger. The Court reasoned that a partnership agreement cannot be re-written so that limited partner units become units in a different limited partnership, or even equity interests in a separate entity.
At oral argument, plaintiffs offered two possible means by which an amendment could achieve the same result as a merger. First, plaintiffs argued that the Partnership could distribute shares of the Parent to holders of common units, and then amend the partnership agreement to cancel the common units. Second, plaintiffs proposed an amendment that would build a redemption right into the provisions governing the common units. The redemption right would then allow the Partnership to buy each common unit in exchange for cash, stock, or a mix of the two. The Court rejected each of these arguments because neither would involve an amendment alone. In each case, the amendment would form only one part of a series of steps that produce an outcome similar to the merger.
Lastly, the Court cautioned that if it were to follow plaintiffs’ logic, then the Amendment-By-Merger Exception would always require parties to a partnership agreement to imagine hypothetical alternative transaction structures that could deploy an amendment as a step towards a substantively similar result. Such an open-ended inquiry, according to the Court, is inconsistent with how Delaware law approaches transactional validity and compliance with the applicable business entity statute or operative entity documents. According to the Court, those who must shape their conduct to conform to the dictates of statutory law should be able to satisfy those requirements by following the literal language of the law rather than being forced to guess about the nature and extent of some broader or different restriction at the risk of an ex post facto determination. The Court reiterated that, for the Amendment-By-Merger Exception to apply, there must be an amendment to the partnership agreement.